Green not always clean in Ukraine

By bne IntelliNews March 15, 2012

Graham Stack in Kyiv -

Gas oligarch Dymtro Firtash's star is rising in Ukraine. Already chairman of Ukraine's main employers' association, Firtash bagged his first state post on February 17 as head of the National Tripartite Social and Economic Council, and is now looking to boost his reputation further in the eyes of the population.

The wheeze he's alighted on is to invest $100m in a greenhouse pilot project designed to revolutionise Ukrainian agriculture - and that in the impoverished West Ukrainian village he grew up in. But bne enquiries have raised questions about the nature of the investment and potential use of state subsidies.

Firtash's holding company, DF Group, announced February 9 that the businessman will invest a whopping $100m in a greenhouse complex in his native Sinkov in the Ternopil region of impoverished West Ukraine where he grew up. To get some idea of the size of the investment, experts estimate it matches the total invested into greenhouse complexes in Ukraine since independence in 1991.

With Ukraine's agriculture still on a downwards slope following the not-very heights of the Soviet era, greenhouses are one technology that could revolutionise the industry. Pioneers look enviously to Holland, world leaders in greenhouse technology. Firtash's project will bring Dutch greenhouse technology to Ukraine, with yields at his state-of-the-art greenhouse complex to exceed those of existing complexes by 30-65%, at commercial farms six-fold and in family plots - the mainstay of Ukraine's vegetable production - by an incredible 18-times, under published plans. According to Firtash, his giant greenhouse complex will be capable of producing around 20% of the country's pepper needs, for example.

Gas to burn

For Firtash, the move into greenhouse technologies could be a logical next step after winning back over $3bn worth of natural gas from Ukraine's gas distribution monopoly Naftogaz Ukrainy, which had been confiscated from Firtash's gas trade Rosukrenergo by former premier Yulia Tymoshenko in gas agreements signed with Russia in January 2009. Not only did Firtash win back the gas thanks to a Stockholm arbitration court decision, but Tymoshenko received a seven-year jail sentence in October for signing the agreements that tried to eliminate Firtash's business.

Firtash now has a lot of gas to burn, but with a market glut in Europe, he is now faced with the question of how to make a decent profit on it. One answer has been his acquisition of most of Ukraine's gas-guzzling chemical industry. And greenhouses, for which gas comprises around one-third of the running costs, are another potential way for Firtash to realise his underground hoard, say experts. But according to bne enquiries, Firtash might not be risking much with this pioneering investment in greenhouses.

As of February 2011, Ukraine's cash-strapped government provides a direct subsidy for greenhouse construction comprising up to 50% of the cost of the investment. The money paid out under this budget position in 2011 was miserly - around $7.5m. But in the 2012 budget, the greenhouse subsidy programme has been pooled with a number of other similar agriculture support programmes, meaning the available budget resources now total roughly $150m. Theoretically, Firtash could thus claim a $50m subsidy for his $100m project. Firtash's press service confirmed the sum of investment and parameters, but didn't answer enquiries about the state subsidies.

Experts and market participants are sceptical at the slated construction cost of $100m for a 10-hectare greenhouse complex in Ukraine. Europe's largest and most technologically advanced greenhouse complex, the UK's Thanet Earth complex, is being built over a number of years at a total cost projected at around $150m - but comprises seven separate greenhouses with 55 hectares under glass, over five-times larger than Firtash's planned complex. The $150m figure for Thanet Earth also includes the cost of acquisition of the site in South England, and the installation of a proprietary heat and power generation plant and an electricity substation.

As a rule of thumb, Ukrainian experts say the most technologically advanced greenhouse complex costs around $400 per square metre to build, so for 10 hectares total costs should run to a maximum of $40m. This raises obvious questions as to whether the much-hyped Firtash greenhouse gas investment is all that it is made out to be - questions which will become louder once the volume of state subsidies is revealed.

Spot in the sun

In a similar vein, Ukraine has established very generous subsidies for solar power, but there are allegations that top government officials are the biggest beneficiaries of the subsidies.

Similar to the greenhouse story, Ukraine has one of Europe's most generous subsidies for solar power: Ukraine offers a feed-in tariff at a price of €0.46 ($0.61) per kilowatt-hour for large-scale solar projects, by the far the highest rate in Europe: rates in environmentally-friendly Germany are €0.05, according to Bloomberg.

The generous subsidies certainly are having a spectacular effect: Ukraine is now set to boast Europe's largest solar power complex, the 80-megawatt (MW) Okhotnykovo Solar Park, installed by the Vienna-based company Activ Solar in sun-drenched Crimea. In fact, this is just one of three major projects completed by Activ Solar in 2010-11 that saw Ukraine's installed power capacity from renewable energy sources double in 2011.

But controversy surrounds who is the real owner of Activ Solar. A number of respected journalist investigations allege that the Vienna-based company is linked to Andrei Klyuyev, until recently Ukraine's first deputy prime minister with a remit for energy. Klyuyev denies this. Investigations by Ukrainian journalists established that Activ Solar CEO Kaveh Ertefai is Klyuyev's son-in-law, and that the company's business development manager is Klyuyev's son Bogdan, as well as numerous intersections between business structures belonging to Andrei Klyuyev and his brother Sergei, and Activ Solar.

Klyuyev's alleged involvement with Activ Solar led to a major spat between the EU and Ukraine, and possibly also to his dismissal from his cabinet post in early February.

In an interview with the usually dependable Kommersant Ukraine, a source identifiable as the European Commission's envoy to Ukraine, Jose Manuel Teixeira, complained about Ukraine's decision to use €31m of EU money intended for energy conservation to construct a power cable link to the national grid for the solar power projects in Crimea and Odesa. "It is probably clear to you which solar power projects this is about, because there aren't that many belonging to Andrei Klyuyev," the European Commission source told Kommersant Ukraine. An EU Brussels spokesman later said it would ask Kommersant Ukraine to retract the article.

Only six days after the article appeared, Klyuyev was removed from his post - to become head of the national security council. But Teixeira was also not forgiven: "The Ukrainian Foreign Ministry is watching with growing amazement the public statements by the EU Ambassador to Ukraine Jose Manuel Pinto Teixeira, which are more and more falling short of a well-established tradition of international relations," Ukraine's foreign ministry spat out later in the month, accusing Teixeira of becoming "Ukrainianized".

Activ Solar has installed 90% of Ukraine's solar capacity to date, according to Bloomberg, thus effectively monopolising the favourable subsidized feed-in rates. The big question is whether the government is ready to open up such generous - and potentially beneficial - subsidies, whether for solar power or greenhouses, to outsiders, or will keep them reserved for the well-connected. Until now, the latter has been mostly true, and given the parlous state of Ukraine's finances, it's unlikely that much will change.

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