Project finance in Q1: Is wind taking off in Ukraine?

Comedians are taking over the politics of Europe. Italy’s leading party is headed by comedian Beppe Grillo, and last week actor and comedian Volodymyr Zelenskiy was elected Ukraine’s new president.

Hilarious, huh? Now we just need Boris Johnson in the UK to complete the set. But I digress...

One of the first challenges facing the new Ukrainian president is no laughing matter: the country’s energy emergency. Ukraine’s energy sector heavily relies on coal and nuclear, but since 2014 the Donbass region, which is the heart of the country’s coal production, has been ravaged by military conflicts with Russia.

This means Ukraine had to import over €2.4bn worth of coal last year to satisfy its energy needs and, paradoxically, 62% of the imports came from Russia. It's a way for Russia to tighten its grip on Ukraine.

However, Russian Prime Minister Dmitry Medvedev announced last week that the country will now ban exports of crude oil, petroleum products and coal to Ukraine. This means that Zelenskiy has to find a solution to keep the lights on.

This is one the main reasons why wind farms could be key for the country’s energy independence, and the recent financial close of a 250MW project shows that there is potential to establish a wind market in the country.

A joint venture between Oslo-based wind developer NBT and French renewable energy firm Total Eren secured financial close in February of the 133MW first stage of the 250MW Syvash wind farm in Ukraine. The project is located in Kherson Oblast in southern Ukraine, and represents total investment of around €380m.

Check out below other key project financial deals announced in the three months ending in March.

Project Finance Deals in Wind in Q1 2019

*Transactions converted to € for ease of comparison -  Source: A Word About Wind

The €155m package included a €75m financing from the European Bank for Reconstruction & Development; a €75m loan from the Green for Growth Fund and the Netherlands Development Finance Company; and €5m from the Nordic Environment Finance Corporation.

Last week, the pair secured the close of the 117MW second phase, for which they won funding from firms including Black Sea Trade & Development Bank, Finnfund and Proparco. In addition, Saudi Arabian conglomerate AlGihaz acquired a minority stake in the project.

Getting the project to financial close wasn’t easy, though.

Alex Blomfield, partner at law firm K&L Gates, which advised NBT and Total Eren on the deal, told us that the pair had to deal with some complex requirements to secure financial close, including currency control regulations: “We had to face a number of challenges, but there was also significant goodwill and support for the project from all stakeholders”, he said.

That support supplemented a number of energy reforms adopted by the Parliament in recent years to promote renewables. This included cancellation in 2015 of a local content requirement which was an obstacle to secure very high feed-in tariffs, introduced by the government led by president Petro Poroshenko to support renewable energy projects: “For wind farms commissioned before the end of 2019 we are looking at a tariff of €102/MWh”, Blomfield said.

In an effort to help the country move towards a more efficient renewable energy market, the Parliament approved last Wednesday a new law, which is now expected to be signed by the president. This will enable the country to move from a feed-in tariff system to competitive auctions for utility-scale renewable energy projects. Transitional provisions are set to still allow projects to continue to avail themselves of the feed-in tariff if certain requirements are met.

Political support to enable the renewable energy market to take off is good news. Despite its attractive feed-in tariffs, renewables currently account for only 2.8% of final energy consumption. In fact, Ukraine isn't an easy place to do business, with Russian aggression being only one reason. The country ranks as one of the world's most corrupt countries in Transparency International's annual index and a volatile politic and regulatory environment represents one of the main challenges for investors willing to enter.

Renewable energy needs to be at the top of president Zelenskiy’s agenda as Ukraine is in need of more projects like Syvash for the independence of its energy system.