Market conditions, not war to dictate success of Ukraine EU integration and investments, Ukrenergo CEO

LONDON (ICIS)– Ukraine should deregulate its electricity market to speed up the integration with neighbouring EU countries and attract investors to rebuild its infrastructure, the CEO of the transmission system operator, Ukrenergo, said.

Speaking to ICIS, Volodymyr Kudrytskyi said the country could fast-track critical projects such as building new and efficient capacity and joining the wider EU electricity market.

However, much depends on its ability to revert to free market conditions even if the country is still fighting off Russia’s all-out war, he said.

“It’s not war that prevents investments, it’s mostly regulations. We should not hold off acting because of the war. We should act because of it,” he said, noting that Ukraine could build the new capacity in less than ten years if market conditions were in place.

Ukraine had pledged to deregulate its electricity and gas sectors but the start of Russia’s invasion in February 2022 prompted the government to introduce martial law, which effectively closed its markets.

State intervention has also created challenges as electricity transmission tariffs are on average 7-10% lower than the levels where they should be at to allow Ukrenergo to finance renewable generation via an intermediary called the “Guaranteed Buyer.”

This means Ukrenergo has accumulated debt amounting to Ukraine Hryvnia 30billion (€716m) and the debt could mount if the state continues to keep tariffs low. The problem has been a recurring theme in recent years but Kudrytskyi said Ukrenergo had almost cleared a higher debt prior to the start of war after working with international banks to pay it off.

NEW CAPACITY

Importantly, the country needs to attract investors to build new capacity to replace plants that had been damaged or occupied by Russia.

Kudrytskyi said Ukrenergo has already modelled the capacity that is required, noting Ukraine would need between 1.3-1.5GW of thermal capacity from biofuel, another 1.3-1.5GW of gas-peaking hydrogen-compatible capacity, as well as 3GW of solar and another 5GW of wind generation.

It would also need one or two more nuclear units and an estimated 1GW of battery storage.

Most of this capacity would be small-scale and dispersed across the country to minimise the vulnerability of the infrastructure to air strikes, drone or missile attacks.

Last year, the Ukrainian power grid was targeted by Russian shelling and bombing which destroyed more than half of the transmission network and generation plants, forcing Ukrenergo to introduce rolling blackouts to stabilise the system.

The situation has been better this winter not only because the infrastructure suffered comparatively fewer attacks but also because Ukrenergo had been working to expand Ukraine’s interconnection capacity with neighbouring EU countries.

CROSS-BORDER TRADING

Its import capacity more than tripled from 500MW in January 2023 to 1.7GW this year, while the export capacity stands at 0.4GW.

The increase is largely due to the fact that Ukrenergo and its Polish counterpart PSE commissioned a new 400kV line last year which now operates under the umbrella of the European Network of Transmission System Operators for Electricity (ENTSO-E), where Ukrenergo became a full member at the start of this year.

Kudrytskyi says Ukraine’s interconnections with neighbouring EU countries and Moldova currently operate at full capacity but added that new capacity was being planned with Romania and Slovakia.

Construction on expanding the interconnection with Romania would start this year but Kudrytskyi could not give further details for security reasons.

The expansion of the cross-border capacity comes as Ukraine celebrates its second year since it unplugged from the Russian grid a few hours before war started and prepared to join the ENTSO-E network.

ENTSO-E

The ENTSO-E synchronisation was supposed to happen over several years, but Ukrenergo fast-tracked the process, launching commercial cross-border trading in the summer of 2022 and becoming a full ENTSO-E member which now allows it to have a decisive voice in shaping Europe’s electricity strategy.

Kudrytskyi said Ukrenergo will have an important contribution to make, not only because it’s ENTSO-E’s fourth largest grid operator by customers served, but also because it has deep technical experience on pooling resources to make the network more resilient to extreme events including war or natural disasters.

“We feel we’re now a member of the European electric union,” he said.