On March 11th, Café Kyiv took place in Berlin. Low Carbon Ukraine, in cooperation with the Centre for Liberal Modernity, organised a panel discussion on energy security.
Energy at the forefront of the war Since the beginning of the war, energy stands at the forefront of the war. Russia targets Ukraine’s energy infrastructure with particular vehemence. Our panel focused on the lessons learned from the outgoing winter and what Ukraine and her partners can do to ensure and maintain national energy security, one of the most critical issues regarding economic recovery.
Discussion with a distinguished Panel We would like to thank our panelists and speakers Roman Andarak, Deputy Minister for Energy of Ukraine Rouven Stubbe, Consultant and Energy Economist, Berlin Economics, Yulia Burmistenko, Head of International Affairs, DTEK, Inna Sovsun, MP, Vice-Chair of the Verkhovna Rada, Delegation to the EU-Ukraine Parliamentary Association and Cyriac Massué, Unit for Eastern Europe, Caucasia, Central Asia, German Federal Ministry for Economic Affairs and Climate Action
Ralf Fuecks, Founder and Managing Director, Center for Liberal Modernity, moderated the event.
We are grateful for the opportunity given to us by the Konrad Adenauer Foundation to host this panel and took notice with delight the large crowds at our panel and at Café Kyiv in general.
This Policy Briefing complements the Policy Proposal “Pathways for Reforming Ukraine’s Carbon Tax: Towards an ETS-Compatible Upstream Tax with an Expanded Scope” as well as the Policy Briefing with the same title, which provides a summary of the aforementioned Policy Proposal. It provides a brief overview of carbon taxation across different European countries, including summary country fact sheets for a selected list of countries. The comparison of sectoral coverage, point of regulation, carbon price levels and other indicators aims to inform the debate on the reform process for Ukraine’s carbon tax. The Policy Briefing illustrates that the overwhelming majority of carbon taxes in Europe are regulated upstream, most of which include sectoral coverage of the buildings and transport sectors. Carbon price levels are consistently higher than the current tax rate in Ukraine. The example of Switzerland’s climate dividend scheme is also reviewed as a blueprint for a social compensation scheme.
This Policy Briefing accompanies and summarises the Policy Proposal “Pathways for Reforming Ukraine’s Carbon Tax: Towards an ETS-Compatible Upstream Tax with an Expanded Scope”. It advocates for an ambitious reform of Ukraine’s carbon tax, transitioning it to an upstream tax with expanded scope and increased price levels. By expanding its coverage to sectors like buildings and road transport analogous to the scope of the upcoming EU ETS 2, it would prepare Ukraine for EU accession, while enhancing efficiency and fairness. Moreover, it could also complement the planned Ukrainian Emissions Trading System (ETS) by providing a price floor, thus stabilising carbon prices and reducing price uncertainty. This Policy Briefing highlights the potential for significant emissions reductions and annual revenue generation of EUR 1.2–4.2 billion by 2030, contingent on an increasing tax trajectory gradually approaching expected EU ETS 2 prices. It also emphasises the importance of mitigating regressive effects through targeted social compensation measures. This reform proposal provides the blueprint for a cornerstone of Ukraine’s future climate policy, enabling Ukraine to ‘catch up’ and converge with European climate policy architecture and carbon price levels while mitigating regressive effects for vulnerable households.
The Policy Proposal “Pathways for Reforming Ukraine’s Carbon Tax: Towards an ETS-Compatible Upstream Tax with an Expanded Scope” addresses the critical need for reforming Ukraine’s carbon pricing mechanisms in alignment with European Union standards and the country’s EU accession goals. It advocates transitioning Ukraine’s outdated and narrowly focused carbon tax to a reformed upstream tax, expanding its coverage to sectors like buildings and road transport analogous to the scope of the upcoming EU ETS 2. This approach would not only enhance efficiency and fairness but could also complement the planned Ukrainian Emissions Trading System (ETS) by providing a price floor, thus stabilizing carbon prices and reducing price uncertainty. The proposal highlights the potential for significant emissions reductions and annual revenue generation of EUR 1.2–4.2 billion by 2030, contingent on an increasing tax trajectory gradually approaching expected EU ETS 2 prices. It also emphasizes the importance of mitigating regressive effects through targeted social compensation measures. This reform proposal provides the blueprint for a cornerstone of Ukraine’s future climate policy, enabling Ukraine to catch up and convergewith European climate policy architecture and carbon price levels while mitigating regressive effects for vulnerable households.
On 20 November 2024, Rouven Stubbe, energy economist and consultant for the Low Carbon Ukraine project, took part at the Kryvyi Rih International Forum on Green Metallurgy. Kryvyi Rih has been severely affected by the environmental impacts of mining and metallurgy, as well as repeated attacks on civilian energy, industrial and residential infrastructure during the ongoing war.
Despite these challenges, Kryvyi Rih’s city council and business community are actively developing ideas for the recovery and transformation of its industrial sector. During the panel discussion many participants presented initiatives and technologies for low-carbon iron and steel production, as well as circular approaches to the reuse of iron ore tailings and steel slag.
The Low Carbon Ukraine-project contributed to the event with a presentation of its latest study on the possible role of carbon pricing for a green reconstruction of Ukraine’s industrial sector, which provides an overview of implications for the industrial sector of Ukraine’s upcoming ETS-scheme, different design options on competitiveness and investment conditions for low carbon technologies.
Despite significant challenges and the loss of production capacity due to the ongoing war, Ukraine’s steel industry remains a vital part of the economy with significant potential for sustainable transformation.
Our policy brief “Ukraine’s Steel Sector: State of Play and Pathways to a Greener Future” provides an in-depth analysis of the current state of Ukraine’s steel industry. It examines the impact of the war on production capacity, the distribution of production technologies and the sector’s CO₂ emissions profile, while exploring viable pathways for decarbonisation.
In the short to medium term, investment in the scrap-based Electric Arc Furnace (EAF) route could reduce CO₂ emissions by 43% by 2035, requiring EUR 1.1-2.0 billion. In addition, the introduction of hydrogen-based Direct Reduction of Iron (H₂-DRI) after 2030 could increase the reduction to 63% by 2035 (14.5 MtCO₂) with an additional investment of EUR 2.0-5.3 billion. A favourable investment environment with strong financial mechanisms and de-risking policies will be essential to attract funding for these low-carbon projects.
Similar to Policy Papers, current or possible future policy topics are discussed. The economic analysis and policy recommendations are presented in a concise manner, focussing on the core arguments and results.
As Ukraine faces the twin challenges of rebuilding its energy infrastructure amidst ongoing Russian aggression and advancing toward a renewable energy future, the import of energy equipment has become a cornerstone of its resilience. This op-ed -based on our recent Policy Study- delves into the critical role of these imports in sustaining energy security and accelerating the transition to renewables, highlighting key policy recommendations to ensure long-term sustainability and independence in the energy sector.
Russia’s full-scale invasion of Ukraine in February 2022 has left a lasting impact on the country’s residential sector, with economic damages exceeding EUR 54 billion. Ongoing assaults on energy infrastructure have deepened the crisis, intensifying energy shortages and underscoring the urgent need for energy-saving solutions. One key response is to prioritize energy-efficient construction and retrofitting measures.
Ukraine’s residential housing stock was already in need of substantial energy efficiency upgrades before the war. With many buildings aging and inefficient, and low energy tariffs discouraging investment, Ukraine’s energy consumption in the residential sector is 30-50% higher than the European average. Compounding this is the high rate of owner-occupancy and the poor upkeep of multi-family houses, which further hinders energy-saving efforts.
Our latest policy paper dives into the challenges and opportunities for improving energy efficiency in Ukraine’s housing sector. We explore financial instruments that could bridge the significant investment gaps in this area. Key recommendations include broadening eligibility for existing programs like the Energy Efficiency Fund to cover more housing types, as well as introducing innovative tools such as green mortgages and energy service companies (ESCOs). These strategies aim to modernize Ukraine’s residential sector, contributing to long-term energy security and aligning the country with EU climate goals.
By investing in energy efficiency now, Ukraine can build a more resilient and sustainable future, even in the face of ongoing challenges.
On October 16, 2024, Robert Kirchner from Berlin Economics participated in the panel discussion “Resilient Against Cold and Darkness: Strengthening Ukraine’s Energy System Against Russian Attacks” at the international Ukraine conference “What Kind of Peace? Ukraine and Us” organized by Center for Liberal Modernity.
Other panelists included Inna Sovsun (Verkhovna Rada of Ukraine), Volker Oel (Federal Ministry for Economic Cooperation and Development, Germany), and Anna Ackermann (International Institute for Sustainable Development). The panel discussed urgent steps required to enhance Ukraine’s energy security in the face of continued military aggression.
Moderated by Daria Malling, participants explored how European integration can strengthen Ukraine’s energy resilience as winter approaches. With about half of Ukraine’s electricity generation capacity either destroyed or occupied, immediate action is essential to ensure reliable energy supplies during the harsh winter months.
We thank Center for Liberal Modernity for organizing this vital discussion and all the participants.
Since Russia’s full-scale invasion of Ukraine in February 2022, the country’s energy infrastructure has been heavily targeted, resulting in significant challenges to maintaining energy security. This policy paper analyses Ukraine’s response, particularly focusing on the surge in imports of critical energy equipment and fuels essential for restoring damaged energy infrastructure and ensuring a stable energy supply. The study identifies key trends in the import of critical energy equipment, noting a significant increase following targeted attacks on Ukrainian energy infrastructure by Russia. The paper finds that the share of energy equipment imports within Ukraine’s total imports doubled from 1.4% in 2021 to 2.7% in 2023, with diesel generators being the most imported energy generation equipment due to their perceived reliability and rapid deployment during outages.
Furthermore, our analysis reveals that rapid energy supply is currently clearly prioritised over renewables deployment and expansion, visible in the decreasing share of renewable based generation equipment imports, namely solar PV and wind generation equipment.
The paper also presents additional considerations and policy recommendations that are crucial for ensuring Ukraine’s long-term energy resilience and supporting its integration with the European energy market.
Despite the ongoing war, Ukraine is actively pursuing recovery, economic stability, and a green transition. Biomethane production and export can play a pivotal role in these efforts, offering a sustainable energy source for both domestic use and the European Union.
Our policy brief, “Fueling the Future: The Economic Potential of Ukraine’s Biomethane Sector,” explores this opportunity in detail, highlighting how Ukraine’s vast biomethane production potential could generate significant export revenues, ranging from EUR 0.97 billion to EUR 1.24 billion by 2030.
Achieving this potential will require producing 1 billion cubic meters (bcm) of biomethane, which reduces GHG emissions by 2.5 MtCO2eq/year. To produce this estimated investments of EUR 2 billion are needed. Furthermore, establishing a national biomethane register is crucial for ensuring compliance with European standards.
On the EU side, policy adjustments are needed—particularly in Germany—where enabling Ukrainian biomethane to count toward the greenhouse gas reduction quotas, enhancing its marketability.
Our policy brief provides key insights into the economic and regulatory frameworks required to unlock Ukraine’s biomethane potential, positioning it as a critical element in both the country’s recovery and Europe’s green energy future.
Ukraine’s energy system is facing significant challenges due to the ongoing conflict. Despite these obstacles, there are significant efforts to transition to low-carbon energy sources. Our energy economist and expert on energy and climate policy in Ukraine, Rouven Stubbe, contributed to a recent FORESIGHT Climate & Energy analysis, providing insights on the need for flexible energy solutions and the potential of renewable energy to enhance Ukraine’s resilience and its alignment with European Union green goals.
On the 25th of April, Berlin Economics, within the framework of the Low Carbon Ukraine project, co-organized an expert workshop on the topic “CBAM and Ukraine: Impact on Ukraine’s Electricity Sector as well as the Role of ETS and Carbon Pricing”.
The workshop aimed to analyze the impact of the EU’s Carbon Border Adjustment Mechanism (CBAM) on Ukraine’s electricity sector and outlined the criteria and steps that Ukraine will need to follow in order to either secure an exemption from the CBAM for its electricity exports or to adapt to it.
Pavel Bilek, Deputy Head of the Energy and Climate team at Berlin Economics, moderated the event, and Rouven Stubbe, Consultant at Low Carbon Ukraine, presented two recent policy studies focusing on the potential CBAM exemption for Ukrainian electricity exports to the EU.
The event featured opening remarks by Ukraine’s Deputy Minister of Energy Yaroslav Demchenkov, Deputy Minister of Environmental Protection and Natural Resources Viktoria Kyreieva, as well as other high-level and expert speakers from the European Commission, the Energy Community Secretariat, Ukrainian Ministries and Reform Support Teams, independent experts and representatives from the private sector.
Key discussions at the event focused on the requirements for a CBAM exemption, ongoing efforts and updates on the implementation of an Emissions Trading System (ETS) and carbon tax reforms in Ukraine, as well as discussions on how to improve Ukraine’s compliance with EU standards.
On April 11th, Rouven Stubbe participated in an online event organized by the European-Ukrainian Energy Agency, with participants from the Ukrainian Ministry of Energy and GIZ on the implications of the Carbon Border Adjustment Mechanism (CBAM) for Ukraine’s electricity sector.
The presentation was based on the corresponding Policy Briefing.
Key insights provided:
– Impact on Electricity Exporters in Ukraine: The analysis provided focused on the repercussions of the Carbon Border Adjustment Mechanism (CBAM) for Ukrainian exporters of electricity, particularly those in the renewable sector. It elaborated on the criteria that renewable energy exporters need to fulfill to avoid the implications of CBAM pricing.
– Potential for Temporary CBAM Exemption: The possibility of a temporary exemption from the Carbon Border Adjustment Mechanism (CBAM) for the electricity sector was also explored. The necessary conditions that Ukraine must meet to obtain this exemption were outlined, the foremost being the implementation of an Emissions Trading System (ETS) that mirrors the EU’s ETS in pricing by the year 2030.
These discussions highlight the strategic challenges and decisions confronting the Ukrainian energy sector in its efforts to align with European regulatory standards and optimize its renewable energy export capabilities.
The Policy Briefing “Pathways for the decarbonisation of Ukraine’s power sector. Scenario comparison, impact of CBAM and the role of Ukraine’s upcoming Emissions Trading System (ETS)” outlines possible pathways for the decarbonisation of Ukraine’s power sector. Different scenarios based on work by Low Carbon Ukraine and modelling by other recent studies outlining net-zero pathways for Ukraine, such as the Clean Energy Roadmap (COP28 Report) and a recent study by REKK, DIXI Group and IEF, are compared. The compared scenarios demonstrate that a full decarbonisation of the power sector by 2050, with 85-90% clean generation by 2030 and a coal phase-out between 2030 and 2035 is possible and can be economically attractive. An Emissions Trading System (ETS) for the power sector can stimulate a cost-optimal, market driven coal phase-out if carbon prices increase predictably. However, a strong price stability mechanism for Ukraine’s upcoming ETS, such as a fixed-price regime during a transitional phase or a price collar, is key to ensure carbon price certainty. A predictable price convergence to EU-ETS price levels is also essential to avoid a carbon price shock upon EU accession.
Berlin Economics had the opportunity to take part on a panel at the Cooperation Dialogue: Forum for Energy and Climate Partnerships, an official side event of the Berlin Energy Transition Dialogue 2024.
The panel on Ukraine focused on financing the green energy transition amidst the ongoing war and beyond, especially within the context of the upcoming Ukraine Recovery Conference 2024 which will take place in June in Berlin. The panel explored current strategies and approaches for financing sustainable reconstruction efforts and the transition to a more decentralized energy supply, as well as technical approaches and enablers for a more energy-efficient reconstruction. The event brought together decision-makers and leading experts from politics, financial institutions, business, and international cooperation actors to share their views on applicable solutions that would pave the way for a more sustainable and resilient energy supply in Ukraine.
Pavel Bilek, Deputy Team Leader Energy & Climate Policy, participated on behalf of Berlin Economics, with his contributing focusing primarily on the soon to-be-published study on the Green Reconstruction of the Residential sector of Bucha, where he emphasized:
The integration of EU Standards and the significance of integrating the principles of “Build Back Better” into reconstruction efforts, focusing especially on the necessary regulatory reforms and converging to EU standards to unlock the greatest benefits from energy efficiency.
Securing investments, highlighting the key challenge of how Ukrainian municipalities can secure the necessary investments for residential reconstruction projects, as well as pathways to enable funding the estimated costs and reducing potential payback periods.
The role of international assistance and private investments, underscoring the crucial role that international donors and the private sector play in supporting large-scale energy efficiency upgrades in Ukrainian cities.
The policy reforms needed to attract and facilitate these investments effectively and to create a broader ecosystem for energy efficiency in Ukraine’s residential sector, including energy market liberalisation and ensuring adequate social compensation mechanisms are in place.
BETD Cooperation Dialogues im Haus der
Bundespressekonferenz in Berlin, 21.03.2024.
On March 7th, LCU consultant and energy economist Rouven Stubbe presented the policy studies on the EU Carbon Border Adjustment Mechanism (CBAM) and the upcoming Emissions Trading System of Ukraine to an audience of energy professionals from public and private energy companies, the Market Operator, transmission system operator Ukrenergo, the Regulator and representatives from relevant Ukrainian Ministries. Yaroslav Demchenkov, Deputy Minister of Energy of Ukraine, delivered the introductory remarks.
The first part of the meeting focused on the Policy Paper “Exemption of electricity exports from EU-CBAM”. The study highlights the conditions under which Ukrainian electricity exports to the EU could be exempted from the new EU Carbon Border Adjustment Mechanism (CBAM), which has been in effect since October 2023. To achieve this exemption, Ukraine must meet several requirements. While some progress has been made, significant steps remain to be taken, in particular the full implementation of the latest EU electricity market acquis, the introduction of an Emissions Trading System (ETS) with pricing aligned to EU-ETS by 2030 and the establishment of a system to prevent indirect electricity imports from non-compliant third countries.
The second part presented the Policy Proposal “Designing a suitable Emissions Trading System for Ukraine”, which outlines the challenges and strategies for Ukraine to align its carbon pricing and emissions trading frameworks with EU standards. It focuses on the design of the ETS, considering options such as a transition period with fixed prices or a price collar with an increasing carbon price floor. The proposal emphasises the need for predictable carbon prices to encourage investment in green and low-carbon assets, and the importance of designing an ETS that converges with EU price levels to avoid future carbon price shocks.
You can access the studies under the following links:
This Policy Briefing accompanies the Policy Paper“Exemption of electricity exports from EU-CBAM. Conditions for exemption and assessment for Ukraine”. It examines Ukraine’s alignment with the EU’s Carbon Border Adjustment Mechanism (CBAM) conditions for exempting its electricity exports. Enacted in October 2023, the CBAM mandates importers of specific goods, including electricity, to account and pay for embedded greenhouse gas (GHG) emissions, with full implementation set for 2026. Ukraine faces a series of stringent criteria to qualify for an exemption, which includes harmonizing its electricity market and renewable energy legislation with EU norms, implementing an Emissions Trading System (ETS) with pricing equivalent to the EU-ETS by 2030, and establishing safeguards against indirect electricity imports from non-compliant third countries. Despite the challenges, particularly the introduction of a price-equivalent ETS, the study emphasizes the advantage of Ukraine’s adherence to these conditions, detailing the need for a carbon leakage protection system and the critical importance of meeting the first compliance report by July 1, 2025. Failure to comply risks not only incurring CBAM costs but also jeopardizes Ukraine’s electricity market integration and its broader EU accession goals, underscoring the urgency and significance of Ukraine’s efforts to align with EU standards and regulations.
Amidst the ongoing Russian invasion, Ukraine finds itself at a critical juncture, grappling with immediate wartime imperatives while striving to advance its long-term climate policy objectives. The panel discussion “Fighting Two Evils at Once – Long-Term Climate Policy in Times of War,” at Café Kyiv, shed light on the intricate interplay between these pressing demands and the country’s green future aspirations. A special highlight of the panel was the keynote address by Yaroslav Demchenkov, Deputy Minister of Energy of Ukraine.
Insights from Government and Civil Society:
Yulia Rybak, articulated the government’s commitment to prioritizing climate action despite the challenges posed by the conflict. She emphasized the importance of strategic adaptation, advocating for initiatives aimed at advancing climate goals even under adverse wartime conditions.
Anna Ackermann, Ecoaction, highlighted the impact of the invasion on their work with municipalities and coal communities. She stressed the necessity of ensuring just transitions, both during and after the war, and underscored the crucial role of municipalities in formulating and implementing climate action plans.
Ongoing Projects and International Cooperation
Julia Jesson from GIZ discussed ongoing projects focused on enhancing energy efficiency and promoting renewable energy sources. Despite wartime conditions, these initiatives align with long-term climate targets such as the Energy Strategy 2050 and the European Green Deal, emphasizing the coordination efforts of the Ukrainian Climate Office.
Heike Freimuth from the European Investment Bank (EIB) explored Ukraine’s EU accession candidate status and its implications for energy and climate policies. She outlined the steps necessary for Ukraine to align with EU standards, emphasizing the pivotal role of international financial institutions (IFIs) in supporting green reconstruction efforts.
Key Takeaways:
The panel discussion provided valuable insights into the multifaceted challenges and opportunities facing Ukraine at the intersection of wartime imperatives and long-term climate aspirations. It underscored the importance of strategic adaptation, local capacity building, and international cooperation in advancing Ukraine’s climate agenda amidst ongoing turmoil.
As Ukraine navigates these complex dynamics, collaboration between government entities, civil society organizations, and international partners will be essential in charting a path towards a more resilient and sustainable future, even in the face of adversity.
This Policy Briefing accompanies and summarises the Policy Proposal “Designing a Suitable Emissions Trading System for Ukraine: Squaring EU Convergence, Price Certainty, and Competitiveness”. It advocates for a tailored Ukrainian Emissions Trading System (ETS) to balance EU integration, economic stability, and competitiveness. We recommend implementing a strong price stability mechanism, such as a fixed-price regime during a transitional phase or a price collar, to ensure carbon price certainty crucial for Ukraine’s post-war recovery. This approach aims for a rapid convergence with EU-ETS prices by 2030, utilizing partial free allocations to ease the transition and mitigate economic shocks. Furthermore, we suggest setting a clear, forward-looking price trajectory and establishing a Ukrainian Carbon Border Adjustment Mechanism (CBAM) to protect domestic industries and keep carbon revenues within the country. The proposed ETS design, emphasizing price stability and long-term planning, seeks to support Ukraine’s economic resilience while advancing towards EU environmental standards.
This Policy Paper examines Ukraine’s alignment with the EU’s Carbon Border Adjustment Mechanism (CBAM) conditions for exempting its electricity exports. Enacted in October 2023, the CBAM mandates importers of specific goods, including electricity, to account and pay for embedded greenhouse gas (GHG) emissions, with full implementation set for 2026. Ukraine faces a series of stringent criteria to qualify for an exemption, which includes harmonizing its electricity market and renewable energy legislation with EU norms, implementing an Emissions Trading System (ETS) with pricing equivalent to the EU-ETS by 2030, and establishing safeguards against indirect electricity imports from non-compliant third countries. Despite the challenges, particularly the introduction of a price-equivalent ETS, the study emphasizes the necessity of Ukraine’s adherence to these conditions, detailing the need for a carbon leakage protection system and the critical importance of meeting the first compliance report by July 1, 2025. Failure to comply risks not only incurring CBAM costs but also jeopardizes Ukraine’s electricity market integration and its broader EU accession goals, underscoring the urgency and significance of Ukraine’s efforts to align with EU standards and regulations.
The Policy Proposal “Designing a Suitable Emissions Trading System for Ukraine: Squaring EU Convergence, Price Certainty, and Competitiveness” explores the complex task of aligning Ukraine’s climate policies with the European Union amidst the ongoing Russian invasion. It advocates for a tailored Ukrainian Emissions Trading System (ETS) to balance EU integration, economic stability, and competitiveness. The study recommends implementing a strong price stability mechanism, such as a fixed-price regime during a transitional phase or a price collar, to ensure carbon price certainty crucial for Ukraine’s post-war recovery. This approach aims for a rapid convergence with EU-ETS prices by 2030, utilizing partial free allocations to ease the transition and mitigate economic shocks. Furthermore, the study suggests setting a clear, forward-looking price trajectory and establishing a Ukrainian Carbon Border Adjustment Mechanism (CBAM) to protect domestic industries and keep carbon revenues within the country. The proposed ETS design, emphasizing price stability and long-term planning, seeks to support Ukraine’s economic resilience while advancing towards EU environmental standards.
On February 8th, Low Carbon Ukraine presented its proposal on an effective Ukrainian ETS system in an online event, jointly organised by the German Agency for International Cooperation (GIZ), the Ukrainian Climate Office, the Ukrainian Ministry of Environmental Resources and Natural Protection and Low Carbon Ukraine (LCU). LCU project leader Robert Kirchner delivered some introductory remarks.
Currently, Ukraine is defending itself against the Russian aggression. At the same time, Ukraine’s new status as candidate country for EU Membership, as well as the soon-to-be-starting accession negotiations mean that the country will need to bring its climate policies and legislations in line with EU standards. One of those areas will be the introduction of an EU-compatible ETS system, guaranteeing carbon prices on a level comparable to those under EU-ETS.
During the event, in which representatives of the Ukrainian government, international organisations, such as the World Bank, the GIZ, as well as from the private sector, Low Carbon Ukraine, represented by Rouven Stubbe, presented its proposal for an EU-ready ETS system, which will be further outlined in a forthcoming study. Next to Low Carbon Ukraine, an array of seasoned experts on climate policy and carbon pricing mechanisms gave their respective opinions and proposal on the issue.
The Ukrainian electricity system has withstood unprecedented and targeted attacks by the Russian aggressor over the past two years. It has remained largely functional, even though there have been repeated temporary and localised power outages, such as during last winter. The coming winter will nevertheless be a challenge – around 50% of all power generation capacity has been damaged or destroyed and there is a shortage of spare parts, especially for specialised high-voltage electronics.
Rouven Stubbe, energy economist and consultant in the “Low Carbon Ukraine” project discussed these challenges at the event “Ukraine: Energy in the Spotlight Revisited” at the University of St Andrews on 23rd of November. He argued that both electricity imports and increased decentralised power generation, particularly from rooftop solar systems with battery storage, could alleviate potential power generation deficits. However, commercial electricity imports have often been prevented by the electricity price caps on the Ukrainian wholesale electricity market – an electricity market reform should therefore aim to remove these hurdles.
Siemens Energy has been in the news recently. The branch of the Siemens Corporation plays a critical role in providing Ukraine with emergency deliveries of power grid technology.
The Russian war has severely impacted Ukraine’s energy sector, damaging critical infrastructure and causing disruptions in energy supplies. Whilst the system has shown remarkable resilience, the war has highlighted the vulnerability of Ukraine’s centralized energy system, emphasizing the need for immediate action to decentralize energy supply and diversify the energy mix. Transitioning to renewable energy sources would enhance energy security, resilience, and environmental responsibility, positioning Ukraine for a sustainable future as an EU member.
The annual German-Ukrainian Energy Day within the framework of the German-Ukrainian Energy Partnership strengthens the partnership between Germany and Ukraine, facilitating strategic engagement, knowledge exchange, and business opportunities within the energy sector. This year’s event was held in Berlin on the 25th of October. During the event, Robert Kirchner, Team Leader of the Low Carbon Ukraine project, participated in a panel on “Strengthening Frameworks for Sustainable Development and Market Integration of the Ukrainian Energy Sector”. The focus was on the further integration of Ukraine into the European energy market, what instruments and regulations should be established for this purpose, as well as possible pathways to develop the green gas industry. During the panel, Mr. Kirchner highlighted the continued support of the Low Carbon Ukraine project to the Government of Ukraine, including recent analyses on energy market reforms, decentralized small-scale renewables and the economic rationale behind building back better.
Rouven Stubbe, energy economist and consultant at the Low Carbon Ukraine project participated in a hot seat panel discussion at yesterday’s IKI conference on “NDCs and Recovering Green: How to prepare and implement long-term Climate Policies in Times of War”. Making climate policy under high political and economic uncertainty as well as fiscal constraints is a complex task. Ukraine’s wartime NDC update will come with particular challenges: Mobilising finance and risk insurance, balancing short-term needs with long-term sustainable reconstruction, providing investors with regulatory certainty and moving forward with policy reforms and market liberalisation against the backdrop of wartime command and control. Nevertheless, there are also opportunities: Energy efficiency and domestic renewables can provide additional energy security benefits and a green reconstruction can be economically profitable with the right mix of policy reforms. Moreover, ambitious climate policy also provides Ukraine with leverage in the upcoming negotiations on Ukraine’s EU accession path.
Copyright images: IKI Initiative
Rouven Stubbe, consultant at Berlin Economics and energy expert at the Low Carbon Ukraine project delivered a speech at the European-Ukrainian Energy Day in Vienna on September 28, 2023. Subsequently, he participated in a panel discussion on “Energy security and building back better: Energy efficiency as part of energy security strategy and a tool for freeing resources for economic growth”. His remarks focussed on the opportunities and costs of a green reconstruction in the residential and district heat sectors. He demonstrated that a green reconstruction is possible and could bring numerous benefits. However, important obstacles need to be overcome first with ambitious policy reforms to mobilise required investments.
The European Union (EU) provides substantial financial support through loans and grants to its members, candidate countries, and those within its neighbourhood policy framework, with a growing emphasis on energy and climate initiatives. Ukraine’s new status as a candidate country might provide access to additional funds such as the Instrument for Pre-Accession (IPA). Nevertheless, facing the twin challenges of post-war reconstruction and “catching up” with investment in green energy and industrial projects under the EU Green Deal is likely to result in significant additional financing needs.
In September 2023, LCU team leader Robert Kirchner participated in an expert interview with the 100GREEN YouTube channel, where he discussed the origins of the LCU project and its role in Ukraine’s energy transformation, the importance of European climate legislation for Ukrainian businesses, as well as Ukraine’s future development.
The increased roll-out of small-scale renewable energy sources and enabling the rise of prosumers are two of the key steps for Ukraine to the transition to a more decentralised energy system. Given the recent adoption of a net billing support scheme, this policy evaluation assesses the costs, revenues and payback periods for the installation of small-scale rooftop solar PV under the available support schemes: a feed-in-tariff and net billing. The adopted feed-in-tariff provides sufficient remuneration levels and offers a payback period of 7-8 years. The net billing scheme however has longer payback periods of 15-16 years, despite the addition of a net pay-out option. As such, the net billing scheme may fall short of providing adequate incentives to stimulate prosumer investments. To address these challenges, comprehensive reforms are necessary, including the phasing out of retail electricity subsidies (i.e. liberalisation of residential electricity retail tariffs) along with the design of the required social support measures. In addition, more specific measures can include the extension of the ‘Green Tariff’ to cover self-consumption for the feed-in-tariff scheme and net billing improvements such as the application of an annual factor to hourly wholesale prices to reduce investor uncertainty, while maintaining the right price incentives.
On April 25th, Low Carbon Ukraine, the German Energy Agency (dena), the German Agency for International Cooperation (GIZ) and the Energy Act for Ukraine Foundation organised a joint online roundtable titled: “Keeping the lights on in times of grid outages”, which brought together a wide range of experts covering both the analytical and practical aspects of the decentralization of Ukraine’s energy system.
The Roundtable began with short opening remarks by the Ukrainian Deputy Energy Minister Yaroslav Demchenkov and Deputy Ambassador of the German Embassy in Kyiv Dr. Bertram von Moltke. At the beginning of the conference, a recent policy briefing on the economic and energy security benefits of distributed energy sources was presented by Dinara Saparova, an Energy and Climate Policy Analyst at Low Carbon Ukraine. Anastasiia Vereshchynska, the Partnerships Manager at Energy Act for Ukraine Foundation then shared with the audience recent experiences with installing and implementing decentralized solar projects at Ukrainian schools and hospitals, including successes and challenges.
Denys Tsutsaiev from Greenpeace Central and Eastern Europe subsequently shared his experience with the green reconstruction and installation of Horenka hospital and Kostiantyn Krynytskyi, Head of the Energy Department at Ecoaction, presented on Ukrainian NGOs’ advocacy for the “greening” of Ukraine’s emergency energy aid. During the conference Senior Expert in Infrastructure and Energy System at German Energy Agency (dena), Yannick Severin dos Santos also presented an overview of Building a Resilient and Decentralized Electricity Distribution System. The series of presentations ended with the introduction of a new upcoming project of the International Climate Initiative (IKI): “Renewables for Resilient Ukraine – R2U”, by Nicolas Heger, Project Advisor at GIZ Ukraine.
The conference concluded with a discussion and Q&A regarding the role of decentralized energy sources and the roll-out of renewables in Ukraine’s current war-time context, as well as the pathways to building a more cost-optimal, green, resilient and economically competitive energy sector.
Polish newspaper “Krytyka Polityczna” has recently published an in-depth interview with our energy economist and consultant Rouven Stubbe. He discusses opportunities and challenges for Ukraine’s green post-war reconstruction, Ukraine’s potential role in a progressively decarbonising European economy and the future of German-Ukrainian energy cooperation.
Within the framework of the German-Ukrainian Energy Partnership, Low Carbon Ukraine and the German Energy Agency (dena) organized a closed-door roundtable on the 29th of March with Ukrainian Deputy Energy Minister Yaroslav Demchenkov and leading German and Ukrainian expert organisations on the recovery of the Ukrainian energy sector and pathways towards a green reconstruction.
Ukraine’s energy sector has been one of the main focal points since the Russian invasion of Ukraine in February 2022. Given the destruction of energy infrastructure, including power generation capacity (both renewable and thermal), transmission and distribution systems, significant work will be required to rebuild the sector once Ukraine has won the war. While short-term repairs are already underway, in particular to ensure energy supply to the Ukrainian population during the cold season, longer-term reconstruction offers opportunities to create a lower-emitting, more efficient and economically competitive sector that balances energy security considerations with the green transition.
The event was opened by Robert Kirchner, the Head of Low Carbon Ukraine and Simon Wolffram, Policy Officer at BMWK. During the event, Deputy Minister of Energy of Ukraine Yaroslav Demchenkov presented an overview of the current situation as well as the goals and principles of Ukrainian energy policy in a keynote speech. A lively and engaging open discussion with participants followed, covering key issues such as the possible pathways for Ukraine’s energy sector, sustainability, resilience and further decentralisation, as well as the role of renewables and nuclear power in the energy mix of the future, and impacts on the wider economy.
We were especially delighted about the participation of the Deputy Minister for Energy Mr. Demchenkov, and the engaging discussion with the audience following the expert input.
Summary:
Russia’s attacks on Ukraine’s energy infrastructure have caused significant electricity disruptions and outages. This policy briefing compares the economic case for installing solar PV panels, battery storage systems and diesel generators at a sample Ukrainian school. Through techno-economic modelling, the paper finds that under current conditions and a variety of tested scenarios, it is economical to install solar PV panels and batteries to mitigate outages and ensure a continuous supply of electricity.
24 February 2023 marked the first anniversary of Russia’s invasion of Ukraine. To mark this tragic day, the Konrad-Adenauer-Stiftung joined forces with partner organisations in an event that would temporarily transform Berlin‘s historic Cafe Moskau into Cafe Kyiv.
Foto: Anika Nowak (www.anikanowak.net)
“Cafe Kyiv – We Choose Freedom” was a one-day event featuring various discussion panels and workshops on the future of Ukraine and Europe, featuring high-ranking Ukrainian and international speakers. At the heart of the event is Ukraine’s quest and hope of freedom, and her future role in Europe following the war’s end and post-war reconstruction. What will Ukraine’s future in Europe look like?
Low Carbon Ukraine was pleased to organize an engaging workshop on the “The Ukrainian Energy Sector and Prospects for a Green Recovery”, with several key Ukrainian experts who shared their experience, insights and vision. We were glad to host Iryna Stavchuk, Ukraine Program Coordinator at the European Climate Foundation; Dr. Yulia Rybak, Co-Head of the Secretariat of the German-Ukrainian Energy Partnership and Valentyn Bondaruk, Expert for International Cooperation at German Energy Agency (dena). The Deputy Head of the Low Carbon Ukraine project Pavel Bilek moderated the event, managing to organize a lively and active discussion with the panelists and audience. After a keynote video message from Yaroslav Demchenkov, Deputy Minister of the Ministry of Energy of Ukraine, the participants discussed such pressing issues and future visions of the Ukrainian energy sector, including the future energy mix, renewable roll-out and energy efficiency and the role of nuclear power in Ukraine’s energy sector.
We were very excited for the workshop and seeing all our partners again in person! We thank the Konrad-Adenauer-Stiftung for organizing this event and for the opportunity for the Low Carbon Ukraine to take active part in this event.
Foto: Anika Nowak (www.anikanowak.net)
The German Economic Team moderates one panel on February 27th at the KAS-event “Café Kyiv – We choose freedom” on economic challenges and reconstruction after the war.
February 24th marks the anniversary of the beginning of the Russian invasion of Ukraine. On February 27th, the Konrad Adenauer Foundation invites you to the premises at Karl-Marx-Allee 34/Schillingstraße in Berlin, which have been renamed Café Kyiv for this purpose.
We are delighted to be able to contribute to this distinguished event with own contributions. The German Economic Team will moderate one discussion panel on economic recovery after the war.
We invite you to participate at the following panel with us:
13:00-14:15 pm CET, Room: Donetsk The Ukrainian Energy Sector and Prospects for a Green Recovery Keynote: Yaroslav Demchenkov, Vize-Minister für Energie der Ukraine
Panel:
Iryna Stavchuk, Ukraine Programme Coordination, European Climate Foundation
Dr. Yulia Rybak, Co-Head Secretariat oft he German-Ukrainian Energy Partnership
Valentyn Bondaruk, Expert International Cooperation, German Energy Agency (dena)
Moderator: Pavel Bilek, Deputy Project leader, Low Carbon Ukraine
Language: English
To participate, please register on the KAS-Website here. Places are limited.
A full outline of the programme, as well as a floor plan, can be foundhere.
Please note that registration is for all events on that day, partial registration is not possible. The whole programme will be in attendance. The general begin is at 9 am.
Last week, our energy and climate expert Rouven Stubbe has been interviewed live on DW News, the global English-language news TV program of Deutsche Welle, on the topic of Russian attacks on Ukraine’s energy infrastructure. Rouven explained the extent of damages to the electricity grid, highlighted the urgency for additional air defence, generators, and grid equipment, and reflected upon the challenges for reconstructing Ukraine’s energy system.
Russia is deliberately targeting Ukraine’s energy infrastructure. 40% of the power grid is said to have already been destroyed. The intention is to make Ukrainians war-weary and drive them to flee to the EU. Our energy economist and consultant Rouven Stubbe contributed to a recent FAZ analysis, providing context on the what the attacks mean for Ukraine’s energy system, how grid stability is affected, and what options exist for the weeks and months ahead. The article including interactive maps and graphs (in German, behind paywall) can be found at https://www.faz.net/aktuell/politik/ausland/krieg-gegen-ukraine-russlands-angriffe-auf-die-energieversorgung-18437800.html?premium
On October 19, the Low Carbon Ukraine team, Ecoaction, and DiXi Group jointly organised a panel discussion on the topic of “Policy reforms supporting Ukraine’s green reconstruction”. Around 55 participants, incl. Yaroslav Demchenkov (Deputy Minister at the Ministry of Energy of Ukraine), Lisbeth Müller-Hofstede (Head of Cooperation at the German Embassy in Kyiv), additional government officials, as well as experts from non-governmental organizations, think tanks, academia, and business groups took part in the event.
Rouven Stubbe (Energy Economist & Consultant at Berlin Economics and Expert in the Low Carbon Ukraine project) delivered a keynote presentation based on LCU’s Policy Proposal “Policy reforms supporting Ukraine’s green reconstruction”. He outlined opportunities for the green reconstruction of Ukraine’s electricity, heat, and residential sectors, explained existing regulatory obstacles and disincentives to mobilising the necessary investments, and presented proposals for key policy reforms to overcome these obstacles.
Subsequently, Kostiantyn Krynytskyi (Head of Energy at Ecoaction) and Mykola Yakovenko (General Manager of Energy Sector Development at DiXi Group) joined Rouven Stubbe in a panel discussion moderated by Maksym Babaiev (Coordinator of the Ukrainian Climate Network and Board Member at Ecoaction). The panel discussed how the presented proposals fit in with the current draft reconstruction plan of the Ukrainian government, what actions should be prioritised, and what additional measures are needed.
The Low Carbon Ukraine team would like to thank Ecoaction and DiXi Group for co-organising this panel discussion. Our team will keep supporting the Ukrainian government to pursue a green reconstruction of the country.
This Policy Briefing is a short version of LCU’s Policy Proposal “Policy reforms supporting Ukraine’s green reconstruction”, prepared as the keynote presentation to a panel discussion on October 19, jointly organised by the Low Carbon Ukraine team, Ecoaction, and DiXi Group. While there are important economic reasons for a green reconstruction of Ukraine’s electricity, heat, and residential sectors, substantial regulatory obstacles and disincentives need to be overcome to mobilise the necessary investments in low-carbon assets. The Policy Briefing outlines these challenges and regulatory obstacles during Ukraine’s reconstruction and identifies key policy reforms to overcome existing challenges.
On 23 September 2022, the Low Carbon Ukraine project participated in an online event co-organized by Ecoclub Rivne and the German Energy Agency (dena) on “District heating in Ukraine – why it is essential and how to preserve it”. Rouven Stubbe, consultant in the Low Carbon Ukraine project, presented LCU’s proposals on “Policy reforms supporting Ukraine’s green reconstruction – Recommendations for the heat sector”.
Rouven Stubbe emphasised that, while there are strong economic reasons for a green reconstruction of Ukraine’s heat sector, substantial regulatory obstacles and disincentives need to be overcome to mobilise the necessary investments in low-carbon assets. Key policy reforms should include phasing out gas subsidies, tackling payment discipline, implementing tariff reform towards incentive-based regulation, harmonising district heating regulations, adequate carbon pricing, strengthened social transfers, and improved governance of state-owned enterprises.
This policy briefing is based on LCU’s Policy Proposal “Policy reforms supporting Ukraine’s green reconstruction” and looks specifically at recommendations for policy reforms in Ukraine’s heat sector with a focus on district heat. While there are important economic reasons for a green reconstruction of Ukraine’s heat sector, substantial regulatory obstacles and disincentives need to be overcome to mobilise the necessary investments in low-carbon assets. Key policy reforms should include phasing out gas subsidies, tackling payment discipline, implementing tariff reform towards incentive-based regulation, harmonising district heating regulations, adequate carbon pricing, strengthened social transfers, and improved governance of state-owned enterprises.
The post-war reconstruction of Ukraine will require massive investments in rebuilding her energy infrastructure. To ensure the country’s future competitiveness in a progressively decarbonising global economy, it is paramount to “build back better”. This paper outlines major challenges and regulatory obstacles to mobilising investments into low- or zero-carbon assets for the electricity, gas and district heating, as well as the residential sector during Ukraine’s reconstruction and identifies key policy reforms to overcome existing challenges.
Today, on August 29, 2022, LCU expert Rouven Stubbe spoke with radio station Bayern 2 regarding nuclear safety at the Russian-occupied Zaporizhzhia Nuclear Power Plant, the risk of blackouts in southern Ukraine and the rest of Europe in case of a disconnection of the plant from Ukraine’s power grid, as well as the longer-term perspectives for renewable energy and its future role in Ukraine’s energy security. Recording of the interview, conducted in German (from 5:17 pm, available for one week)
On 26 June 2022, LCU consultant Rouven Stubbe has participated in an expert interview with the NGO Ukrainian Prism on the subject of “Ukraine’s place in the EU’s common energy policy: recipient of practices or initiative partner?”. Rouven Stubbe explained Ukraine’s short-term challenges in the upcoming heating season in the context of the war as well as the challenges and opportunities of a post-war green reconstruction for Ukraine. He highlighted the role of close EU-Ukrainian energy cooperation for jointly overcoming the European energy crisis and explained the synergies of decarbonisation and the new emerging European energy security paradigm increasingly based on domestic production of renewable energy.
The shelling of Zaporizhnia Nuclear Power Plant, Europe’s largest nuclear power plant, has lead to grave concerns. While the overall stability of the European grid seems secure, destruction of power lines can have severe consequences for the reactor cooling system.
A policy briefing has also been prepared on the basis of the policy paper:
For the annual meeting of the OECD’S Green Action Task Force, we contributed a background study analysing the impact of the war in Ukraine on climate and energy policies in eight countries of the European Union’s Eastern Partnership and Central Asia: Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan.
For the annual meeting of the OECD’S Green Action Task Force, we contributed a background study analysing the impact of the war in Ukraine on climate and energy policies in eight countries of the European Union’s Eastern Partnership and Central Asia: Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan.
We find that:
Globally, countries will face strong incentives to lower domestic consumption of fossil fuels due to high and unpredictable prices and supply issues, such as increased demand for non-Russian fossil fuels
Exporters of energy and/or metals will be incentivised to increase exports but may be constrained by capacity or logistical difficulties
Countries with closer ties to Russia may have access to discounted energy imports, weakening incentives to conserve energy or invest in renewables
However, this is counteracted by a new energy security paradigm emerging in the region. Domestic renewable energy sources provide an attractive alternative to increasingly price-volatile fossil fuel imports
A weaker global and regional macroeconomic situation will lead to a more challenging context for ambitious domestic climate policy in the region
Conversely, reduced growth may lead to lower emissions in the short run
On 13 July 2022, VoxUkraine published an article from David Saha, Pavel Bilek, Rouven Stubbe and Manuel von Mettenheim, Anna Ackermann, Anna Danyliak and Viktoriia-Anna Oliinyk on “Putting the green reconstruction of Ukraine into action: Requirements for programme design and policy”. The article is based on the LCU Policy Paper published in July 2022.
Several crucial themes for a robust and successful green reconstruction have been identified:
The implementation of green reconstruction requires a mix of programme design and policy, incl. policy reforms that remove known regulatory obstacles to green finance.
A strategic decision is required regarding whether to make Ukraine a showcase model for selected frontier technologies.
Affordable financing is vital for green reconstruction.
Efficient administration of green reconstruction projects is necessary to secure speedy implementation.
Governance of reconstruction programmes and a continuation of reform processes are required to attract financing.
International private investment will require political risk insurance.
Green post-war reconstruction of the country cannot happen without ensuring restoration of damaged ecosystem services.
Ukraine needs to develop a clear vision for its reconstruction in terms of the priorities and desired transformations. In other words, Ukrainians need to come together and decide which kind of country will be rebuilt.
On 30 June 2022, the Low Carbon Ukraine team participated in the Annual meeting of the Green Task Force organized by the Organisation for Economic Co-operation and Development (OECD). For more than 20 years, the OECD has been supporting the countries of Eastern Europe, the Caucasus and Central Asia (EECCA) to green their economies through the Task Force for the Implementation of the Environmental Action Programme for Central and Eastern Europe.
The 2022 Annual meeting provided an opportunity for members and partners to discuss the environmental and economic consequences of the Russian invasion of Ukraine on climate policies in the EECCA region. Rouven Stubbe and Manuel von Mettenheim presented LCU’s policy paper on Effects of the Russian invasion of Ukraine on climate and energy policies in the European Union’s Eastern Partnership and Central Asian countries and answered questions from the participants. This paper analyses the impact of the war in Ukraine on climate and energy policies in eight countries of the European Union’s Eastern Partnership and Central Asia: Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan.
Low Carbon Ukraine, together with Centre for Environmental Initiatives “Ecoaction” and CEE Bankwatch, have organised a roundtable conference on May 31st. This roundtable brought together over 60 representatives from civil society and industry, as well as national and international experts, to discuss what green reconstruction means concretely in every sector, what barriers to a green reconstruction currently exist, and how an optimal policy mix could overcome these barriers. This article reflects the insights the organisers gained from the conference.
On 23 June 2022, the Low Carbon Ukraine team participated in a discussion on the “War in Europe: Prospects for clean energy transition and Ukraine’s green post-war reconstruction”. The event was organised by the International Institute for Sustainable Development (ISSD), Ecoaction and other partner organisations. Participants shared their knowledge, experience, and ideas on the current state of play and possible future reconstruction pathways. Russia’s invasion of Ukraine has created many crises unfolding in parallel, all of which must be thoroughly studied and addressed. The discussion focused on two important topics: a clean energy transition and green economic recovery. Manuel von Mettenheim presented LCU’s policy briefing on Economic Reasons for a Green Reconstruction of Ukraine and answered questions from the participants.
On 9th June 2022, the Low Carbon Ukraine team has participated at an event of AHK Ukraine on “Green Reconstruction of Ukraine: German outlook”.
David Saha presented LCU’s policy briefing on “Economic Reasons for a Green Reconstruction of Ukraine” and discussed preliminary results from the industry session of LCU’s join roundtable conference with Ecoaction and CEE Bankwatch “Towards a Green Reconstruction of Ukraine” (May 31st). Rouven Stubbe and Manuel von Mettenheim discussed takeaways from the roundtable’s electricity as well as buildings and heat sessions. Subsequently, the LCU team participated in an open discussion with AHK participants about transformations, key challenges, and necessary policies for the green reconstruction.
On 09 June 2022, VoxUkraine published an article from David Saha, Pavel Bilek, Rouven Stubbe and Manuel von Mettenheim on “Economic reasons for a green reconstruction programme for Ukraine”. The article is based on the LCU policy briefing published in May 2022.
Ukrainian infrastructure has suffered massive damage due to the Russian hostilities, with recent estimates putting the damage to infrastructure at around USD 105.5 bn. We argue that reconstruction should not recreate the old fossil-based pre-war assets. A green reconstruction that replaces old power stations or steel plants with new, green ones and energy-inefficient houses with modern, thermally insulated ones, is vital to Ukraine’s interest and energy security in the future. A crucial task ahead is to design an institutional architecture for a reconstruction programme. In the context of the National Council for the Recovery of Ukraine and of direct advice of the Ukrainian government, we look forward to taking a constructive role in this challenge.
On 31 May, the Low Carbon Ukraine team, Ecoaction and Bankwatch jointly organised an online roundtable to discuss the options for a green reconstruction of Ukraine. Around 60 participants, incl. experts from non-governmental organizations, think tanks and international companies, took part in the roundtable.
David Saha, Head of Energy and Climate at Berlin Economics, presented a LCU Policy Briefing on the economic reasons for a green reconstruction for Ukraine. Already before the war, falling costs for green technologies, an increasingly inefficient and obsolete fossil asset base, as well as international policy pressure and obligations (NDC, IED/NERP, CBAM) were pushing Ukraine towards decarbonisation. With the full-scale Russian invasion, drastically increased fossil fuel prices and price volatility, continued dependence on Russian fossil fuel imports, and the EU membership perspective all add towards the imperative of a green reconstruction in Ukraine. Green reconstruction should mean replacing destroyed or damaged assets linked to an old fossil-based economy by new technologies.
Participants were then divided into five parallel thematic working groups for five sectors: (1) industry, (2) electricity, (3) buildings and heat sector, (4) agriculture sector, and (5) environment and nature. Participants discussed the financial, economic, legal and technological perspectives for green reconstruction in the different sectors. The results of the lively discussions will be incorporated into a publication.
To conclude the event, Ievgenii Cherviachenko, Consultant at Berlin Economics, and Alona Korohod, Policy Analyst at Dixi Group, discussed the policy instruments and frameworks necessary to implement a green reconstruction.
The Low Carbon Ukraine team would like to thank Ecoaction and Bankwatch for co-organising the roundtable. Our team will further support the Ukrainian government to pursue a green reconstruction of the country. Just recently, VoxUkraine published an article from David Saha, Pavel Bilek, Rouven Stubbe and Manuel von Mettenheim on the economic reasons for a green reconstruction programme for Ukraine.
Ukraine faces massive reconstruction needs in the aftermath of the Russian invasion. A reconstruction programme should be focussed on low-carbon technologies taking into account the cost reduction of green technologies, Ukraine’s climate policy obligations and EU accession perspective, elevated global fossil energy prices and price volatility, as well as energy independence from Russia.
Ukraine’s electricity sector will play a salient role in decarbonising the economy. A cost-optimal configuration of the power plant park in 2032 implies a complete replacement of coal-fired power generation by renewables and gas turbines. In the transition phase, around EUR 1.5 bn per year will be necessary to finance those new generation technologies.
Ukraine needs €47bn of additional investments to reach 2NDC emission targets. The €102bn figure often mentioned includes €55bn of regular investment unrelated to NDC. Ukraine’s investment need still is high, but not as high as often mentioned. Additionally, efforts must be undertaken to re-channel some of the €55bn into “green” projects. A carbon price would be a crucial instrument to achieve this.
In this Policy Evaluation, we aim to evaluate and compare Ukrenergo’s Adequacy Report with LCU calculations in terms of scenario building, carbon emissions, expansion of renewables and flexibility options for the electricity system by the year 2032. LCU and Ukrenergo envisage a similar development of the electricity system in the coming years. While the share of nuclear in the electricity mix will increase due to political decisions to expand capacity, thermal power plant capacity will decrease significantly due to high investment needs for filters and lifetime extension. While LCU envisages a total phase-out of thermal power plant capacity, Ukrenergo expects further usage of them beyond 2032. Replacing thermal power plants with renewables (wind, solar and biogas) while increasing balancing capacity (gas turbines and possibly batteries) is in line with LCU publications(more…)
Summary:
The Housing and Utilities Subsidy (HUS) is a social transfer meant to assist low-income individuals in the payment of housing and communal services. However, and despite its heavy weight on the government budget, many poor households are not awarded the HUS (only 50% of poor households received the HUS in 2018, and only 28% in 2019). Moreover, the wealthiest households often receive the subsidy, and, due to its design, such households also often receive large amounts. More stringent exclusion criteria in 2018 led to fewer households receiving the HUS in 2019, yet such reduction in coverage was achieved at the expense of all households, including the poorest. Several of the exclusion criteria, hinging on debt accumulation and on the presence of individuals without (substantial) declared income, likely harmed the most vulnerable households.
The current payment of the HUS – detached from household specific energy consumption – means price increases, if significant, can incentivize energy efficiency measures, a central goal for Ukraine with short- and medium-term benefits to the most vulnerable. However, not all eligible households apply for the HUS. Easy access must exist for all, without harm to those possibly less informed.
Reduced electricity tariffs actively work against energy efficiency and are also not the answer to assist the poor, given they are regressive: a subsidy to the largest energy consumers, or, in other words, a subsidy for the wealthy. The HUS is as of now a lump-sum transfer to household income, but not sufficiently progressive and leaving out many households in need. In this sense, its heavy burden on the budget could be reformulated into another type of transfer, designed, for instance, on the basis of income directly, which would be able to protect the most vulnerable and still allow market prices to incentivize energy efficiency.
Ukraine risks significantly falling behind on implementing the National Emission Reduction Plan (NERP), a binding obligation towards the Energy Community (EnC). A debate about a possible revision of the NERP has started in Ukraine but so far focuses on relaxing the requirements of the NERP, including the deadlines already extended especially for Ukraine. Such a course of action appears highly risky with regard to the necessary agreement of the EnC’s Ministerial council. This paper aims to analyse Ukraine’s obligations and options to get implementation of the NERP back on track.
Our analytical work shows that the current NERP, which provides for the modernisation and replacement of coal-fired power plants, is too expensive and leads to significant overcapacities. The costs of the electricity system can be reduced by scaling down the number of coal-fired power plants and replace them by open cycle gas turbine plants with simultaneous expansion of renewables. The saving potential amounts to EUR 14.7 bn of investment costs and EUR 3.1 bn of annual costs. Furthermore, carbon emissions can be substantially reduced.
On June 29th and 30th, 60 Ukrainian participants from academia, the government, private companies and public energy agencies joined Low Carbon Ukraine and the Kyiv School of Energy Policy for a workshop on energy and electricity system modeling. The event was co-organised with Bruegel and Paris Reinforce.
Ukraine recently committed to carbon neutrality in 2060 and signalled support for the European Green Deal aiming for net zero emissions by 2050. On the course of its decarbonisation and the country’s path towards the EU, it will need to adopt the stricter environmental rules and standards introduced by the Green Deal. At the same time, it will need to restructure its coal sector, which is heavily subsidised, loss-making and environmentally harmful. To deal with these issues effectively, we suggest a well-coordinated set of policy measures across three areas of action – better regulation of the energy market, taxing carbon emissions and the creation of a green modernization fund. The fund could channel a part of carbon tax revenues towards supporting green modernisation of Ukraine’s energy and industrial sectors while another part might be used for social protection of former coal miners, lower-income segments of the population and other vulnerable groups.
Summary:
Ukraine’s draft 2nd NDC (NDC2) envisions an economy-wide reduction of emissions from ca. 340 megatons of CO2 equivalents (MtCO2eq) in 2018 to ca. 290 MtCO2eq in 2030. It projects that the electricity sector will ensure roughly 45% of the total projected emission reductions from now until 2030.
To achieve these emission reductions and simultaneously create a well-functioning electricity system, investments of approx. EUR 27 bn in the energy system (including electricity and CHP generation) until 2030 are needed.
These EUR 27 bn would enable the necessary:
a) construction of 17 GW renewable electricity sources, installation of 1 GW of OCGTs and batteries and 1.2 GW renewable combined power and heat, as well as the b) NERP-compatible lifetime expansion of existing power plants. This requires the retrofitting of approx. 14 GW thermal electricity capacities (including 5.5 GW CHP).
The resulting electricity system in 2030 would be appropriate to securely generate above 185 TWh (gross electricity generation), being able to meet a net demand of 150 TWh.
Realising this transformation of the energy sector successfully would cause the carbon intensity of net demand to decrease from approx. 360 g/kWh in 2020 to 190 g/kWh in 2030. This represents abatement costs of approx. 40EUR/ton of CO2-equivalent, similar to current levels of the EU ETS.
Meanwhile, the necessary investments would increase the aggregated electricity generation costs from EUR 7 bn in 2020 to EUR 12.5 bn in 2030. This represents generation costs of 83 EUR/MWh – compared to 59 EUR/MWh in 2020. This is an increase of 41%.
However, even without the installation of new RES capacities, investments in new capacities and the NERP-compatible life-time expansion of at least 14 GW of thermal power plants (TPPs) are necessary to meet future electricity demand. The respective annual generation costs would thus increase to EUR 11.2 bn, or 75 EUR/MWh, representing an increase of 27% compared to 2020.
To ensure the flow of private investments and the ability of generators to finance their operations, reforms in the electricity market are of high importance. E.g., current transmission tariffs are too low to pay for the two Ukrainian public service obligations. Additionally, aggregated generation costs exceed system-wide revenues by approx. EUR 1 bn annually, mainly because Energoatom does not receive cost-covering electricity fees. For the same reason, Energoatom is not able to adequately maintain its fleet of nuclear power plants with the current fixed price it receives for its electricity.
We can show that the investment needs estimated in the Ukraine NDC draft are adequate to achieve planned emission reductions in the sector. Furthermore, the emerging system structure enables a higher security of supply. Resulting generation costs are approximately 41% higher compared to today’s costs but would kick-start a long-term climate-friendly transformation of the Ukrainian economy. With abatement costs of only 40 EUR/ton CO2, the electricity sector can compete with other sectors’ costs for reducing emissions. Finally, it is important to generate an investor-friendly business environment through a robust and reliable policy framework and to transform the Ukrainian economy towards a greener and more sustainable growth path. This would further reduce generation costs due to lower risk premia and interest rates. The approval and implementation of the Ukrainian NDC2 will support this transformation.
This series was elaborated in the framework of the project Low Carbon Ukraine (LCU) supporting more ambitious paths for selected energy and climate policy areas.
The idea to develop the present ten “Policy Proposals” arose in the course of LCU’s support for the Ministry of Energy of Ukraine in setting up a National Energy and Climate Plan for Ukraine. While Ukraine’s climate targets are partially very ambitious, we often observed a lack of underlying analysis and concrete policy measures to achieve those targets. For the mostcrucial topics, we provide a comprehensive analysis and propose concrete policy measures based on international experience.
Each Policy Proposal was written in a multi-stage process: a first draft of LCU experts or invited professionals was discussed over summer and early autumn 2020 with Ukrainian experts and stakeholders. Results of those discussions were taken into account when updating the Policy Proposals. It is important to note that the presented results reflect the view of the authors and not necessarily the position of the BMU (Federal Ministry for the Environment, Nature Conservation and Nuclear Safety).
We hope that the present analysis and proposals will contribute to a fruitful and constructive discussion and help Ukraine to develop ambitious, yet realistic energy and climate policies.
Dr. Georg Zachmann, project leader Ina Rumiantseva, project manager
Our policy event “Reaching Ukraine’s energy and climate targets” organized together with the NGO “DixiGroup” in Kyiv, was a complete success. Of the more than 400 registered participants, 240 actually attended the official online meeting, and another 200+ visitors watched the livestreams on Facebook.
Thereby, we presented six of our papers, addressing:
The decarbonization of the steel sector (David Saha)
The renovation and modernization of Ukraine’s public building stock (Frank Meissner)
A reform of the electricity market (Matti Supponen)
A socially acceptable transformation of mining regions (Manuel von Mettenheim)
Synchronization of the Ukrainian with the European electricity grid (Lukas Feldhaus)
An increase of Ukrainian production of electricity from renewable sources. (Clemens Stiewe)
The fact that we were able to attract a number of high-ranking politicians and experts for our panel discussions certainly contributed to the large turnout.
Among them were Roman Abramovsky, Ukrainian Minister of Environment, Maksym Nemchynov, Ukrainian Deputy Minister of Energy and Oleksandr Martynuk, Head of Department at the Ukrainian Ministry of Energy, Volodymyr Kudrytskyi, CEO of the Ukrainian network operator Ukrenergo.
Further international experts were Professor Max Åhman, Lund University, Susanne Nies, General Manager Germany at Smart Wires, and Martin Schön-Chanishvili, Senior Advisor at Germanwatch.
In addition, our presentations and panel discussions also attracted a large number of international experts including representatives of relevant international organizations, government and embassy representatives, as well as international private companies and universities.
We are particularly pleased that our ideas for a profound reform of the Ukrainian energy system seem to be attracting broad public interest in Ukraine.
We hope that with this event and our Policy Proposals, we were able to make a helpful contribution to translating Ukraine’s many energy and climate goals into concrete action.
Presentation: Reaching Ukraine’s Energy and climate targets by Georg Zachmann (LCU Project Leader)
Thematic Sessions
Zoom Room 1: Energy and Heat
Zoom Room 2: Electricity
Towards a decarbonisation of Ukraine’s steel sector
11.10-11.25: Presentation: David Saha (LCU) (English)
Reforming Ukraine’s electricity market
11.10-11.25: Presentation: Matti Supponen (LCU) (English and Ukrainian)
A socially sustainable coal phase-out in Ukraine
12.00-12.15: Presentation: Manuel von Mettenheim (LCU) (English)
Synchronising Ukraine’s and Europe’s electricity grids
12.00-12.15: Presentation Lukas Feldhaus (LCU) (English and Ukrainian)
Energy efficiency in public buildings – 50% retrofitting target until 2030
12.50-13.05: Presentation Frank Meißner (LCU) (English and Ukrainian)
A cost-efficient deployment of Renewables
12.50-13.05: Presentation Clemens Stiewe (LCU) (English)
“We want to go from plans to
measures, to turn targets into
action.”
Georg Zachmann, LCU Project Leader
About the Low Carbon Ukraine project
The project Low Carbon Ukraine (LCU) is part of the International Climate Initiative (IKI) and supported by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) on the basis of a decision adopted by the German Bundestag. It is implemented by BE Berlin Economics GmbH. It started in September 2018 and is designed to last until August 2021.
About DiXi Group think tank
DiXi Group was founded in 2008 in Kyiv as a think tank involved in research and consultations in the energy sphere – on the crossroads of politics, public relations, safety and investments. The Centre combines both professional analysis of performance and reforms in the specific sector and wider tasks – strengthening transparency and accessibility of energy policy, improved governance, cooperation of the government with the public and business.
Summary:
Deferred maintenance and repair investments reduce the value of the Ukrainian building stock and annihilate private and public property. Moreover, the poor condition of the Ukrainian building stock accounts for high energy consumption and is a large contributor to GHG emissions. Both is economic inefficient in short and long-term and directly impact living conditions of the population negatively. A long-term retrofitting strategy in line with the Energy Efficiency Directive (2012/27/EU) is required for residential as well as public buildings.
We evaluate an ambitious annual retrofitting of approx. 5,500 public buildings representing approx. 16m m². This will require energy saving related investments of EUR 1bn annually until 2030. The primary energy savings sum up to 700 TWh until 2059 and save 140 Mt CO2. We propose to finance the energy retrofitting through emittinggreen bonds worth EUR 8bn. Assuming a constant bond issue in EURin the period 2021-2030 with an interest rate of 7% and a run time of 15 years – trough reinvestment of bonds with a maturity of approx. 5 years – the CAPEX sums up to approx. EUR -19.6bn, including a budget funded own contribution of building owners of approx. EUR 1.6bn (see Table 1). Energy savings reduce payoffs amounting to approx. EUR 24bn until 2059 while the resulting CO2 abatement costs are approx. -5 EUR/t CO2 discounted which indicates a gain. We expect additional non-energy related investment needs of about EUR 640m that are required for an overall modernisation of these public buildings. A funding has to be provided by the state and/or municipal budgets for securing long-term usability of the building stock. This funding is not considered in the following analysis.
We are aware of the administrative difficulties resulting from the implementation of green bonds at state level to finance investments at local and/or municipal levels. We recommend that this issue be addressed in a newly established working group for exchange between the Ministry of Finance and the Ministry of Regional Development of Ukraine.
Ukraine’s greenhouse gas (GHG) emission from transport saw a strong decline in the 1990 and have been slightly increasing since the year 2000. While the economic contraction was largely responsible for past emission decreases, Ukraine needs a set of policies to actively steer the transport sector towards a low-carbon future. Despite economic challenges, we argue that Ukraine is in a good position to further decrease transport emissions and to reach its long-term climate goals. Ukrainian policymakers should focus on developing an integrated strategy that connects road, rail, and aviation. Especially the transport sector deserves holistic thinking: while different levels of governance and governments have to coordinate vertically, the decarbonization of the transport sector mustbe thought together horizontally with the decarbonisation of other sectors. Without a low-carbon electricity sector, many policies for the transport sector will fail.
Although Ukraine can build on an already good efficiency level of new cars and trucks, it should think about introducing its own CO2 emission targets for vehicles. Crucially, policies aiming to upgrade the old and inefficient stock of cars and trucks should be introduced. In the context of a sustainable development, Ukraine’s low rate of motorisation should be seen as an asset rather than a deficiency, helping to avoid building a car-centred mobility system. Importantly, Ukrainian policymakers should push for alternative modes of transportation, especially in the cities. Local public transportmust be improved, active modes of transportation, such as walking and cycling, strengthened, and cars more efficiently used. Although emissions from domestic aviation are still small, they have been increasing in recent years. Instead of investing into new air-related infrastructure, investment should be primarily targeted to railway. Railwayhas a key part to play when it comes to decrease emissions from domestic flights, long-haul car travels, and freight transportation.
Crucially, transport policies for Ukraine need to be designed to provide new modes of transportation for citizens and to improve their quality of life. Policies need to be socially just, so they are attainable for citizens and politically feasible. Transport policies must be designed in an integrative way: for instance, pricing of traffic will only be successful when adequate transport alternatives exist for citizens. If done correctly, various transport policies offer possibilities for economic development and will generate several co-benefits, such as lower levels of pollution, traffic, and noise. With the right policies, Ukraine can achieve to further decrease transport emissions and reach its mid-and long-term climate goals. Ukrainian policymakers will in due time need to take decisions towards this direction so that harmful trends,such as an over-reliance on cars, can be avoided from their beginning.
This paper considers the potential for decarbonizing Ukraine’s steel sector, at present one of the main sources of Ukrainian CO2 emissions. The aim is to propose policy measures that lead to a decarbonisation of Ukrainian steelmaking whilst taking into account the importance not to undermine the viability of this key industrial sector and the existence of a challenging international environment for the Ukrainian steel industry.
We analyse the status quo of the steel sector in Ukraine, its CO2 emissions and economic challenges before reviewing the potential of different avenues (changing production processes, retrofitting or replacing technologies and plants) to reduce CO2 emissions. Finally, we recommend a set of policy measures and set out a scenario to decarbonize the Ukrainian steel sector by 2050.
Despite its continuously decline in the past 30 years, Ukrainian hard coal production still plays a salient role in Ukraine’s economy. On the demand side, thermal powerplants which are fueled with coal, still generate 31% of Ukrainian electricity. However, to comply with its climate obligations, a coal phase-out is an inevitable step for Ukraine on its decarbonization path. Economic reasons will also push coal out of the market as an energy source. This is due to the decreasing profitability of coal mines in Ukraine, which will be further reduced by the implementation of the National Emission Reduction Plan, a potential move away from coal subsidies and a presumed increase of the carbon tax.
This paper proposes accompanying measures for the coal phase-out, aimed at dampening its negative impact on the development of affected regions and their labour market. The measures proposed include direct measures addressing former miners, such as retraining programs, but also broader instruments like the set-up of a just transition fund and the creation of new regional development agencies. If successfully implemented, a politically accompanied structural change offers the opportunity to bring about an economic shift towards a more future-oriented industrial landscape and to overcome the socio-economic challenges that coal mining areas are facing today. A phase-out of subsidies can accelerate the process and carry some costs of this change.
For Ukraine, the cost of synchronisation with the Continental Europe power system will be significant. But the benefits in terms of energy security, market integration, energy efficiency, decarbonisation and competitiveness – i.e. the five dimensions of the Energy Union – would be even larger.
Ukraine and its TSO Ukrenergo intend to synchronise the Ukrainian with the Continental European electricity grid for political, economic, and technical reasons. Their aim is to finalise this integration already by 2023. This time plan is very ambitious as several key difficulties needs to be overcome before synchronisation.
Thanks to generous feed-in tariffs (FITs) for renewable energy sources (RES), Ukraine has seen a remarkable surge in RES capacity addition in recent years. In 2020, 10% of electricity has been generated by RES (incl. hydro) in Ukraine. In order to rein in the spiralling costs of RES support, Ukraine has adopted an auctioning system for RES support. From 2021 on, this system will be used to determine support levelsfor utility-scale RES on a competitive basis.
In December 2020, the Ministry of Energy of Ukraine announced draft quotas for the first RES auctions in 2021 and indicative annual quotas for 2022 until 2025. According to the Ministry, 365 MW of RES capacity would be auctioned in 2021, and quotas would then slightly increase from 420 MW in 2022 to 570 MW in 2025.
In this Chapter, we show that at moderate electricity consumption growth, the current deployment path will increase Ukraine’s RES share in electricity generation to around 21% in 2030. This path is insufficient to significantly move forward on decarbonising Ukraine’s electricity sector. It moreover conflicts with the country’s ambition to become a producer of green hydrogen. We estimate that doubling the currently planned auction volumes would allow Ukraine to achieve a 30% RES share in electricity generation in 2030, helping Ukraine to keep pace with global decarbonisation efforts.
A more ambitious deployment is feasible with policy measures that help to reduce the integration cost of renewables. To foster the integration of RES into the electricity market, we propose the introduction of a feed-in premium (FIP) scheme. For new RES plants, this FIP scheme would entail the obligation to sell the generated electricity on the wholesale market, rendering the intermediary step of selling electricity to the single offtaker Guaranteed Buyer (GB) unnecessary. Introduced together with balancing responsibilities for RES, a FIP scheme would incentivise RES to deliver better generation forecasts and allow them to sell or buy electricity on all short-term markets to react to forecast updates. These regulatory changes would reduce RES imbalances, ensure a more efficient dispatch of Ukraine’s electricity system and hence reduce the need for costly balancing energy.
To incentivise the market entry of flexible generators that are needed to balance RES fluctuations, we argue that minimum and maximum price caps on Ukraine’s electricity wholesale market should be phased out. We show that eliminating price caps is consistent with the objective to achieve low average prices and would help to address the high market concentration on Ukraine’s electricty market.
The Ukrainian electricity market opened in July 2019. The market started with limited functionalities as some elements were not yet operational while others where constrained to address structural shortcomings. In this Chapter, we assess the recent market development based on the experience of the first year of market opening. After looking into the history of market opening and exploringand why it is important to have an EU-compatible electricity market in Ukraine, we address a number of issues that we deem critical for ensuring the development of a stable, transparent and competitive market.
Fossil fuel subsidies have been a popular measure for governments all around the globe. However, subsidies can have a range of adverse effects on the economy, which is why large international organisations, like the World Bank, the OECD as well as the IMF, advice to phase-out these subsidies.
By promoting wasteful consumption and discouraging the implementation of low-emission production technologies, energy subsidies can lead to an increase in Greenhouse Gas (GHG) emissions. Further, the IEA (2019) demonstrated that they rather benefit wealthy recipients and that only a small portion arrives at low-income households, thus they can even promote income inequalities. Further, subsidies can pose a substantial burden to government budgets – and consequently taxpayers.
This paper focusses on consumer subsidies in the natural gas and electricity sector. Producer subsidies in the coal sector are covered in a separate proposal and are proposed to be phased-out in accordance with the coal transition.
Among the countries that implemented a carbon tax, Ukraine’s carbon price is one of the lowest. Studies have shown that it was virtually ineffective in strengthening energy efficiency and reducing carbon emissions, thus it does not support meeting international climate obligations. The country’s current efforts to introduce a range of measures to achieve emission reduction goals call for a revision of Ukraine’s carbon pricing strategy.
To avoid possible border-tax adjustment effects from the EU, we propose a price consistent with projections of the EU carbon price for 2030. Consequently, in the following, the implications of a carbon tax of EUR 39/t CO2 are discussed.
Within our Policy Proposal series, we propose ambitious measures to reduce and curb greenhouse gas emissions in a variety of sectors of the Ukrainian economy. Since the proposed measures are capital-intensive, this paper aims at the capital markets and the unlocking of private capital. Therefore, we propose an overview of tailor-made green financing schemes consisting of public and private funding. We elaborate on certain financial instruments typical for green measures, such as green bonds, and potential ways of their correct implementation in Ukraine.
For the transport sector, we proposeto implementproject finance for public private partnership in order to financethe capital-intensive monitoring and control infrastructurefor congestion charging in Ukrainian cities. The scheme allows for the cooperation of the public and private sectors.
To cushion the impact of a coal phase-out on regional socio-economic indicators, a transition fund could be established to finance retraining programs, pension schemes etc. A mix of grants on the one hand and loanson the other could then channel funds to regions and projects useful for anequitable transition.
To finance an increaseofrenewable electricity generation, project finance and on-balance sheet financeare considered. High capital costsdue to high perceived risks of such investmentslead to a higher cost of electricity from renewable energy. Therefore,steps to reduce the risks are needed.
We propose the use of green bonds to supportenergy efficiency retrofitting of public buildings asthey offer secure options for large-scale projects and attract private investors. Nevertheless, government expenses will still be needed to accompany green bond financing.
Our financing approach to support steel companies investing in new technologies andupgrades of their existing installations includes a modernisation fund and a credit from a multilateral development bank backed by a potential increase in carbon taxproceedsto front-load the fund.Then, the fund could provide grants to cover part of theinvestment into green modernisation projects with the company financing the other part of its project itself.
To cover the expenses for Ukraine’s ENTSO-E integration, Ukrenergo has to apply on-balance sheet financing with loans from international credit donors and higher tariffs with which Ukrenergo refinances itself.
The last six months were characterized by the Covid-19 pandemic. The Ukrainian electricity system has been put under stress in the first half of 2020. Quarantine measures caused a decline in electricity consumption as industry and businesses reduced operation. Moreover, renewable electricity generation has reached record levels, testing the technical limits of Ukraine’s power plant park. A decline in nuclear output could be observed in May 2020 that was not justified by technical or economic reasons, lower electricity demand or RES deployment. Instead, Energoatom’s decision to decrease nuclear electricity generation has been a result of market design inefficiencies.
On July 1st, 2019, Ukraine opened its electricity market, shifting from a regulated single-buyer model to competitive liberalised model in line with EU directives. The reform was implemented in the tight timeframe of only 2.5 years – very quick by European standards. Our 5th issue of the Monitoring of Electricity Market Opening (MEMO) series now takes stock of the first 12 months of operation under the new wholesale market. It provides an overview of how the market performed, what changes have been introduced and what issues still need to be addressed.
The report presents a comprehensive analysis of the available data and contains 66 figures, tables and charts in total. For convenience, it is structured in the following way:
The first part gives a general overview of the market, with an analysis of key metrics and a timeline of legislative framework changes.
The second part provides a comprehensive review of the main events that occurred during 12 months and key problems remaining in the market.
The third part focuses on recommendations for improvements and a to-do list for the next twelve months.
The fourth part comprises an extensive in-depth data analysis, with graphical representation and short narratives about the market performance.
Judging from EU experience electricity market reforms take years to finalise. Ukraine has just started its long way towards a truly liberalised competitive market. Now it is important to develop a long-term strategy on how to make the reform come to fruition and benefit Ukrainian consumers.
Electricity generation from nuclear sources shows a downward trend starting at end of April. It is important to note, that the NPP maintenance plan foresees a nuclear power generation of up to 3.5 GW higher than the actual generation in May 2020.
This deviation cannot be explained neither by a Covid-19 related demand decrease nor by a high share of RES generation. Our modeling results show that NPP electricity generation in May was below the economic efficient level.
On July 22, the “Low Carbon Ukraine” project submitted a draft of the “Integrated National Energy and Climate Plan” (NECP) to Deputy Minister Yaroslav Demchenkov of the Ministry of Energy of Ukraine, that is responsible for the NECP drafting process.
The Ministry of Energy had requested the support of the project “Low Carbon Ukraine” to prepare a draft in accordance with the template proposed by the Energy Community (EnC). After a kick-off meeting in May 2019 and the formation of a Technical Working Group under the auspices of the Ministry, the project started to comprehensively map existing policies and measures, plans and strategies and conducted a profound gap and target analysis. As proposed by the EnC template, this overview was organised three chapters:
Chapter 1: Overview and process for establishing the plan
Chapter 2: National objectives and targets
Chapter 3: Policies and measures
The last two Chapters then describe the effects of policies and measures along the five dimensions of the Energy Union (explanation see below):
Baseline Scenario (Chapter 4): Current situation and projections with existing policies and measures
Policy Scenario (Chapter 5): Impact assessment of planned policies and measures
Chapter 5 was not included into the submitted draft due to the explicit request by the Ministry of Energy as Ukraine’s updated NDC scenarios – that would ideally be consistent with the NECP baseline and policy scenario – are still under discussion.
Throughout the preparation phase, the project reported on the results and status of the work in regular meetings with the responsible Deputy Minister. On July 24th, the submitted NECP draft was presented to and discussed with the Expert Council of the Ministry of Energy in Kyiv. By the end of August, the document will be reviewed in an intra-ministerial process. In September, the updated document shall be discussed in a comprehensive stakeholder process.
BACKGROUND
As a Contracting Party of the Energy Community (EnC), Ukraine committed to submit a NECP by the end of 2020. Following the Presidential Decree №837/2019, the integrated plan shall be prepared and approved by 30 September 2020.
The NECP was originally developed for EU Member States in the framework of the Energy Union. It shall enhance the governance process between EU and Member States, ensure compliance with international climate obligations, enhance transparency for Member States and address policy interactions.
The national plan takes a holistic approach and addresses the five main dimensions of the Energy Union in an integrated way, which recognises the interactions between the different dimensions. That means, the integrated plan reports on existing plans and strategies (and thus does not represent an additional strategy or plan) and analyses their impact along the five dimensions of the Energy Union:
Energy security
Internal energy market
Energy efficiency
Decarbonisation
Research, innovation and competitiveness
The integrated plan covers the period up to 2030 with an outlook to 2050.
Key Messages
Curtailment is a valuable system flexibility option and should be compensated
Curtailing and compensating RES can be cheaper than taking up 100% of RES electricity through investment into conventional plant park or transmission
Ukraine should start with a simple heuristic to estimate curtailed energy and later introduce a more precise method based on weather data
The past months were characterized by the government reshuffle, the Covid-19 pandemic, and a debt crisis in the electricity market. The government under new prime minister Denys Shmyhal decided to create the Ministry of Environmental Protection and Natural Resources separating it from the Ministry of Energy and Environmental Protection. This was preceded by a change in the leadership of the ministry, which was provisionally handed over to Olha Buslavets.
We estimate the impact of the COVID-19-induced economic crisis on Ukraine’s electricity consumption
Annual electricity consumption to decrease by 5% in best- and 8% in worst-case scenario in 2020
The effects of the crisis on wholesale electricity prices and on the generation mix might not be straightforward due to market regulations and require further assessment
Dr. Zachmann explained that LCU analyses indicate a decoupling of wholesale market prices and marginal costs of production, leading to prices well above those in neighbouring countries. The reason can be found in structural problems of the Ukrainian electricity market, that is characterized by a significant concentration in generation (and resulting risks of market power abuse), the isolation of the power system and cross subsidies. Those issues can only be addressed by structural measures.
The 4th issue of the Monitor of Electricity Market Opening covers the period from July 2019 to February 2020 and gives a comprehensive review of the electricity market development. The main messages of the Monitor are:
Legislative framework is volatile, with 16 changes to key regulatory documents for 8 month and at least 4 expected in Q2 2020. All the changes focused on re-regulation and increase administrative control rather than liberalisation and boosting of competition.
We identified 4 phases of market development in Integrated Power System of Ukraine, with different factors kicking-in and affecting price. Nuclear power, channelled exclusively through organised segments of the market, has a dominant share, and its oversupply had a decisive impact on price. The thermal generation, mostly private, faces no significant competition on bilateral agreements segment, as import from Russia and Belarus have a limited effect.
The overall overcapacity in Ukraine creates conditions for oversupply and contributes to dramatic price drops. This situation will persist if market players like Energoatom do not follow economic reasoning but rather an administrative directive regarding the volume they produce, and if thermal and nuclear generation do not compete in all market segments.
In the Burshtyn Energy Island, increased import has no significant impact on competition and price. A significant share of imports is traded on the DAM, just to be bought and re-exported to EU countries. Most likely, DTEK has established control over cross-border allocation via auctions, managing to keep DAM prices high.
The loopholes in market rules created a dangerous positive feedback effect in Jan’-Feb’20, driving DAM prices below economically reasonable levels in some weeks, and syphoned millions of hryvnias from the system.
Increased transparency is a big upside of the new market. A lot of previously hidden data became available, enabling better assessment of trends. Much is to be done to reach levels of transparency of established markets, to attract new players.
Debts are now accumulating in the system, adding to an unaddressed legacy of UAH 30 bln from the old market. Non-payments on the balancing market threaten the stability of PSO schemes and Energoatom, as more and more nuclear is sold as imbalances due to surplus in the system.
If fundamental flaws of the market structure will not be addressed, any minor change or tweak will not make the market function properly. Market concentration and lack of competition, both on wholesale and retail side, should be addressed as soon as possible. The administrative price control should be phased out.
The outgoing Honcharuk government left a mixed legacy. On the climate side, the Ukraine Green Deal announced in early 2020 provides strategic guidance to investors and policymakers towards a sustainable energy and climate system. But to become effective this concept will still need to be underpinned by significant measures. The National Energy and Climate Plan – that is to be completed in the second half of 2020 – should help to identify concrete policy measures. One important quick measure can be redesigning the current carbon tax into an upstream tax on fuels. A tax of about 1 EUR/t proposed by the Ministry could help to collect some UAH 6 bn.
The new gas contract with Russia can also be seen as a success as it provided significant short-term benefits to Ukraine and avoided a month-long “gas war” that would have been detrimental for Russia-Ukraine, Russia-EU and EU-Ukraine relations.
On the other hand, there was limited progress on many other urgent matters. Coal sector reform did not progress and the electricity market remains a tightly-regulated mechanism in need of repeated quick-fixes such as Ukrenergo’s pursuit to operate storage facilities. Also, energy efficiency programs remain stuck and privatisations (Centrenergo) did not proceed. A new issue is investment-uncertainty over a discussed restructuring of feed-in tariffs for renewables. Given the quickly increasing cost, investors and government so far unsuccessfully tried to achieve a mediated compromise and there is a risk that unilateral actions will destroy credibility and significantly increase the cost of future foreign investments.
Ukraine opened its electricity market in July 2019 by introducing competitive market principles in line with the 3rd energy package laid out in EU directives. The general market framework as well as the fundamental principles of how the electricity market should function are set out in the Law on the Electricity Market, while numerous by-laws provide detailed regulations.
On December 12, 2019, draft Law #2582 was registered in the Ukrainian parliament. Its goal is to provide incentives for energy storage systems in the Ukrainian electricity market. LCU analysis of the draft law text shows that instead of while providing certain incentives for energy storage, it may also undermine competition on the ancillary services market.
In order to stimulate the development of energy storage in Ukraine, a draft law:
should remove existing legislative barriers on the market. It should define fundamental principles instead of specifying detailed procedures. Detailed provisions should be set out in by-laws;
should explicitly prohibit system operators from owning, developing, managing or operating energy storage systems, which are used to provide services in organised electricity market segments;
may introduce definitions for energy storage operations in order to provide the Regulator with a legal basis to separate energy storage operations from operations of buying and selling electricity;
may introduce definitions for energy storage that distinguish energy storage used to participate in the market and energy storage used as a fully integrated grid component;
should determine an approach for a due process that will allow exceptions from the rule that prohibitis the system operator from owning, operating and managing energy storage systems;
may create an incentive for RES operators to use energy storage for non-market activities by fostering a deeper integration of RES into the market and giving them more flexibility in the balancing market;
should not explicitly state any technical characteristics. Those characteristics should not be determined by legislative bodies, but by executive bodies in accordance with established rules;
consider introducing a definition for an aggregator as a market player, with a fair, equal and barrier-free status on the market compared to other players.
Here ist the presentation of Dr. Matti Supponen “Electricity for all”, who has been working for decades for the European Commission as an expert for electricity markets. The presentation is based on an introduction into basic technological and economic features of electricity markets on the example of European countries.
On December 14th, 2019, experts of the project „Policy advice on low-carbon policies in Ukraine – Low Carbon Ukraine” (LCU) gave an introduction into aspects of energy and climate policies to a group of experts and parliamentarians, most of them members of the energy committee of the Ukrainian Verkhovna Rada. The aim was to provide newly elected MPs with fundamental expertise on the complex topic of electricity markets, to discuss specific challenges of integrating renewable energy sources into Ukraine‘s energy system, and to look into challenges of coal phase-out in Ukraine.
We analyse the impact of different sets of RES quotas on the Ukrainian electricity system. In our best-case scenario Ukraine would construct 3 GW of wind and solar based on existing contracts (pre-PPAs) and set RES auction quotas of 1.6 GW until 2025. The corresponding annual auctioning quotas for wind, solar, bioenergy and small hydro can be found in the table below. This pathway has four advantages over other analysed pathways.
The revenues of taxing the CO2 content of fuels with 27 UAH/t CO2 are estimated between UAH 5.6 and 6.1 bln per year depending on draft law option for taxation (based on 2017 energy balance and fuel specific CO2 contents).
The highest price increase from taxation results for coal (between +3.5 and +4.3%). Effects on prices for transport fuels, electricity, natural gas and household district heating tariffs are estimated between +0.2 and +2.7%.
Depending on whether wholesale electricity prices (including CO2 tax) reach price caps, non fossil electricity producer on might make windfall profits.
The past months were characterised by new appointments and organisational changes in the political and regulatory bodies that govern Ukraine’s energy sector. A new ministry that is responsible for environment, energy efficiency and energy with seven new deputy ministers has been created. New commissioners were appointed at the regulator. And most MPs that form the Energy and Utilities Committee of the Rada have not been in parliament before.
Assessment of feed-in-tariff, related expenditures for RES, current scheme of financing, impact on state budget and electricity prices. Analysis of risks of retroactive change in support scheme.
Assessment of the progress on the ESU 2035 action plan implementation, analysis of gaps, barriers and the lessons learned, providing recommendations on further improvement of the process.
Effects of enabling electricity imports from Russia and Belarus:
Lower coal consumption in Ukraine → allowing higher coal stocks in Ukraine and hence increasing supply security
Reduced emissions, as typically Ukrainian coal plants are replaced by gas-fired units
Increased competition in the electricity market → allowing electricity supply from Russia contests the market power in the highly concentrated Ukrainian market → can lower electricity prices disproportionally
Possible revenues for the Ukrainian state → introducing import quotas allows the state to participate in the excess revenues from importing “cheaper” electricity from Russia
Loss of revenues for Ukrainian generators → Lower prices and volumes reduce cash flow which could in principle be invested
With increasing shares of electricity generation from renewable energy source (RES), the fluctuations of RES electricity generation are increasing too. This presents a challenge to electricity system operators across the world, among them Ukraine’s Ukrenergo. The need to balance these fluctuations can be addressed by adding flexible generation or storage capacity as well as demand response and transmission capacity.
Market regulations continue to adjust financial flows in the system. This time Energoatom and Ukrhydroenergo are required to provide more electricity at low prices to the Guaranteed Buyer (GB) so that the GB can increase profits from selling this power at higher prices and use these additional revenues to take over financing renewables support costs from the transmission tariff. While this allowed to decrease the transmission tariff for the time being, it may put renewables support at a risk if the profitability of the GB is challenged – e.g., by the discussed reduction in price caps at which the GB can sell its electricity. Furthermore, it implies that more and more electricity is traded at regulated prices – undermining the very idea of market opening.
Ukraine’s electricity imports from Russia and Belarus continue to rise (see Figure 1 below). Nevertheless, import volumes remain limited in terms of total market volumes. However, recent changes to the Law allowed to import power from Russia and Belarus under bilateral agreements, which was not possible before. This will clearly lead to increased cross-border flows with these countries. This might be good for competition and market liquidity but due to the highly regulated nature of the system (see above) may lead to problems on other market segments.
In Burshtyn trading zone producers execute their market power and maximize their profits by switching volumes to the balancing market segment. This pushed average day-ahead prices to their highest levels since market opening.
In the mainland trading zone, making more low-cost electricity available to the GB may have positively affected the liquidity on the day-ahead market, leading to price decrease during last 2 weeks. However, liquidity was slightly boosted by increasing RES output, and this positive effect might decrease in autumn-winter, as Ukrainian RES is mostly PV.
Average prices, at which state-owned TPP operator Centrenergo sells on exchange are significantly lower than on organised segments. Press reports indicate that this low-cost electricity is mainly bought by one business group that also allegedly exercises some managerial control over the Centrenergo management.
