Ukraine must develop gas storage and trade if transit role lost – regulator official

LONDON (ICIS)–Ukraine must build on its powerful natural gas storage system and adopt a strategy geared towards encouraging trading and investments if it wants to stay competitive in the long-term, a Ukrainian energy regulator official said.

Speaking to ICIS, Olena Antonova, NERC member under rotation since July 2020, said the two objectives were linked to Ukraine’s future to replace its role as a purely transit country of Russian gas, which would dictate the steps it would take over the upcoming years.

Ukraine, the historic transit corridor for Russian gas, could see its role in European markets shrink if volumes are diverted away to the Nord Stream 2 pipeline.

OBJECTIVES

This raises questions about its future ties with Europe and the objectives it must embrace to remain a relevant European player.

Firstly, she says, it must champion its storage sites, which have a capacity of 31 billion cubic metres and could become the safety valve for the entire continent.

This was already the case last year when nearly 80 non-resident companies rushed to inject volumes in Ukrainian facilities.

Secondly, it should build a reliable exchange and settlement infrastructure to support and attract natural gas and electricity trading.

Ukraine’s synchronisation with the EU’s electricity grids scheduled for 2023 should give further impetus to create the necessary conditions for an integrated traded electricity market.

Thirdly, she said, Ukraine should develop a precise long-term strategy that would reflect the country’s future generation mix based on demand projections, the effects of the synchronisation with the European electricity transmission system, sources of financing new investments and end-user price scenarios.

ENERGY TRANSITION

Equally important, would be to fix existing market distortions, negotiate EU support throughout the energy transition and a waiver from instruments such as the carbon border adjustment mechanism (CBAM). The EU intends to adopt CBAM to ensure that goods imported into the EU are covered by equivalent carbon pricing.

She said Ukraine’s successful transition to a net zero emission economy hinged on developing an affordable energy strategy, with gradual displacement of its almost 22GW of coal-fired capacity. The country should rely on traditional renewable forms of generation, nuclear and hydro that would be complemented by combined cycle gas turbines (CCGT) and battery storage to create more flexibility in the market.

“The era of coal will soon be over. However, with where our system currently is, it is only coal that can provide for a daily change of load in winter as we severely lack flexible capacity, which would be even more needed with the growing share of renewables,” she said. Exactly for this reason the Ukrainian electricity grid operator evaluates that up to 12GW of renovated coal will still be needed in the system by 2031, accompanied by 2GW of highly flexible capacity and 0.5-2GW of batteries with nuclear remaining at current levels.

Equally important would be solving issues related to payment of debt to renewable producers. This occurred as a result of the fact that the share of renewable generation rose just as electricity demand dropped during the 2020 Covid pandemic.

One solution would be for the electricity transmission system operator, Ukrenergo, to issue green bonds to service the balance of debts to renewables, she said.

ACHIEVEMENTS

Antonova said Ukraine had already made tangible progress in terms of aligning domestic legislation with that of the EU and following it through.

“We not only merely made a choice, but also systematically followed it through [by] complying with EU energy law, regardless of short-term crises or political agendas. This is an achievement in itself already,” she said.

Among key achievements, she mentioned the unbundling of transmission operations, the introduction of respective regulations including network codes and tariff methodologies for regulated businesses.

However, she said there were also multiple problems in both sectors – ranging from outstanding debt of Ukraine hryvnia 90bn (€3bn) in natural gas and in excess of UAH 60bn (€1.9bn) in electricity.

CHALLENGES

She said the biggest challenges faced by the regulator in the electricity sector included standing up to political pressure to postpone or suspend reform without any relevant changes to the primary legislation, introducing “temporary” price caps which later became a permanent solution or simply trying to establish a system of market monitoring without having the relevant IT infrastructure in place.

She warned that with uncertainty related to Ukraine’s role as a transit country for gas delivered to Europe, Ukraine faced risks related to price regulation. This is because if Ukraine loses its transit revenue, the costs to optimise the transmission system would have to be reflected to end consumers, potentially leading to soaring bills.

She said end-user price intervention in response to crises should be just a temporary and not a permanent solution, adding that the government should develop instruments to protect vulnerable consumers.

Antonova stressed the importance of shielding the energy regulator from political interference.

“I have run second in the first ever open tender for the selection of the regulator board. Myself and four more colleagues made up the first independent board. After multiple changes… we have now come to a situation where only one out of five members was selected through an open tender,” she said.

REGULATORY PREDICTABILITY

Finally, she rejected claims that natural gas tariffs were changed without proper consultation. These claims came primarily from non-resident companies which complained about regulatory unpredictability related to storage tariffs.

“If we are talking about regulated tariffs for natural monopolies in gas, I do not see a problem with the regulatory process. The public consultation process is systematically followed through by the regulator.”