Economic Analysis and Policy 62 (2019) 227–235

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Economic Analysis and Policy

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Full length article

Support scheme for electricity output from renewables in

Ukraine, starting in 2030
Galyna Trypolska
Institute for Economics and Forecasting, National Academy of Sciences of Ukraine, Panasa Myrnogo Street, 26, Kyiv, 01011, Ukraine

article info a b s t r a c t

Article history: Ukraine has an officially adopted target for energy from renewables of 25% by 2035.
Received 15 January 2019 Renewable energy producers in Ukraine enjoy a feed-in tariff, valid until 2030. In
Received in revised form 7 April 2019 Ukraine, a debate has begun on whether the feed-in tariff should be prolonged. This
Accepted 11 April 2019
paper focuses on the projected cost of electricity from renewables, nuclear and fossil
Available online 16 April 2019
fuels in Ukraine in 2030, based on a levelized cost of energy (LCOE) approach. Results
JEL classification: indicate that prolongation of the feed-in tariff is necessary for most types of energy
Q48 generation from renewables. The existing rate of the CO2 emissions tax is too low to
Q420 affect the LCOE of fossil fuel-based electricity. Coupled with the projected low price for
Keywords: coal and natural gas, this will make renewables less competitive in Ukraine in 2030 if
Renewables there is no feed-in tariff.
LCOE © 2019 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights
Ukraine reserved.
Feed-in tariff

1. Introduction

Many countries and regions globally have adopted long-term targets of achieving up to 100% of their energy from
renewable energy sources (RES). These include Australia, Belgium, Denmark, the EU in general, Germany, Great Britain,
Hungary, India, Israel, Macedonia, North African countries, the South America group of countries, Philippines, Morocco,
Sweden, the US, Canada and others (Diachuk et al., 2017). Ukraine has also developed a 100% RES scenario (Diachuk et al.,
2017), but a 100% RES target has not yet been officially declared. Currently, Ukraine has an officially adopted target of
25% of its energy from RES by 2035, in accordance with its updated Energy Strategy up to 2035 (CMU, 2017). Ukraine
is now considering the possibility of achieving a greater share of renewables in the energy balance. Child et al. (2017)
studied the possibility of Ukraine reaching 100% of RES in the energy balance. The results show that the levelized cost of
electricity would decrease from 82 EUR/MWhe to 60 EUR/MWhe by 2050. The storage required would consist of 0–139
GWhe of batteries, 9 GWhe of pumped hydro storage and 18,840 GWhgas of gas storage. The authors conclude that a 100%
renewables system would be an economical and efficient solution for Ukraine; however, it would necessitate overcoming
existing barriers through policies of state support. This study also contains valuable information on cost parameters of
future and existing technologies in 2030, used by the author for the purposes of this paper.
A similar study was conducted by Diachuk et al. (2017), where the authors developed several scenarios for energy-
sector development (conservative or baseline, liberal and revolutionary scenarios) that represent either technologies at
their current level of development, the development of the energy sector in Ukraine under conditions of free competition
or rapid growth of RES. The results show that in the revolutionary scenario, RES could provide up to 91% of the final energy
consumption, and energy demand would decline by 42% by 2050 compared to the conservative scenario. Ukraine’s RES

E-mail address: [email protected].

https://doi.org/10.1016/j.eap.2019.04.007
0313-5926/© 2019 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.
228 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235

Table 1
FIT adoption by various countries across the globe (REN21, 2018).
Year of introduction Countries/states
1978–1999 USA,a Portugal, Germany, Switzerland, Italy, Denmark, India, Spain, Luxembourg, Greece, Sri Lanka, Sweden, Norway,
Slovenia
2001 Armenia, France, Latvia
2002 Algeria, Austria, Brazil, Czech Republic, Indonesia, Lithuania
2003 Cyprus, Estonia, Hungary, Slovak Republic, Maharashtra (India), Republic of Korea
2004 Israel, Nicaragua, Prince Edward Island (Canada), 2 states in India
2005 China, Ecuador, Ireland, Turkey, 3 states in India
2006 Argentina, Pakistan, Thailand, Ontario (Canada), Kerala (India)
2007 Albania, Bulgaria, Croatia, Dominican Republic, Finland, Macedonia, Moldova, Mongolia, South Australia (Australia)
2008 Iran, Kenya, Liechtenstein, Philippines, San Marino, Tanzania, Queensland (Australia), 7 states of India, California (USA)
2009 Japan, Serbia, South Africa, Ukraine, 3 states of Australia, Taipei (China), 3 states of USA
2010 Belarus, Bosnia and Herzegovina, Malaysia, Malta, Mauritius, United Kingdom
2011 Ghana, Montenegro, Netherlands, Syria, Vietnam, Nova Scotia (Canada), Rhode Island (USA)
2012 Jordan, Nigeria, State of Palestine, Rwanda, Uganda
2013–2017 Kazakhstan, Pakistan, Egypt, Vanuatu, Virgin Islands (USA), Czech Republic (renewed), Zambia, Vietnam, Massachusetts
(USA)
a
In bold, countries that ceased their FIT policies.

potential is sufficient to cover all the potential demand for energy goods and services, even while maintaining a high level
of energy-intensive industry (iron and steel industry, chemical industry, etc.).
In order to achieve the largest possible share of energy from RES in the energy balance, support mechanisms and
schemes are required. Global support schemes include feed-in tariffs (FITs) (nowadays used mainly in Europe, but also
elsewhere), tenders (auctions) and taxes. These are claimed to be effective policies for renewables deployment. The rate
of electricity consumption is a major driver that affects the spread of renewables in the EU-28 and in the US (Kilinc-Ata,
2016). Table 1 shows that peak years for FIT adoption were 2002–2011, and during the history of its existence only six
countries have refused it.
Nonetheless, many countries are already turning to auctions, in order to diminish the cost of electricity from
renewables. Del Río (2017) showed that the effectiveness of auctions largely depends on their design scheme. Despite
the fact that the main elements of auctions are known, including careful scheduling, volume disclosure and penalties, the
final design scheme depends on the target that governments are aiming to achieve (Del Río, 2017).
FITs were introduced in Ukraine in 2009, effective up to 2030, in accordance with the Ukrainian ‘‘Law on the Energy
Industry’’ (SCU, 1997). FITs have become an effective tool for promoting renewable energy in Ukraine (Trypolska, 2012;
Sysoiev, 2012) and globally (Kilinc-Ata, 2016), resulting in the creation of new jobs, the gradual replacement of fossil
fuels with RES and a contribution to reducing greenhouse gas emissions into the atmosphere. At the beginning of 2014,
FITs had been enacted in various forms in 71 countries and 28 states/provinces (Leidreiter, 2014). Now, in Ukraine and
globally, the question often arises of whether FITs are needed at all at the present stage of technological development
and with what other regulatory instrument or stimulation measures the FIT system could be replaced.
In accordance with Ukrainian legislation, FITs are gradually decreasing and currently, in Ukraine, a discussion on the
development of regulatory policy after the end of the FIT system has begun. It is believed that the reduced cost of
technologies will make RES competitive and will allow Ukraine to discontinue state support for green generation. Auctions
are considered to be the most likely future option or support instrument for this market, and the reduction of state support
for RES electricity generation is in line with European practice and European Commission directives regarding the role of
state support.
The purpose of this paper is to analyse whether FIT prolongation will be needed in Ukraine from 2030, as FITs in Ukraine are
currently set to exist only up to the end of 2029. We consider a scenario in which FITs are valid until 2030; in other words,
FITs cannot be abolished retrospectively for enterprises that have already received them, because laws in Ukraine are not
counterproductive, and even high rates of FITs will not be able to compensate for the reputational damage to Ukraine in
the event of premature termination of FITs.1 Although this is a subjective opinion of the author and market participants,
it can be reinforced by the argument that electricity from RES in 2017 (the most recently available data) constituted
1.75% of the electricity balance and is growing significantly more slowly than programme documents anticipated. At
these levels, FIT design cannot constitute a great burden on non-RES consumers. A number of countries in the world
have gradually switched to auctions for large installations with a certain threshold of installed capacity, (e.g., greater than
40 MW). It is also possible that FITs in Ukraine need to be extended for certain types of power generation, e.g., for small
hydropower plants, whereas for other types of energy generation, auctions can be introduced (subject to compliance with
the thresholds of installed capacity).
The paper is structured as follows. In the introduction, we briefly focus on FITs in Ukraine. In Section 2, we continue
the review of FITs. In Section 3, we briefly focus on the method of research, i.e., the concept of the levelized cost of energy,

1 However, in Spain and Greece, FIT design imposed a considerable burden on non-RES consumers, so FITs were changed retrospectively.
 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235 229

Fig. 1. Components of the cost of capital for RES projects (Arsenijevic, 2017).

extensively described in other papers referenced. In Section 4, we estimate the weighted average cost of capital (WACC)
in Ukraine. Then, we calculate the levelized cost of electricity from RES and from nuclear and fossil fuels. We compare
the figures with the available FIT data for the last FIT period (2025–2029). We also consider the impact of the existing
CO2 tax in Ukraine on the levelized cost of electricity. Based on a comparison of the expected levelized cost of electricity
from RES and fossil fuels, we conclude in Section 4 that it is necessary to prolong FITs in Ukraine.

2. Materials. FIT schemes.

There are several fundamentally different FIT schemes. According to one scheme, the initial level of the tariff is low with
a gradual increase over time (for new companies), since the most suitable sites are gradually being occupied, so the higher
FIT rate compensates for the lower suitability of potential sites (Arsenijevic, 2017). According to another scheme, FIT rates
are high at the beginning of their introduction and gradually diminish in order to create economies of scale and to take
advantage of learning by doing. Under such a system, oversubsidization is possible if the cost of technology reduces more
rapidly than the FIT coefficient decreases. This logic works well in developed countries. Legislation in Ukraine embodies
the second model, with a gradual decrease in FITs. In Ukraine, the risks of doing business are high and loan capital is
expensive; hence, a relatively high FIT level aims at offsetting these risks. The high cost of capital is determined by many
components, the most important of which is the actual state of development of the economic system, as shown in Fig. 1,
based on a survey conducted by various participants in the energy market in Belarus, whose economic development is
similar to that of Ukraine.

3. Theory and method

In this section we calculate the cost of electricity generation from RES in 2030 in Ukraine and compare it with the
corresponding coefficients of FITs for 2025–2029. The reason for such a comparison is because in Ukraine, different values
of FITs are presumed for different time frames. These time frames are divided as follows: 2017–2019, 2020–2024 and
2025–2029. We assume that the level of technological development in 2029 (when FITs will still be available in Ukraine),
will be similar to that in 2030, when FITs are no longer available. We use the concept of the levelized cost of energy (LCOE),
which allows us to compare the cost of electricity generated from different sources during the period of operation of power
plants. The LCOE indexes for renewable energy technologies are widely used to model the impact and the fruitfulness of
regulatory policies (IRENA, 2012b). The theory of LCOE is reviewed in more detail by Trypolska (2014). The LCOE is given
by:
∑t
(Inv t + O & M t + F t + Decomt ) ∗ (1 + r)−t
LCOE = Pel = ∑ , (1)
(Elt ∗ (1 + r)−t )
where Pel is the electricity price, t is the year of electricity production and sale, Invt represents investments made
in the year t, O&Mt represents operation and maintenance in the year t, Ft is the fuel cost in year t, Decomt is the
decommissioning cost in the year t, Elt is the electricity output in the year t and r is the discounting rate.
230 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235

Table 2
The weighted average cost of capital (WACC).
Source: Own calculations based on Donaldson and Danthine (2015) and
Eckmann and Gapenski (1992).
R 0.13
Rm 0.14
B 0.5
Ks = R + b ∗ (Rm − R) 0.135
R 0.25
T 0.18
Kd = r ∗ (1 − T) 0.205
Ws 0.3
Kd 0.2050
Wd 0.7
T 0.19
WACC = Ks ∗ Ws + Kd ∗ Wd ∗ (1 − T) 0.1567

As shown in Eq. (1), this calculation does not include system costs, such as grid expansion, etc. The calculation does
not include the costs arising from the need to build excess capacity and from electricity transmission to the grid during
shortfalls in electricity production from RES.
Based on the IEA methodology (IEA, 2015), assumptions were made that the cost of decommissioning is 5% of the
construction costs (except for nuclear power plants), hydroelectric power plants operate for 80 years, the expected period
of operation of wind power plants is 25 years (IRENA, 2018) and that of solar power plants is 40 years (Child et al., 2017).
The construction of power plants is assumed to take one year, except for solar power plants of up to 10 kW power (which
can be built overnight) and wind farms with a capacity exceeding 2 MW (which are built within two years) (IEA, 2010).
LCOE indicators are sensitive to the discount rate. Calculations refer to an abstract company – a producer of electricity.
The electricity producer is assumed to be a joint stock company, and thus it may be a stock market participant (except
for households, which are not stock market participants). The β (beta) coefficient, which measures the risk level, varies
from 30 to 50%, as renewable energy in Ukraine can be a risky business due to significant political issues and difficulties
with access to borrowed capital.
The weighted average cost of capital (WACC) is given by:

WACC = Ks ∗ Ws + Kd ∗ Wd ∗ (1 − T ) (2)
where Ks is the equity value, Ws is the share of own capital (%), Kd is the cost of loaned capital, Wd is the share of loaned
capital (%) and T is the income tax rate (%) (Donaldson and Danthine, 2015).
The equity value Ks in the capital asset pricing model (CAPM) is given by:

Ks = R + β ∗ (Rm − R), (3)

where R is the risk-free rate of return (for instance, the deposit rate) (%), Rm is the average return on equity on the stock
market (%) and β is the factor measuring the risk level (Eckmann and Gapenski, 1992).
The cost of loaned capital (Kd) is given by:

Kd = r ∗ (1 − T ), (4)
where r is the annual loaned-capital discount rate (%) and T is the income tax rate (%).
We calculate the weighted average cost of capital WACC (Table 2) using the following assumptions.
– The average yield of shares in the stock market was calculated at 14%, based on the indexes of a number of asset
management companies in Ukraine for 2016.
– The rate of income tax is 21%.
– The annual rate for use of a loan in Ukrainian currency (UAH) is 25% (Finance Liga, 2016).
– The share of equity is 30% and the rest is borrowed capital.
– The exchange rate is 1 USD = 26 UAH, 1 EUR = 30 UAH.
As Table 2 shows, the WACC is 15%. This is a rather high value, especially compared with European countries. In the
OECD countries, it does not exceed 10%. In a recent report, IRENA states that the cost of capital is assumed to be 7.5%
in OECD countries and in China, and 10% in the rest of the world (IRENA, 2018). Market analysts state that, in fact, the
WACC in Ukraine should be not less than 19% (LB, 2017).
Given the WACC value, the LCOE was calculated based on Eq. (1), as shown above. For calculation purposes, forecast
data on the cost characteristics of various renewable energy technologies by 2030 in Ukraine were used. For energy-
generating facilities, the assumptions given in Table 3 were used, as well as some other specific assumptions as
follows.
– The cost of connection of the RES facility to the grid is 10% of the investment cost.
– Run-of-the-river small hydro power plants were considered.
– For rooftop and ground-mounted solar power plants (SPPs), the expected lifetime is 40 years (Child et al., 2017).
 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235 231

Table 3
Major assumptions on RES objects in Ukraine in 2030.
Lifetime, Capex, c /kWel Opex, c /kWel Decommissioning cost
years
Small capacity wind power 25 1570 39 5% of Capex (IRENA, 2012c)
plants (WPPs) (UWEA,
2016)
Average capacity WPP 25 1505 34 5% of Capex (IRENA, 2012c)
(UWEA, 2016)
Large capacity WPP (UWEA, 25 1440 29 5% of Capex (IRENA, 2012c)
2016)
Small hydro PP 80 2560 77 0.0072 EUR/kWh (IRENA,
2012a);
Rooftop SPP 40 760 (Child et al., 2017) 11 (Child et al., 2017) 0.00067 EUR/kWh
(Charlotte Solar Project,
2012)
Ground-mounted SPP 40 700 (Diachuk et al., 8 0.00067 EUR/kWh
2017) (Charlotte Solar Project,
2012)
Biogas (manure) 25 4200 (Diachuk et al., 11% of Capex (Anaerobic 2% of Capex (Warren, 2012)
2017) Digestion Plant, 2019)
Biogas (agricult. residues) 25 2700 (Diachuk et al., 11% of Capex (Anaerobic 2% of Capex (Warren, 2012)
2017) Digestion Plant, 2019)

Table 4
FIT and LCOE from RES by 2030 in Ukraine.
Technology FIT coefficient in FIT value in 2025–2029 LCOE from RES in 2030
2025–2029 (SCU, 1997) (EUR/kWh.) (EUR/kWh.)
WPP with units of capacity of up to 0.6 MW 0.84 0.045 0.108
WPP with units of capacity of up to 0.6–2 MW 0.98 0.053 0.088
WPP with units of capacity of above 2 MW 1.47 0.079 0.076
Biomass 1.84 0.099 0.040
Biogas 1.84 0.099 0.077
Ground-mounted SPP with capacity below 10 MW 2.23 0.120 0.110
Ground-mounted SPP with capacity above 10 MW 2.23 0.107 0.110
Rooftop SPP 2.43 0.097 0.089
Rooftop SPP of households by 30 kW 2.69 0.111 0.114
WPP of households by 30 kW 1.73 0.093 0.108
Micro Hydro PP (up to 0.2 kW) 2.59 0.140 0.108
Mini Hydro PP (0.2–1 MW) 2.07 0.112 0.142
Small Hydro PP (1–10 MW) 1.55 0.084 0.108

– Ground-mounted SPPs with tracking systems were considered.

– For biogas projects, the cost of connection to the grid was assumed to be 2% of investment (Biogas Renewable Energy,
2019). Fresh (and not dry) poultry litter is used, so the biogas output is 100 m3 /tonne (content of methane (CH4 ) is 65%)
(Feiz and Ammenberg, 2017). The net calorific value of biogas is 20.2 MJ/kg (BAU, 2014). We consider that the feedstock
for biogas plants is 90% by volume of manure and 10% by volume of corn silage. The cost of corn silage is 800 UAH/tonne,
the cost of (own) manure is 1.5 UAH/tonne. One tonne of beet pulp yields 120 m3 of biogas (Agravery, 2017) and costs
30 EUR.
– When burning wood, the amount of CO2 emitted by the wood is absorbed during growth, so the energy derived from
wood fuel is considered to be CO2 -neutral (US EPA, 2018).

4. Results and discussion

The calculation of LCOE from RES in Ukraine in 2030 (Table 4), i.e., the period when the FIT expires, is given below.
The expected costs of RES energy technologies in Ukraine in 2030 were used.
Table 4 shows that FITs in Ukraine are expected to be lower than the projected LCOE in 2030, for WPPs with a unit
capacity of up to 2 MW, for ground-mounted SPPs with capacity above 10 MW, for newly built, (i.e., not refurbished) mini
and small hydro PPs (0.2–10 MW) and for household SPPs and WPPs with a capacity of up to 30 kW. It also follows from
the table that the LCOE for electricity produced using biomass, biogas, ground-mounted SPPs and micro hydro PPs will
be equal to, or slightly lower than, the FIT rate, which implies that FIT prolongation is needed beyond 2030.
As mentioned above, capital is very expensive in Ukraine. This makes it necessary to conduct a sensitivity analysis to
show how the WACC affects the LCOE. For this purpose, we use several WACC values: 7.5% (as in OECD countries and
China, according to IRENA (2018), 10% (as in the rest of the world, according to IRENA (2018) and 15% and 19% (as market
participants claim it to be in Ukraine in reality). The results are shown in Fig. 2.
232 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235

Fig. 2. The impact of different WACC estimates on LCOE values.

Table 5
Cost parameters of electricity generating technologies using fossil and nuclear fuel in Ukraine in 2030 (EIA, 2017; Diachuk et al., 2017).
Capex (EUR/kWel ) Opex (EUR/kWel ) Capacity factor (%) Efficiency (%) Lifetime (years)
CHP, Natural gas (combined cycle) 1000 20 50 60 35
CHP, Natural gas (natural gas turbine) 600 20 50 52 35
CHP, Natural gas (steam turbine) 920 12 50 34 30
CHP, Coal (circulating fluidized bed) 1700 28 50 43 35
CHP, Coal (integrated combined cycle of gasification) 1800 63 50 46 35
CHP, Coal (burning on subcritical parameters) 1600 30 50 39 35
CHP, Coal (burning on supercritical parameters) 1300 43 50 43 35
TPP, Natural gas (combined cycle) 800 42 50 50 35
TPP, Natural gas (steam turbine) 920 12 42 45 35
TPP, Coal (combined cycle) 1200 52 50 36 35
TPP, Coal (steam turbine) 1100 52 50 33 35
Nuclear PP 6500 137 92.3 38 40

Fig. 2 shows that the WACC value directly affects the LCOE for all technologies: the higher the WACC, the higher the
LCOE. This leads to the conclusion that reducing the cost of capital, at least for RES projects, should be a priority for
government. The cost of capital is the main determinant of the cost of energy from renewable sources and is significantly
different in different countries (CCEE, 2017). Reducing the cost of capital could be achieved by providing internal and
external government loan guarantees, introducing relatively new financial tools such as green bonds, wider inclusion of
domestic banks for financing RES projects or cooperating with international financial organizations such as the Global
Environment Facility, the European Bank for Reconstruction and Development and the Clean Technology Fund.
To prove the assertion that FIT prolongation past 2030 is needed for some technologies, the calculation of LCOE for
electricity produced using fossil fuels in 2030 is given below. Subsequently, we compare the obtained results with the
LCOE for electricity from RES. The calculations are based on the assumptions given below, as well as those in Table 5.
– The decommissioning cost of a nuclear power plant (NPP) is 254 EUR/kWel (Bayliss and Langley, 2003).
– The cost of decommissioning combined heat and power (CHP) plants and thermal power plants (TPPs) is 2% of capex.
– Coal price in 2030 is projected to be 55 EUR/tonne (Diachuk et al., 2017).
– Natural gas price in 2030 is projected to be 5.6 EUR/MBtu (Statista, 2019).
– Nuclear fuel cost is 0.0033 EUR/kWh (World Nuclear, 2017).
Fig. 3 compares the LCOE of electricity from fossil fuels, nuclear fuel and RES. Renewables and nuclear energy have
high capital expenditures, whereas fossil fuel power generation has high operating costs (CCEE, 2017).
The figure above shows that the LCOE for fossil and nuclear fuels in Ukraine is expected to be significantly lower than
the LCOE for RES, indicating the need for extension of the FIT. This can be explained by several factors, particularly the
 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235 233

Fig. 3. LCOE for electricity produced using different energy-generating technologies in Ukraine in 2030, in EUR/kWh.

fact that RES technologies in Ukraine are not becoming more affordable quickly enough, the fact that coal will remain a
relatively inexpensive energy source and the fact that the cost of carbon emissions is extremely low and does not affect
the LCOE.
The latter thesis requires detailed consideration, and therefore we compare the LCOE using fossil fuels with a similar
LCOE value taking into account the current tax on fossil fuel emissions, (10 UAH/tonne of CO2 eq, (i.e., 0.3 EUR/tonne of
CO2 eq)) and the LCOE values with a fossil fuel tax of 1 EUR/tonne of CO2 eq, a CO2 tax of 5 EUR/tonne of CO2 eq and a
tax of 10 EUR/tonne of CO2 eq (Fig. 4). In the respective calculations, we assume that the combustion of 1 TJ of natural
gas yields emissions of 55.405 tonnes of CO2 eq, and the combustion of 1 TJ of coal yields emissions of 95.152 tonnes of
CO2 eq (MENR, 2017).
Fig. 4 shows that the current tax rate for CO2 emissions of 0.3 EUR/tonne CO2 eq will not affect the LCOE value of fossil
fuel-derived electricity in Ukraine in 2030. Similarly, a tax rate of 1 EUR/tonne CO2 eq will not affect the value of LCOE.
With an increase of this tax up to 5 EUR/tonne CO2 eq one might notice a slight increase in the LCOE value. At a tax rate
of up to 10 EUR/tonne CO2 eq, the increase in LCOE is more significant. For comparison, in Sweden, the CO2 emissions tax
is 118 EUR/tonne, in Finland it is 54–58 EUR/tonne and in Norway it is 3–47 EUR/tonne (ACEE, 2016). In a simulation of
the effects of the transition to RES with energy efficiency measures, the European Commission considers an emissions
tax rate of 14–42 EUR/tonne CO2 eq (CCEE, 2017). In Ukraine, there are concerns that an increase in this tax will burden
industry and make it less competitive.
The above calculations show that the prolongation of FITs after 2030 is needed for the majority of types of power
generation from RES, and a different regulatory tool is needed for large installations. According to NEC Ukrenergo, large
installations in Ukraine are those with a capacity of 10–15 MW. For comparison, in Germany, large installations are
those with a capacity of 40 MW. At present, the most common ‘‘next’’ tool is auctions: as of early 2018, these have
been widespread in 84 countries globally. Auctions reduce the cost of electricity from RES, in cases where technology
development and regulatory policy are adequate. For example, in 2016 in Germany, a decision was made to terminate
the FITs from 2017 in favour of auctions for large installed capacities, so that the development of onshore wind energy
should become predictable and the annual increase in installed capacity after 2020 should not exceed 2.9 GW (Hill, 2016).
FITs would remain for installations with a capacity of less than 750 kW (Morris and Pehnt, 2012). For this purpose, pilot
auctions for solar energy began as early as 2015, and the price fell to 0.0658 EUR/kWh in early 2017, which is a good
result for a relatively cold country. The minimum unit of annually installed SPPs in Germany is 1.5 MW. Because of
extremely widespread small energy units in Germany (up to 750 kW, which are still covered by FITs), the government
can also control the development of this market segment: if more than 20 MWh of ‘‘solar energy’’ is consumed, a tax of
0.0205 EUR/kWh should be paid for the entire amount of electricity, except for approximately 0.02 EUR/kWh, which is
234 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235

Fig. 4. LCOE for fossil fuels in Ukraine with different rates of CO2 eq emissions tax and without emissions tax.

the premium for RES. Solar power from new SPPs can cost 0.09 EUR/kWh, but the government adds 0.04 EUR/kWh for
installations up to 750 kW (these are mostly on the large roofs of commercial enterprises). Biogas projects enjoy FITs for
only half the time of operation during the year, as they operate when wholesale prices are high, i.e., biogas becomes a
flexible type of power generation that complements WPPs and SPPs (Morris and Pehnt, 2012).
The advantage of auctions is the predictability of the electricity output from RES and the establishment of new
production capacities. In addition, auctions allow the implementation of the most advanced technologies, and the auctions
themselves are possible in markets where the volume of installed capacity and output allow for economies of scale. If
the cost of electricity from RES is high, then auctions will make electricity from RES unprofitable to produce, and instead
of an increase in production capacity the opposite will be observed. In addition, small and medium-sized producers are
generally unable to take advantage of auctions, which will negatively affect competition in the medium term. The whole
idea of auctions is new for Ukraine and requires further study, negotiations with stakeholders and careful design.

5. Conclusions

The calculations lead to several conclusions. Firstly, a prolongation of FITs from 2030 is required. This is especially the
case for WPPs with a unit capacity of up to 2 MW, for ground-mounted SPPs with capacity above 10 MW (unless covered
by auctions), for newly built mini and small hydro PPs (0.2–10 MW) (again, unless covered by auctions) and for household
SPPs and WPPs with capacities up to 30 kW. The LCOE for electricity produced using biomass, biogas, ground-mounted
SPPs and micro hydro PPs will be equal to, or slightly lower than, the FIT rate, which implies that FIT prolongation is
needed for these types of generation. Prolongation of FITs should be legally assured in the near future in order to avoid
lack of investment in RES in the early 2020s, when the lifetime of an existing FIT would not be sufficient to repay the cost
of new potential RES projects. In the case of failure to prolong the FITs, Ukraine is expected to suffer reputational losses
if the share of RES does not increase enough to comply with EU directives, which became mandatory after the start of
Ukraine’s membership of the European Energy Community.
Secondly, the low CO2 tax rate in Ukraine, along with the low cost of coal, makes fossil fuel-based energy generation
cheaper than energy generation from RES. Therefore, the latter type of generation needs further government support from
2030. The prolongation of the FIT system could partially compensate for the high risks of doing business in Ukraine.
Thirdly, the cost of electricity from RES depends strongly on the high cost of capital in Ukraine. A higher cost of
capital leads to a higher electricity cost. Despite the fact that the current status of a country with a market economy,
insufficient economic development, corruption, hostilities in the east of the country and other issues, make capital even
more expensive, further steps are needed to reduce the cost of borrowed capital in Ukraine.

Acknowledgement

This research was supported by the Institute for Economics and Forecasting, Ukrainian National Academy of Sciences.
 G. Trypolska / Economic Analysis and Policy 62 (2019) 227–235 235

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