Green energy financing to promote the energy security in Ukraine

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Green energy financing to promote the energy security in Ukraine

Introduction

The current scientific discourse aims at exploring and examining both existing and potential intersections and synergies between the finance industry and energy sector that promote the more sustainable and eco-friendly economic practices. Of high importance nowadays is to outline the way finances (alternative financial practices) relate to the green energy via sustainability- oriented services, creating a specific focus on energy security in the national countries. The abovementioned issue is of great interest for Ukraine, due to various reasons: competing at the international market following the general trend of the so-called “greening”, pandemic crisis being tough on the economy and presumably strong actions needed in the post-pandemic times, the military conflict taking place in the East of the country, which creates additional security threat due to high energy dependence, etc.

According to the study by Sabine Dorry and Christian Schulz “Green financing, interrupted” [1, p. 718] the differences of the categories “financing” and “investing” is explained in terms of green economy. Noteworthy is the fact that traditionally “financing activities comprise obtaining funds for starting and operating a business”. Therefore, the abovementioned activities explain the connection between the enterprise, “its lenders (e.g. banks, investors) and owners (e.g. shareholders of the lender)”. However, when talking about financing green projects, including the green energy, we imply certain return. Following this logic, we assume that return implies a surplus on the invested funds, taking into account the initial funding and all transaction and administration expenses. Such an “asset-like” approach shows that “green finance” imply “green investing” in its essence. That is why we can conventionally divide the green finance market into the green investment market and the green debt finance market.

Nevertheless, the involvement of financial resources in the development of green energy both supporting the energy security is an insufficiently researched issue. Mainly the reports and studies of the international organizations reveal the issues of green energy financing (mainly the practical and theoretical aspects of investing in renewable energy), such as the International Renewable Energy Agency (IRENA), Organization for Economic Co-operation and Development (OECD), International Energy Agency (IEA), global renewable energy community of actors from science, governments, NGOs and industry REN21 and others.

According to the International Energy Agency “Global Energy Review 2020. The impacts of the Covid 19 crisis on global energy demand and CO2 emissions” by 2040 the electricity demand and CO2 emissions in developing countries are expected to increase, and renewable energy will account for about 30% of global generation electricity [2].

The most urgent problem is Ukraine's energy dependence on fossil fuel supplies. Taking into account the conditionally primary nuclear energy, the level of energy dependence of our country in recent years was 60.7% [3].

Presentation of the main material

Elimination of energy saving problems is combined with solving environmental issues. Environmental and energy issues, the situation with the development of alternative energy sources, the use of energy-saving technologies are in the center of the global attention. There are specific programs and mechanisms to stimulate energy preservation: government subsidies; concessional lending; tax incentives both for manufacturers of energy efficient technologies and equipment and for homeowners who improve their thermal performance; preferential rates, etc.

The alternative energy sources nowadays include the bacterial energy, bioenergy, wind energy, hydrogen energy, geothermal energy, space energy, waste disposal, solar energy, etc. Justification of the security significance of projects on the green energy should be an incentive for the implementation of projects on alternative energy in Ukraine.

Green finance is a set of mechanisms to direct the financial resources for projects in the field of green economy. These finances can include the funds from the state budget, the funds credited in the state budget within the framework of international agreements on financing the sectoral budget support programs, and the funds of enterprises operating in the field of green economy.

Green financing includes expenditures and investments aimed at projects and programs in the field of environmental management, environmentally friendly business, reduction of greenhouse gas emissions. In addition, green financing covers financial mechanisms to promote the implementation of alternative energy projects that help reduce greenhouse gas emissions and adapt to climate change, such as special quotas and network tariffs for the use of electricity from renewable sources.

The study by Razumkov Centre “Green investment in sustainable development: world experience and the Ukrainian context” [4] views the green finances from two perspectives. On the one hand, green finance plays a role in mitigating the environmental threats and damages, such as the effects of climate change on the economic system and society. On the other hand, green finance in its essence is a targeted funding that supports green growth. Here the support of a financial system is required to meet the needs of capital financing of sectors of the economy suitable for “greening, such as energy sector, since its implementation would combine the environmental sustainability and security, and economic growth. That is why green energy reveals the need to promote national security and a new paradigm of economic growth - green growth.

The Energy Strategy of Ukraine for the period up to 2035 “Security, Energy Efficiency, Competitiveness” was adopted by the Cabinet of Ministers of Ukraine back in 2017, and projects to increase the share of renewable energy to 12% of total primary energy supply in 2025, and not less than 25% - by 2035 (including all hydrogenerating capacities and thermal energy) [5].

The problem of Ukraine's energy dependence and inefficient energy use is becoming more acute every year. As energy consumption increases, so does electricity production to meet the needs of the population. However, only 1.26% of all electricity generated is the share of green energy.

The data from the report “Energy efficiency and “green” energy of Ukraine: achievements of the last 5 years and next goals” [6] states that in 2019 the planned revenues from the environmental tax for CO2 emissions would increase from UAH 50 million to UAH 1.5 billion. However, none of the current 30 budget programs has measures to reduce CO2 emissions by industry.

According to the study by Taghizadeh-Hesary F. and Yoshino N. “Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects”, there are “two major barriers associated with green energy projects: (a) a lower rate of return compared to fossil fuel projects and (b) a higher risk of investment compared to fossil fuel projects. Due to the associated risk and due to the Basel capital requirements, many banks are reluctant to finance green energy projects. Another reason why debt finance is hard to secure for new green energy projects is that, historically, regulated utility rates spread risks in utilities across consumers” [7].

The Doctrine of Sustainable Development of Ukraine till 2030 identified the key destabilizing factors for the development of Ukraine, significant level of energy intensity of Ukraine's GDP being one of such factors [8]. Therefore, transformation processes in the energy sector of Ukraine can be aimed at solving the tasks to implement the energy efficiency measures, in turn, to reduce energy consumption and increase the generation of renewable energy in the country's energy balance. Naturally, the significant amounts of investment are needed to transform the economy, the sources of funding for transformation activities in which traditionally are the state budget, international financial assistance, and private investment. financial environmental energy sustainable development

Among the main reasons for the discrepancy between the level of development of the financial system and the goals of green energy system are the following: prices in the real economy do not provide full consideration of environmental and social costs; budget resources are insufficient to close the gap between the actual needs of budget expenditures for decarbonization of the economy and budget revenues; fiscal rules governing the financial system do not take into account the social and environmental risks of decarbonisation [9].

Along with the general green financing instruments used in the world along with the sources of financing of green investments in Ukraine, demonstrated in the Table 1, there are very specific green energy-oriented instruments, such as green tariff systems (FITs and FIPs); quota commitments using green certificates (TGC); soft loans; credit guarantees; investment grants (investment support); tax exemption/reduction; tender schemes.

Table 1

The green financing instruments

Source: developed by the authors

Preferential loans or credits are provided at interest rates below market ones, at the same time using extended payback or deferral periods. The key advantage of soft loans and credits is the transfer of part of the financial risk to the lender (being mostly the government agencies). While, the tax incentives are a flexible tool and can be chosen and applied selectively either at specific energy technologies or at individual market participants.

The green tariff was introduced in Ukraine in 2008, being the only one for different types of renewable sources for 10 years at the level of doubled weighted average tariff for electricity purchased from energy generating companies operating in the wholesale electricity market of Ukraine on price bids. Different coefficients were introduced in 2009 to calculate the levels of the green tariff for each type of renewable energy source, which decreased over the years. In 2015 the possibility was introduced to receive a surcharge to the green tariff for the use of a certain share of elements of Ukrainian origin in the construction of RES projects. In the same year the levels of green tariffs were revised and reduced due to the rapid development of technology and the reduction in the cost. Overall, gradually reducing green tariff will stay in effect in Ukraine until 2030.

Ukraine needs to develop the effective financial support mechanism to attract investment in projects that will be implemented in the transition to a green energy system. The abovementioned mechanism can include the following elements: market infrastructure; financial instruments; regulatory framework for the regulation of processes; regulatory activity of authorized state bodies and international organizations; tax and tariff policy; financial, legal and organizational processes (Table 2).

Table 2

Elements of the financial support mechanism for green energy

Source: developed by the authors

The national green energy standard should be as close as possible to the international one to open the Ukrainian market for green projects to international investors. For this, the system of green financing should be as transparent as possible, the requirements for financial instruments are to be clear for international investors, and the classification of green areas should be compatible with international ones.

Energy saving policy is supported by both economic and administrative measures. The key ones among them are financing the development of new types of biofuels, public procurement of cars with electric and hybrid engines, incentives in the form of a tax credit in the household for the installation of energy-efficient equipment, financial incentives for green construction, legislative measures to ensure the transition to energy-saving lamps, quotas on consumption/production of green energy. The mentioned measures have the potential to change the vector of movement of financial resources in the direction of financing the green energy projects.

Implementing green energy transitions will require much more than just choosing instruments from a list of green policies. The set of clear goals and objectives are to be set, as well as synergies and trade-offs between different options for development vectors to achieve the security goals, effectively plan and implement priority actions, and monitor progress, analyse the strategies over time through a continuous adaptive management process.

Conclusions

Environmental and energy threats caused by climate change produce the immanent calls to develop and implement the system of financing, taking into account the risks of the global development, and the national security threats, where the first position is occupied by the energy security threats. That is why the priorities of the economy of Ukraine is to include the financing mechanism to restore energy ecosystems to a safe level, while adhering to the European principles of sustainable development. Nevertheless, significant investment and financial support from the government is needed to implement the energy-saving, environmentally friendly and green projects. The abovementioned justifies the growth of the green energy potential as one of the most advanced green industries. The global practices demonstrate that the following financial instruments are driving investment both from the private and public sector in energy projects: guarantees, technical assistance, grants, “green” shares, “green” bonds, “green” loans, credit lines, etc.

Green energy now plays a significant role in ensuring energy independence, environmental and economic security and efficiency. An increase in investment and development in the economy of Ukraine is defined, amongst the other factors, by the choice of a state regulation strategy to promote the development of the energy sector. Where the driving force belongs to the state to create favorable conditions for the transition into the green energy system via the use of a variety of financial tools.

In these circumstances, the role of green private investment sector is also quite significant. However, under the current financial mechanism, it is difficult to invest in green projects, as the risks and potential return on investment are different from investing in traditional industries.

The practical implementation of the concept of financing the green energy involves: the availability of effective legislation in key sectors of the energy field, active government stimulation of the process, the need to increase investment in green infrastructure, implementation of sustainable production and consumption, support for research and innovation, development and dissemination of clean technologies, providing companies with cheap loans and tax benefits to start a green energy business. Thus, the expansion of green energy financing in Ukraine will help solve urgent problems, which are Ukraine's energy security.

However, when implementing the principles of a green economy and introducing alternative energy sources in order to save energy, in our opinion, the emphasis should be placed both on financial and environmental indicators. The resulting social effect from the use of green energy can become a significant incentive for the promotion and activation of areas of the green economy in Ukraine.

Overall, the expansion of the market of green finance is aimed at financial ensuring a sustainable development of the economy, which involves addressing a range of environmental risks, improving the energy efficiency of the economy, social development indicators and the quality of the existing management system to promote the green growth doctrine at all levels.

References

1. Dorry S., Schulz C. Green financing, interrupted. Potential directions for sustainable finance in Luxembourg, Local Environment, No 23:7, 2018, p.717-733.

2. Global Energy Review 2020. The impacts of the Covid 19 crisis on global energy demand and CO2 emissions // ІЕА. 2020.

3. Решетник Н.І., Шульпіна Н.В., Симончук В.А. Стратегія розширення ринку «зелених» фінансів // Східна Європа: економіка, бізнес та управління. - Дніпро, 2019. - Вип. 1(18). - С. 62-67.

4. “Зелені” інвестиції у сталому розвитку: світовий досвід та український контекст / Видання серії “Бібліотека Центру Разумкова”.

5. Енергетична стратегія України на період до 2035 року «Безпека, енергоефективність, конкурентоспроможність» від 18 серпня 2017 р. №605-р // Офіційний сайт Верховної Ради України. 2017.

6. Енергоефективність та “зелена” енергетика України: здобутки 5 останніх років та наступні цілі.

7. Taghizadeh-Hesary F, Yoshino N. Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects. Energies. 2020, No 13(4). P. 788.

8. Україна 2030: Доктрина збалансованого розвитку. Видання друге. Львів: Кальварія, 2017. 164 с.

9. Petlenko Yu.V., Pohribna N.V. Transformation of the financial system in the conditions of decarbonization of the economy // European scientific discussions. Proceedings of the 9th International scientific and practical conference. Potere della ragione Editore. Rome, Italy. 2021. Pp. 322-328.

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