Background and motivation

Current challenges for Ukraine

Ukraine’s energy sector is important for the country’s economy as it accounts for about 13 % of its GDP (Antonenko et al. 2018). Yet, Ukraine is among the least energy efficient countries in Europe, which drags down economic growth and has left it vulnerable to political pressure from energy suppliers. Moreover, Ukraine’s energy sector currently faces a number of other – often intertwined – challenges such as a longstanding investment backlog, loss-making state-owned companies, and increasing energy cost for households.

Phasing out subsidies: Natural gas price subsidies 2013-2017, % of GDP

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Supply and transit of natural gas have for the last decades dominated public debate on Ukraine’s energy sector, both on the national and international level. Natural gas represented about 30 % of the country’s primary energy consumption in 2016 and is particularly important for heat generation (BP 2018).

Yet, repeated disputes with the historic main supplier Russia over the terms of gas supply and transit highlighted the risks associated with a dependency on gas imports from the East.

The country’s electricity sector has been significantly affected by the conflict in eastern Ukraine as the occupation of coal mines in those regions has restricted supply with high-quality coal, thus forcing the country’s thermal power plants to increasingly rely on imports. The dependency on coal imports – mainly from Russia – is widely viewed as a significant threat to national energy security. Ukraine’s nuclear power industry also heavily relies on Russian imports, as the bulk of nuclear fuel is imported from Russia and used in all of the country’s 15 reactors. Since Ukraine’s nuclear plants generate more than half of the country’s electricity, they are critical to national energy security (Ministry of Coal and Energy 2018).

Furthermore, aging power generation and electricity network assets highlight the need for attracting investments to ensure supply security.

Energy costs on the rise: Average electricity tariffs and district heating (DH) tariffs

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Ukraine’s international obligations

Ukraine has entered into a number of obligations in order to achieve its long-term goal of becoming a full member of the EU internal energy market. In 2011, Ukraine joined the Energy Community, a group of southeast and east European countries that agreed to adopt the EU’s internal energy market legislation. It has thereby obliged itself to establish real markets for electricity and gas and to integrate these markets with the EU. Ukraine also promised to unbundle transportation of electricity and natural gas from production and distribution in order to open up both pipelines and grid to third parties.

By signing the Ukraine–European Union Association Agreement in 2014 and the treaty of the Energy Union in 2015, Ukraine further committed to aligning its energy and climate policy to EU standards. The obligations of the Association Agreement included, among others, the development of a non-discriminatory and competitive energy market, the support of renewable energy, and the encouragement of energy efficiency and energy security. In June 2017, the state-owned operator of the Ukrainian power grid, Ukrenergo, signed the agreement on Ukraine’s accession to the EU grid ENTSO-E, which had already been an obligation under the Ukraine-EU Association Agreement.

Increasing import dependency: Coal exports vs. imports, ktoe

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By ratifying the Paris Agreement in 2016, Ukraine signalled the political will to contribute to global efforts to tackle climate change and to reduce the shares of gas, coal and oil in the country’s energy mix. Ukraine’s future emissions will depend on energy system choices and investments in the coming years. Yet, the current debate in Ukraine is driven by incumbent interests that prefer a high-energy-consumption, high-fossil-fuel-share pathway. This scenario is inconsistent with Ukraine’s energy policy goals. The LCU project therefore aims at supporting the government of Ukraine in their efforts by developing sector strategies and policy measures that are in line with the country’s international obligations and long-term energy policy goals.

The Energy Strategy of Ukraine: a window of opportunity

In September 2017, the Energy Strategy of Ukraine (ESU) was approved by the Cabinet of Ministers of Ukraine. The ESU’s main goals are the liberalisation of energy markets and the establishment of effective regulation, which should in turn attract investors to the country’s energy sector. It encompasses the whole range of the country’s energy goals until 2035 and defines the necessary steps to achieve them.

Vice Prime Minister Volodymyr Kistion, who coordinates the Cabinet’s measures on energy policy, is responsible for its implementation. Successful implementation of the ESU would ensure the much-needed coordination among the different ministries and state agencies regarding strategic decisions on energy and climate policy. The adoption of the ESU hence provides a window of opportunity for the Vice Prime Minister to improve coordination of Ukraine’s energy and climate policy.