Ukraine needs predictable, stable laws for successful energy transition – think tank

LONDON (ICIS)–Ukraine needs to create a stable and reliable legal environment if it wants to attract more investment, integrate with EU markets and switch successfully to a carbon-neutral economy, according to two high-profile members of Ukraine’s leading energy think tank.

DiXi Group president Olena Pavlenko and research director Roman Nitsovych told ICIS that Ukraine was facing internal problems such as legal unpredictability, issues related to the country’s coal phase out, and mounting debt and transmission imbalances in the electricity sector. The country is also facing external challenges such as the possible introduction of an EU carbon border tax, which could hit large swathes of its economy.

However, they also described the genuine efforts taken both by the public and private sectors in outlining long-term visions and moving in lockstep with the EU towards a successful energy transition.

For example, just like the EU, Ukraine has also launched its own green agenda, discussing carbon neutrality and the right means to reach it.

GREEN TARGETS

Earlier this month, Ukraine adopted its second Nationally Determined Contribution (NDC), a document which most countries have committed to that sits at the heart of the Paris agreement on combating climate change.

Under the latest targets, the share of renewable generation in the electricity sector is set to increase to 30% by 2030 from approximately 13% in 2020. Meanwhile the use of biofuels in the heating sector is also set to increase by 30% by the same date.

The share of electric vehicles in the transport sector is expected to reach 15% by 2030.

Even so, Nitsovych believes the broader goals to reduce emissions by 65% by 2030 and by 94% by 2060 compared to the 1990 baseline are not ambitious enough.

“[If we consider these targets], we would improve our historical records only slightly, since in 2018 we already achieved a 61% reduction [on the 1990 baseline level],” he said.

However, he said that although the publication of the NDC report dragged on for a year, it was an encouraging sign that the government published it, giving a clearer idea of the country’s long-term vision. The document is under consultation and will be approved later this year.

COAL REPLACEMENT

To reach its carbon neutrality goals, Ukraine will have to phase out most of its coal-fired capacity, which currently stands at 18GW.

The most important question will be what will replace coal and what funding will be available to underwrite new construction.

Pavlenko said much will depend on the steps the government would take to improve the functioning of the electricity market to guarantee a correct price signal for investors and on the tenders for new builds that would be organised in the upcoming years.

Ukraine is a major European gas producer and is thought to have untapped reserves in excess of one trillion cubic metres. It also has unrivalled bioenergy and offshore wind capacity potential, which could propel it to among Europe’s leading generators of clean energy, as well as gas production.

However, its electricity sector has been riddled with problems linked to household subsidies and a faulty feed-in tariff scheme which led to piling debt thought to hover around Ukraine hryvnia 24bn (€733m).

Pavlenko and Nitsovych said the country also needed a functional ancillary market and a capacity market for electricity.

“We have excessive capacity in the system although most of it is not available,” Nitsovych said.“I refer to coal-fired capacity in particular. Much of it is scheduled to be decommissioned, but this will depend on the national coal phase-out plans.”

He said the government had overstimulated growth in the wind and solar sectors, but has not offered sufficient support for developing biofuels, despite Ukraine’s vast agricultural landmass.

Pavlenko added that another area that Ukraine was increasingly focusing on was research into developing the hydrogen sector and said the government, with support from international institutions, may publish a long-term strategy later this year.

EU CARBON BORDER TAX

A major challenge ahead is the possible introduction of a carbon border tax which could hit Ukraine’s chemical and metallurgical industries.

Pavlenko said that there was ongoing discussion about the impact, should the proposals be adopted by the EU, and what options would be put in place to mitigate its effects.

She said Ukraine was committed to introducing an emissions trading scheme (ETS), which would eventually be linked to that of the EU.

However, Nitsovych said the timeline was yet to be defined, noting that the country introduced a monitoring, reporting and verification (MRV) system for greenhouse gas emissions on 1 January 2021.

He said the ETS may be introduced after the MRV has been in place for three years.

He said other options including possible derogations were being analysed.

Pavlenko said the Energy Community, an institution designed to extend the EU’s free market goals to neighbouring countries, argued that since Ukraine had signed up to the EU’s energy market principles it should not be treated as an outsider and therefore liable to pay the border tax.