Economic challenges for entrepreneurs
By the end of 2024, Ukraine plans to install 1 GW of capacity for distributed power generation. This was announced by President Volodymyr Zelenskyy at a conference in Berlin, and Energy Minister Herman Halushchenko expressed confidence that this step would ensure critical infrastructure even during blackouts.
At first glance, investments in distributed generation look promising. Entrepreneurs evaluate this decision through two key factors: payback and cost of electricity. Today, the cost of electricity for enterprises consists of two parts: the cost of electricity itself (through the DAM system) and distribution costs. If we divide these two cost items, the cost of electricity is 80% of the total cost, and distribution is 20%.
Business owners estimate the return on investment in generation based on a possible 20-30% increase in gas prices. Estimates show that under such conditions, generation can be 40% more profitable than buying electricity from the grid, which creates an incentive for investment. However, a more detailed analysis shows that the optimistic forecasts may not be so unambiguous.
However, the optimistic scenario loses its clarity when analyzed in more detail. Gas-fired reciprocating engines have a high combustion temperature, which leads to rapid wear of components and requires frequent maintenance. This increases repair and maintenance costs by several times compared to diesel generators, reducing the initial benefits of energy savings.
Additional investment costs and risks
Another important issue is connecting to the grid to sell excess electricity. This requires an additional integration and management system, which significantly increases investment. It should also be remembered that electricity will be sold to the grid at a tariff that does not include distribution costs, i.e. only at the cost of electricity itself (through the DAM system). Therefore, the profit from sales is not as significant as from self-consumption, which casts doubt on the feasibility of creating additional capacity exclusively for sales.
Entrepreneurs also weigh the risks associated with blackouts and possible attacks on the power grid. If the grid is unavailable, any generation for sale will be useless, and the expected profit will be volatile.
In the current economic environment, businesses are forced to carefully consider every investment. Distributed power generation opens up new opportunities for businesses, but with a high level of risks and costs. Therefore, businesses prefer to choose generation capacities that cover only their own consumption and peak loads, leaving the possibility of expansion in question. For many entrepreneurs, this means choosing a minimum threshold of capacity that is necessary to meet basic needs, even if this reduces the overall resilience of the system.
This limitation of investment is often based on a cautious financial forecast. Companies calculate their payback, taking into account that having excess capacity does not always pay off. According to economic calculations, each additional unit of generation capacity requires not only investment, but also regular maintenance, technical support and resource costs. With limited government support and volatile energy markets, companies seek to avoid excessive costs.
Optimization of investment volumes
The additional costs of excess generation limit the potential for investment. For example, if a company decides to install a 2 MW generator instead of a 1 MW one, it requires almost double the funding - not only for the installation itself, but also for its connection, certification, and related maintenance. Without adequate compensation through government programs or a stable market for surplus electricity, such investments look too risky.
In addition, many businesses face the issue of financial liquidity. High upfront costs of generating equipment and slow payback can negatively affect a company's cash flow, especially if there is insufficient support from banking institutions. Some companies choose the option of gradually increasing generation capacity, which allows them to spread investment costs over time and provides flexibility in case of unfavorable economic conditions.
This restraint in investment reduces the potential for scaling up distributed generation in the country by 20-40%. If the government introduces additional support mechanisms, such as guarantees of a stable gas price or investment tax credits, it will help companies invest more confidently in generation capacity. In the long run, this will not only improve the energy autonomy of businesses, but also strengthen the energy stability of the entire country.
Necessary steps to stimulate business investment
In order to boost investment in distributed power generation and increase business energy independence, a comprehensive support strategy needs to be developed at the state level. The potential of businesses to generate their own electricity can significantly expand the capabilities of the energy sector, reduce the load on the grid, and cut costs for enterprises, but this requires systematic government action.
First, direct incentive mechanisms, such as government subsidies or compensation for the installation of generation equipment, should be considered. This will help companies from various industries to reduce the significant initial costs of generation and motivate them to invest even in the absence of an immediate payback. In practice, such measures can be successfully implemented through government co-financing programs that will support strategically important projects for the country's development.
In addition, the introduction of tax incentives for companies investing in distributed generation can be an effective lever for long-term investment. For example, introducing a temporary reduction in income tax for companies that install generation capacity will allow businesses to recoup their investments faster and at the same time contribute to the country's overall energy sustainability. This will also create a chain effect, where each new investment strengthens the financial position of the company and stimulates additional investment flows.
Another important step is to simplify administrative procedures related to permits for the installation and operation of generation equipment. The introduction of the “one-stop shop” principle and a reduction in the timeframe for approving power generation projects can significantly reduce the time and resources spent at the implementation stage. It will also allow more companies to start operating in a short time, ensuring a quick return on investment.
Additionally, a guarantee of stable energy prices and the availability of long-term contracts may increase business interest in distributed generation. Stable pricing policies for gas and other energy resources will allow businesses to plan their budgets and projects more effectively. For companies that rely on stable resource costs, this will be a significant advantage that will increase the investment attractiveness of energy projects in the country.
Given the ever-growing need for energy sustainability, the implementation of these measures not only encourages businesses to invest in distributed generation, but also strengthens the country's energy security. Thus, the state will not only help businesses, but also create conditions for building a stable energy future for the country, which will attract new investments, increase international competitiveness, and promote economic growth.