Fixing the renewable support scheme

Ukraine introduced one of the most generous feed-in tariffs in Europe for renewable generation, and it worked exactly as intended: a large amount of solar and wind capacity was built in a short period.

Where the design failed

The tariff was set high, denominated with reference to a foreign currency, and guaranteed for a long period. Meanwhile the cost of building solar fell dramatically worldwide, so the tariff that had been necessary to attract the first projects was several times more generous than needed by the time later projects were built.

The obligation was payable by a state-owned buyer funded from the electricity market. When the volume of guaranteed payments outgrew the revenue available, arrears accumulated.

What restructuring involved

A negotiated reduction in the tariff for existing projects in exchange for a commitment to settle the arrears on a defined schedule. Producers took a real loss; the alternative was continuing non-payment against a contract nobody could honour.

The lessons

A support scheme must have a mechanism that reduces the rate automatically as costs fall, either by degression on a calendar or by auction. Fixing a rate for a decade in a sector whose costs drop annually is a design error.

And the payment obligation must be funded from an identified, sufficient source, or the guarantee is not a guarantee.

The reputational cost

It was substantial, and it is why the design of the next scheme matters beyond the sector. Investors remember a renegotiated contract for a long time.

A receivable that goes unpaid costs a sector more than the money; it creates the risk premium everyone adds the next time they quote into that country. I have lived this on the equipment side: one late payment prices itself into the next three contracts. The real cost of the restructuring was not the cut in the tariff but how long that premium would be paid.