Ukrainians Must Understand that Subsidizing an Old, Inefficient System Leads to a Bankrupt State | VoxUkraine

Ukrainians Must Understand that Subsidizing an Old, Inefficient System Leads to a Bankrupt State

3 June 2015

How can Ukraine secure its energy supply? What will happen to the conventional energy industry? You will find the answers in the second part of our interview with Hans-Josef Fell, the architect of the German feed-in tariff. Read the first part here.

Hans-Josef Fell was a member of the German Parliament from 1998 until 2013. He was the spokesman for the Green Party on energy policy. Mr. Fell is a globally recognized expert on energy policy and climate change with a visionary view on renewable energy sources. He is the key architect of the German feed-in tariff, which has been copied by more than 60 nations around the world. Hans-Josef Fell has won various international prizes for the promotion of renewable energy and remains active as a member of the World Council for Renewable Energy.

It happens that not only media, but also expert society can be a source of manipulative information and wrong data. Access to relevant and high quality information is essential for decision-making and for communicating information. Very often people operate with the numbers that don’t have any credibility. I personally feel that there is a big hunger for adequate data in Ukraine.

This is true – sometimes experts show wrong numbers – especially when their research is financed by conventional energy companies, who are interested in showing particular numbers, not necessarily correct ones. Such data manipulation happens not only in Ukraine, but worldwide.

One of the good solutions that can help in this situation is giving money to Universities to conduct research. And this money must be independent from the big energy companies. When we had the red-green coalition in Germany in 2000 we allocated, together with the environmental Ministry, a lot of public money for the research. This helped us a lot afterwards.  The research institutes we supported at that time now can attract money independently. And now we have a lot of interesting and high quality scientific reports in Germany, which highlight the benefits of renewables.

In Ukraine energy security is one of the hottest topics at the moment. In public discourse energy security means, first of all, gaining independence from Russian oil and gas. The most common answer to this challenge on the highest governmental level is increasing oil and gas production in Ukraine. What is your opinion on this government’s position?

Ukraine, as well as Germany and the EU, is dependent not only on Russian oil and gas, but also on Russian uranium and coal. To be really independent you must be independent from all of these energy sources.

The calls for increasing oil and gas production in Ukraine to secure freedom from Russian energy is indeed often heard, but this is not a solution. Any production of new energy, regardless of the type of energy, requires new investment. At the moment renewables are much cheaper than natural gas power stations. Gas production means both fuel investment and power station investment. The costs of gas power stations are much higher than renewable energy investment to solar and wind generation. ‘Fuel’ for wind and sun is costless.

Another aspect of gaining energy security in Ukraine with your own oil and gas production is the actual amount of oil and gas you have. Our research in Germany conducted by the Energy Watch Group shows that Ukrainian deposits for conventional energy production are not sufficient. The potential for fracking in Ukraine was completely overestimated. The biggest shale gas companies started leaving Ukraine. With fracking gas – even if you had big deposits – you would have your investments back in 5-6 years, at the time when the gas fields are already empty. And with wind and solar energy your energy deposits [will never be] empty.

Claims that you will be able to satisfy your demand with conventional energy production, especially in the long run, are complete speculations. People must be very careful and never trust facts and numbers that do not give reference to independent scientific reports.

How does the economy work for investors in this case, who will invest in conventional energy even though it’s so expensive?

The investors’ decisions are based on market prices, and these market prices are not fair. Prices for renewable energy that are visible to consumers are real prices that include all costs. The prices for natural gas, coal or nuclear electricity that are shown to consumers are not real and fair prices, because they don’t contain external costs[1]. These prices are highly subsidized from the taxpayers’ money. Most of taxpayers even don’t know that their money is spent on subsidizing energy prices. When consumers see the price for energy from the conventional energy sources and this price is much lower that the price for renewable energy, they must understand that the real price for conventional is much higher.  And that they pay for the illusion of low price with their own taxes.

Therefore, those investors who enter the Ukrainian fossil fuel market know that they enter a highly-subsidized market where there is no fair competition for renewables. If you have the market without subsidizing with the taxpayers’ money and with the inclusion of all the external costs for conventional energy producers, renewable energy will immediately become cheaper in comparison with conventional energy. But today’s market is not fair, and this is the biggest problem. Changing this situation must be a political task of the highest priority.

Ukrainians must understand that subsidizing an old, inefficient system leads to a bankrupt state. You already see the results of the flawed political system at work in your country. The Ukrainian government has almost no money not only because of war, but also because of subsidizing conventional energy producers. Every year you buy a lot of energy from natural gas, nuclear energy and coal and every time you face problems with paying the bill afterwards. And your political leaders do not emphasize this problem. If they really wanted to change the system, they have to design a regular framework that would be fair for every energy producer.

When it comes to energy questions, political will for positive changes is always hard to get. Top level politicians are dependent on big conventional energy producers not only in your country, but worldwide. The biggest energy and utility companies give the most money for election campaigns. Sometimes money is given directly to politicians. When utilities are owned by the state, there is additional difficulty for increasing political interest in renewable energy. In those countries where utilities are public, the resistance against renewable energy is the highest.

The major argument of the Energy Regulator and Ministry of Energy in Ukraine against the development of renewable energy is the shortage of money in the budget. They say that during the time of military conflict and economic crisis developing renewable energy is impossible, because it would be hard to pay renewable energy producers for their energy at a high feed-in tariff (called ‘green tariff’ in Ukraine) rate.

If an empty budget is really the reason, then no money can be invested in oil, gas, coal and nuclear either because this investment is very expensive. When we want to set up new energy generation facilities, we must consider the cheapest investment. And the cheapest investment is renewable energy investment. So, if the budget is empty, you cannot invest in anything, and you will soon have no energy production at all.

If your government says that investment in coal, nuclear, oil and gas doesn’t require any additional budget spending, because all the money would come from private investors, and only renewable energy requires additional budget spending, it’s a lie. You already know about the subsidies that conventional energy producers receive from the budget regularly. And the irony is that a big portion of the money given by the EU to Ukraine in the form of support for economic development is spent on covering the debts for Russian gas.

This vicious system destroys the Ukrainian economy. So saying that in the situation of the shortage of money in the budget we would rather spend money on conventional energy than on renewables, absolutely contradicts common sense, because in this case you only increase your dependence on fuels, while renewable energy (except for bioenergy) doesn’t require any additional fuels for generating energy. When you spend, let’s say, 1 bln euro on buying gas you literally burn money in chimneys. And if you invest this 1 bln in the wind or solar power, this money will be generating electricity for the next 40 years, without creating any additional demand on fossil fuels.

Are the things really that bad with conventional energy producers in comparison with the renewables ones? Could you, please, give some examples?

Nuclear companies now experience big financial problems and are therefore planning to build additional nuclear capacities will definitely create a very big pressure on the  budget. You can look at the French nuclear company Areva, which is getting closer and closer to bankruptcy with the deficit of 4,9 bln euro in 2014, because of investment in new nuclear power stations. This is a serious signal for other nuclear companies who have ambitions for new investment, like Rosatom, which plans to build several new nuclear power stations abroad; or for the nuclear power station in Finland that was planned in 2008 with the estimated costs of 2 bln. euros and ended up with the current cost of 8 bln. euros.

And remember that during the first 10 years, a nuclear power station does not produce any electricity. In 10 years the prices for electricity from renewables will be much cheaper (lower) than today. This is absolutely crazy investment. At the same time some countries still try to support nuclear companies. Great Britain, for example, implements feed-in tariff law for the new nuclear power station in Hinkley Point. And nuclear energy there is already 3 times more expensive than wind and solar power.

The nuclear companies [that] opposed feed-in tariff in the renewable energy sector – saying that it is a burden for the budget and creates unfair conditions for other energy market players – now learned that the feed-in tariff is a very good instrument and started using it for themselves. They even have allowance for using the feed-in tariff for nuclear energy from the European Commission, but this allowance is against the basic EU laws and now is being appealed in the Court of Justice of the EU.

Soon death awaits the coal industry as well. There are structural declines of coal industries globally, like the reports from Sierra club and Coalswarm show.

At the same time the investment to renewable energy globally grows fast, for example Google invests in new business connected with renewable energy; one of their recent investments was a 100 MW solar park in California. The new business for the world is renewable energy. Monitoring the changes and shifts in the world energy market is very important for being successful. When Ukrainian leaders hesitate about whether or not they should invest in renewable energy, I’m wondering why renewables business models work successfully for the whole world, and only in Ukraine and Russia the old business would still be the best?

Can we also say that developing the renewable energy sector is much easier and cheaper for the countries that just started than it was 10-20 years ago for Germany and other ‘early adopters’?

Yes, of course, now the situation is very different from what we had in Germany years ago, and Ukraine, as well as many other countries, can use the advantage of doing business with cheap renewable energy. This also means that popularity and acceptance of renewables by the majority of people in Ukraine can be potentially achieved much faster than it was years ago in Germany.

Ukraine was one the first post-Soviet countries that started developing a renewable energy market in 2009. How would you assess the success of the policy implemented since then?

In Ukraine the renewable energy sector has been driven sometimes by oligarchs. During the sector’s development, you always had issues with import of Russian gas and support for Russian oil and gas industry from the local Ukrainian oligarchs. During the last 3 years it has become clear that the power of conventional energy oligarchs is bigger than the power of renewable energy investors in Ukraine. In this regard, the Ukrainian Energy Regulator is not completely wrong saying that the feed-in tariff for renewables in Ukraine must be reduced, because it was too high and the income eventually went to oligarchs. Of course, the feed-in tariff must be reduced with the new law, but those investors who are already at the Ukrainian renewable energy market, should not suffer and illegally lose state guarantees. New context makes the development of renewable energy in Ukraine harder, with the occupation of Crimea, where the biggest solar capacities in Ukraine are located.

Third part.

[1] “…The external costs used to calculate this indicator are based upon the sum of three components: climate change damage costs associated with emissions of CO2; damage costs (such as impacts on health, crops etc) associated with other air pollutants, and other non-environmental social costs for non-fossil electricity-generating technologies…”

By Ganna Gladkykh



The author doesn`t work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations