Ukraine’s wind market has promise – but faces political and economic challenges

Last week, we analysed the top 30 emerging wind energy markets in our Emerging Markets Attractiveness Index. Ukraine made the cut, but only just. It came in last place as economic and political uncertainty weighed on its prospects.

In fact, 2018 has been fairly good for Ukraine’s diminutive wind market. In the first half of the year, 50.35MW of wind farms were completed, bringing total capacity to 515.5MW.

This is partly driven by the ambitions of the Ukrainian government, as it aims for renewables to make up 11% of the country’s energy mix by 2020 – up from 1.5% now. Ukrainian energy conglomerate DTEK, owned by oligarch Rinat Akhmetov, is also a big driving force. With atarget of 1GW of solar and wind projects to be installed by 2020, DTEK currently generates 65% of Ukraine’s wind energy.

And yet political and financial uncertainty continue to be issues.

In political terms, hostilities with Russia pose threats. With pockets of Ukraine ‘temporarily occupied’ by Russia, fighting between Ukrainian nationalists and separatists – often backed by the Russian military – has created a permanent state of political limbo. The upheaval has directly affected investors in the past: the 2013 ‘Ukrainian crisis’ prompted the government to introduce a ‘state of emergency’ in the electricity sector, during which energy payments were delayed. Some investors later launched lawsuits against the government.

More recently, the oligarch Akhmetov has been targeted. In March 2017, DTEK’s offices in the separatist Donbas region of Ukraine were seized by protestors.

Ukraine also lacks a stable financial environment, with shaky market conditions and loan interest rates three or four percentage points higher than elsewhere in Europe. However, developers can get around this by securing international finance instead. In August, it was announced that €90m for DTEK’s 100MW Primorskaya wind farm would be provided by a consortium of German banks.

Finally, there is Ukraine’s regulatory environment. The generous feed-in tariff regime, which was introduced in 2009, is due to end in July 2019. After this, new wind projects over 20MW face having to compete via an auction process. This has attracted some criticism: Valentyna Beliakova, director at TIU Canada, has said the government was ‘changing the rules of the game’ for investors.

But we think this shows a sensible attitude to ensuring the long-term sustainability of the market. Investors have been given due warning: projects commissioned by July 2019 will have access to the FIT until the end of 2029. And while nascent wind markets do require government support, at some point they must enable developers to stand on their own.

Ukraine’s wind market certainly has promise. In 2017, IRENA estimated Ukraine’s wind power potential to be 320GW. We think the government is making a good start in trying to establish a stable, self-sufficient market while contending with wider political and economic issues. Hostilities with Russia are unlikely to cease any time soon, and so balancing these concerns will be key.

We also think that while Ukraine just scraped into our list of the top 30 emerging markets this year, it will be climbing the ranks over the coming years.

But – if you’re thinking of investing – get some political risk insurance.