During 2024, a significant number of Ukrainian companies began investing in the domestic energy industry, with prominent Ukrainian businesses such as OKKO, BGV, and Nova Poshta all constructing power generation facilities and opening energy trading branches. The reasons behind this developing trend are fairly obvious. First and foremost, all businesses care about safeguarding secure energy supplies, but Russia’s extensive bombing campaign targeting Ukraine’s power grid has placed the country’s energy security in question. The price of electricity also rose by around one-third year-on-year up to September 2024, which helped make energy infrastructure investments appear significantly more financially attractive. Meanwhile, wartime restrictions imposed by the National Bank of Ukraine on cross-border payments in foreign currency have meant that more Ukrainian businesses are looking to invest any excess revenues in infrastructure projects.
The energy industry is a complex environment for newcomers to navigate, with relatively expensive investment tickets for energy projects and high requirements for the company’s financial, organizational, and technical capacity. If a company plans to invest in an energy project that is more complicated than the relatively simple installation of rooftop solar panels or gas-fired units for in-house electricity needs, management must be ready to conduct a thorough initial assessment of the project before proceeding. Any mistakes, oversights, or omissions during the project development, construction, or commissioning phase can lead to subsequent delays in commercial operation, resulting in significant losses which can soon begin to add up. Past experience demonstrates that there are a number of issues and potential challenges that all companies should take into account if they are planning to invest in Ukrainian energy infrastructure projects.
Grid Connection
In addition to the land usage and environmental protection regulations that routinely feature in most infrastructure and construction projects, securing grid connection for power generation projects is critical for the timely commissioning of power generation facilities. Based on the current regulatory framework, there are a number of possible approaches to this issue. One option is to pursue connection under the terms of an existing agreement with the distribution system operator. Another avenue worth exploring would involve grid connection in line with the National Energy and Utilities Regulatory Commission (NEURC) resolution of March 2022. It would also be possible to seek grid connection as envisaged by Ukraine’s Distribution System Grid Code or Transmission System Grid Code. The various available options all provide for different procedures, timelines, and costs. Assessing the most suitable format is crucial before making any definitive investment decision. In addition, it is important to underline that in some cases, construction of grid connection facilities including electricity lines and substations may require further land allocations with accompanying ownership, leasing, or usage issues. This factor is often omitted by developers, but can potentially lead to project delays and rising costs.
Regulatory Requirements
The Ukrainian energy sector remains highly regulated and is governed by extensive legislation as well as numerous regulations issued by NEURC. Plotting a pathway through this dense regulatory environment often requires detailed cooperation with local authorities as well as engaging in bureaucratic procedures for the execution of contracts with state-owned companies and electricity market stakeholders. Any competent project management team will need to address a long list of requirements including licensing, registration of the wholesale market participant, execution and performance of contracts for electricity market operations, and public procurement issues. These all need to be taken into consideration when developing the financial model for the project.
Energy Market Strategy
The electricity market in Ukraine is well known for its volatility and for the complexity of operations. This is due to a number of factors including state regulations and the high volume of interested stakeholders, along with a range of production and consumption-related variables such as fuel prices, weather conditions, and ongoing military action. With this in mind, most comprehensive business plans for energy projects should take into account the possibility of unanticipated electricity market shifts, and should factor in the need to accommodate different scenarios.
In light of present market realities, businesses with an appetite for energy projects may want to consider cooperating with Ukrainian banks or international agencies. In addition to providing a range of financing opportunities, cooperation with international agencies in particular can also create the conditions to test existing business models and investor assumptions in detail during discussions with experienced financial, technical, and regulatory experts.
One alternative approach is to focus on cooperation with experienced energy sector development teams. There are a number of professional energy developers in Ukraine. The right partner can oversee the efficient preparation of a project and monitor construction costs to keep them remain within acceptable margins, before ensuring the commercial operation of completed energy facilities. This kind of cooperation can be managed through corporate and contractual instruments such as conditional share purchase agreements, shareholder agreements, and development services agreements, which can be defined based on commercial arrangements between project partners.