How the Energy Sector Is to Become the Driver of Ukraine’s Economy Development

One year has passed since the Government of Ukraine adopted the national energy strategy. For readers’ convenience, the vision is structured by the following criteria: resources, infrastructure, markets and investments.

Resources. Continued policy of energy supply diversification is definitely a positive achievement. It should be reminded that for the third year in a row Ukraine buys natural gas in Europe to cover its own needs. Dependence on the nuclear fuel supply is reducing significantly. In this context, economic links between Energoatom and Westinghouse play the key role. Broader use of coal in energy sector along with lower energy intensity of GDP are seen as key factors in reducing the energy dependence on the Russian Federation. Other positives include the development of a commercial and technological model for creating strategic stocks of oil and petroleum products. It is expected that the parliament approves it already in 2019. Such changes are essential for improving the situation in the petroleum products market, which becomes increasingly monopolised.

Speaking about transformations in the energy infrastructure, there is some concern, primarily related to delays with unbundling — setting up the gas transmission system operator independent of the parent company. This prevents introducing a dynamic gas market and signing of a new transit contract after 2019. At the same time, quite inspiring is the fact that the Ukrainian parliament consistently creates a legislative basis for reforms. The key laws on the Electricity Market, on the Natural Gas Market and on NEURC have been adopted.

Effective markets are impossible without reliable infrastructure. Ahead of 2019, when markets of energy resources are to become operational, it is important to assess the process of their establishment. Let us start with the natural gas market. Implementation of the Law "On the Natural Gas Market" has been slow. The main problems include repeated delays with unbundling, as well as postponed introduction of daily gas balancing. All market participants are to be blamed for that matter.

As for the electricity market, the process of its formation looks more optimistic. If there is no force majeure, the market should become fully operational from the second half of 2019. In case of some political collisions, which are quite possible in the election year, this event may be delayed.

For example, the launch of the new electricity market model in 2019 may provide for additional annual growth of Ukraine’s GDP by at least 1% by improving investment conditions to generate funds for infrastructure modernisation, and by increasing the volumes of electricity trade. Synchronised operation of Ukraine and Moldova’s power systems with ENTSO-E will contribute to this process. With active cooperation of all parties, this goal can be achieved by 2023. The maximum volume of power exchange in case of full synchronization in the export-import mode will reach 4 GW, thus allowing to increase the electricity trade by six times — from $250 million to $1.5 billion
The introduction of a new electricity market will be crucial, as it opens fundamentally new opportunities for investors and consumers. New market rules imply the right of a consumer to freely choose the energy supplier. The EU countries receive additional opportunity to buy significant volumes of electricity from Ukraine. This will increase energy supply in the market for the benefit of consumers. On the other hand, the EU electricity producers will have access to the Ukrainian market.

The lack of resources, infrastructure and markets means no investment. To improve the investment situation in the country, it is necessary to de-monopolise markets, ensure protection of property rights, finalise accessibility of geological information, and stabilise tax legislation. Below is an example of successful investment. It concerns the gas sector. Ukraine is ranked 3rd in Europe in proved reserves of gas at about 1 trillion cubic meters. In case of favourable investment environment and increased efficiency of gas use, the Ukrainian gas industry will be able to meet the domestic demand with own production by 2025.

Improved energy efficiency of buildings and the energy sector, as well as total energy metering are measures that can bring about rapid effect in terms of energy security and commercial interest.

Potential threats. First, the wear and tear of Ukraine’s electric grids is 70%. By introducing the incentive pricing model, including RAB-based system, Ukraine will be able to encourage potential investors to invest in reconstruction and modernisation of the energy infrastructure, which will result in additional $10 billion in the national economy over the next 20 years.

Second, there is global underfunding of nuclear energy sector. Current tariffs for electricity produced by Energoatom are unable to cover the company’s strategic needs and support the sector in proper condition, thus creating risk of accidents.

Third, certain difficulties may arise in the operation of Ukraine’s gas transmission network following the completion of Nord Stream 2 gas pipeline. There are also serious risks linked to significant dependence on Russian supply of petroleum products and coal.

Fourth, the cyber security of the power grid amidst armed aggression is another area of concern. Everyone remembers a powerful cyberattack on Ukrainian energy sector in 2015, staged by the Russian special forces, which resulted in massive disconnection of consumers.

And finally, I’d like to outline priorities of the Ukrainian energy sector development, including its pillar — the nuclear power. In the next 20 years, the national economy will not be able to develop properly without this type of energy. In addition, it is much better positioned for achieving de-carbonisation, especially compared with the coal sector.

In quantitative terms, the future of the Ukrainian energy sector will look as follows. Over the next 15 years the share of renewables will increase by five times — up to 25%. At the same time, the share of coal will reduce by 2.5 times to 13%. The shares of gas and nuclear power in primary energy consumption will remain at approximately current levels of 30% and 25% respectively. Also, the share of petroleum products will decrease substantially to 7%.

source:

Volodymyr Omelchenko

Director, Energy Programmes


Born in 1967 in Kyiv.

Education: Kyiv Politechnic Institute, Department of Chemical Engineering (1992).

Author of over 50 scientific works and op-ed publications. Took part in development and implementation of international energy projects and scientific research in international energy policy.

Employment:

1992–1996, worked in different positions in the mechanical engineering industry;

1997–1998 — head expert of the division of oil, gas and petroleum refining industry of the Ministry of Economy of Ukraine;

1998–2003 — Naftohaz Ukrayiny National Joint-Stock Company, in charge of oil transportation section;

2004–2007 — chief consultant at the National Institute of International Security Problems of Ukraine’s NSDC;

since February, 2007 — Leading Expert, Razumkov Centre. Director since 2013.

(044) 206-85-02

omelchenko@razumkov.org.ua

volodymyr.omelchenko