Ukraine’s Power Sector Is Set For A Major Transition

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Originally published on EnergyPost.

Ukraine’s power sector has seen few changes during the two decades after the dissolution of the USSR, as it continued to operate as part of an energy system inherited by the newly independent states.  For 20 years, it was rolling down the hill without a clear vision for the future. Now everything is about to change. Multiple pressures and opportunities have merged to open up a new pathway for the country: Ukraine can get on board of Europe’s grand energy transition by starting a profound transformation of its power sector.

As the pillars of Ukraine’s power sector – coal and nuclear – are shaking, the country is on the point of a major energy transformation, writes Oleg Savitsky, climate and energy policy expert and journalist. But some crucial steps still need to be taken to make it possible. Chip in a few dollars a month to help support independent cleantech coverage that helps to accelerate the cleantech revolution!

The historic choice of EU integration made by the Ukrainian people in 2014 during the Euromaidan revolution has launched a cascade of dramatic events, which together with accumulated industry-specific problems are now driving a major change away from coal and nuclear and full-speed towards renewables.

Former heartland

Ukraine’s old energy system is faced with tremendous challenges. The occupation of the Donbass region, the former heartland of coal, has resulted in an abrupt and irreversible decline of domestic coal mining and new energy security threats. Since 2014, the region has been ravaged by ongoing military conflict and paramilitary pillage of infrastructure, as a result of which many coal mines are now flooded.

Dependency on coal imports is continuously rising, while planned ramping up of domestic production is not happening due to the stalled process of re-organizing remaining state-owned mines. Compared to 2016, coal imports in 2017 doubled. 56% of total supplies came from Russia. Apart from fuel shortages in winter, which are possible if Russia stops coal supplies again as it did in 2015, reliable power supply is threatened by ever more frequent malfunctions of obsolete power plants.

Ukraine’s nuclear power industry also remains heavily dependent on Russia, despite some considerable fuel diversification efforts and new supply contracts with Westinghouse.

The majority of Ukrainian coal power capacities were commissioned in the 1960s and lack even basic pollution control. Under EU regulations, most of these plants, if not all, would not be permitted to operate due to unacceptable levels of dust, SO2 and NOx emissions. Even without a carbon tax, these plants are increasingly becoming stranded assets.

Ukraine’s nuclear power industry also remains heavily dependent on Russia, despite some considerable fuel diversification efforts and new supply contracts with Westinghouse. The bulk of nuclear fuel is still coming from Russia (69.2% in 2017), and it is used in all 15 reactors of the country. Spent fuel from three out of a total of four nuclear power plants is also being sent to Russia. The construction of a centralized storage facility for spent nuclear fuel in the Chernobyl exclusion zone started on November 9, 2017, but it may take years before it gets operational.

Apart from energy security issues, Ukraine’s nuclear industry has a very burdensome legacy. For more than 30 years, Ukraine has been coping with the terrible aftermath of the Chernobyl nuclear accident, and the story is very far from being over. New Safe Confinement – a unique project designed to create conditions for the dismantling of the remnants of reactor unit #4 – took 1.5 billion euros to build and is it not fully operational yet.

Costs are also mounting for the treatment and long-term storage of nuclear waste and spent fuel. Additional financing is needed for the modernization and safety upgrade(s) of nuclear plants undergoing controversial lifetime extensions.

Moreover, current payments to the Decommissioning Fund are insufficient to enable safe and timely decommissioning of depreciated reactor units. Not paying for it now (as the tariff for nuclear electricity is currently set at 0,02 EUR/kWh) means increasing future costs and risks.

(Note: in Ukraine fixed tariffs for each type of power generation – coal, nuclear, hydro, gas-fired CHP – are set individually by the National Energy Regulatory Commission on a quarterly basis. State enterprise “Energorynok” buys electricity from all power companies at these prices and from renewables at feed-in tariffs and then sells it at a “wholesale electricity price” to distribution system operators. The wholesale electricity price is calculated by averaging the costs from different types of generation according to their share of supply, plus a margin on operational expenses and transmission grid maintenance/service.)

Eventually, all these costs will add up, directly or indirectly hitting the pockets of several generations of Ukrainian citizens in the future. If nuclear safety is not paid for in a timely fashion, future costs will multiply and the risk of new accidents and radiation hazards will increase, which can affect not only Ukraine but also other European countries.

Significant steps

But there is a bright side too. Last year Ukraine took some significant steps towards the implementation of reforms in the power sector and is about to create a new framework to enable accelerating and continuous deployment of renewable energy sources.

On June 28 2017, at the Assembly of the European Network of Transmission System Operators (ENTSO-E), Vsevolod Kovalchuk, CEO of national TSO “Ukrenergo”, signed an agreement on the conditions of the future accession of Ukraine to the pan-European electric power grid. Full integration with ENTSO-E by 2025 is now set as a target, with far-reaching implications for the entire power industry.

This came after Kovalchuk’s earlier public statements in support of the full-scale deployment of renewables in Ukraine. On April 3, at a special public event, he presented a summary of research and analysis of necessary steps for the integration of solar and wind capacities in Ukraine, along with the problems that need to be addressed in the process of variable renewable energy sources (VRES) deployment.

According to Ukrenergo’s forecasts, by the end of 2019 renewable energy capacity in the country will double from the current 1.5 GW to 3 GW. Up to 2020 new solar and wind capacities can be integrated with existing flexibility options, but further development will require balancing, storage and other auxiliary measures. There will be no special changes to the grid for variable renewables before total capacity of solar and wind in the system reaches 3 GW.

Up to 2020 new solar and wind capacities can be integrated with existing flexibility options, but further development will require balancing, storage and other auxiliary measures.

Kovalchuk stressed that Ukrenergo will be working closely with all other stakeholders to enable further growth of VRES after 2020. He also said that grid modernization, balancing and storage capacities would require significant investment. By 2025, the grid operator wants to have 500 MW of batteries and 2 000 MW of  gas “peaking” plants on the grid.

In light of these developments, the future of Ukraine’s thermal power fleet after 2025 is very questionable. To date, financial mechanisms for the implementation of the National Emission Reduction Plan and provisions of the Industrial Emissions Directive (2010/75/EU) – Ukraine’s obligations under the Energy Community Treaty – are still undefined, while the issue of toxic air pollution and its impact on health are receiving rising public attention and outcry. Very poor environmental performance and unreliability of Ukraine’s depreciated coal power plants make them unfit for fair competition in the EU’s power market after full synchronization with ENTSO-E.

Member of IRENA

A second important step was made on February 24, 2018, when Ukraine officially became a member of the International Renewable Energy Agency (IRENA). This gives Ukraine access to some unique know-how about the development of renewable energy, the world’s best experience in renewable energy deployment and an opportunity to participate in specialized research run by the IRENA Secretariat to find effective ways to reduce its dependence on coal and other fossil fuels.

In a 2017 report “Cost competitive renewable power generation: Potential across South East Europe” IRENA estimates that Ukraine has great potential for renewables deployment: 70 GW for solar and an impressive 320 GW for wind energy. Ukraine also has the best potential in Southeast Europe for biomass/biogas power generation. It is also getting increasingly recognized by investors.

The renewable energy market in Ukraine has doubled in the last two years with major growth driven by subsidized utility-scale solar

Ukraine’s current total installed power generation capacity is 55 GW, more than half of which is 45-50 years’ old depreciated thermal power plants. Against this background, wind power is already cost-competitive with new thermal power generation and even as replacement for existing generation, making Ukraine a major emerging market for wind power technologies. Several projects of big wind parks (>100 MW) are already taking place.

A third step that is now coming is a revision of the support scheme for renewable energy. The renewable energy market in Ukraine has doubled in the last two years with major growth driven by subsidized utility-scale solar, but there are legitimate concerns about the financial sustainability of the existing support scheme, which provides high fixed feed-in tariffs for solar that do not follow cost reductions.

To prevent the scheme going bust, a draft law has been submitted to parliament on June 7 proposing a new system based on capacity auctions. It will apply to solar power plants with installed capacity exceeding 10 MW and wind power plants with installed capacity exceeding 20 MW. Projects with lower capacities and those that sign purchase agreements by 1 July 2019 will be able to stay within the feed-in tariff system, which expires at the end of 2029.

Small solar projects will get access to a simplified procedure.

Capacity auctions are scheduled to start in 2020. They will be held by the Guaranteed Buyer, a state-owned entity, which will be part of new electricity market infrastructure. Power Purchase Agreements (PPAs) will be awarded to bidders who set the lowest fixed power price at auction. The Guaranteed Buyer will buy electricity from renewable energy producers under PPA and will compensate the difference between the electricity market price and the fixed auction price via Contracts for Difference (CFD). The auction price will be fixed in euros. Both PPAs and CFDs will have 20-year terms.

With its high potential for deployment of renewables, Ukraine can greatly contribute to the decarbonisation of power supply in the pan-European energy market

Successful adoption and implementation of this legal proposal along with the implementation of the new law on the electricity market (adopted in 2017) will enable a major transition in Ukraine’s power sector. Ukraine now has a great chance to become part of the renewables revolution.

By contrast coal and nuclear – formerly unshakable pillars of Ukraine’s power sector – are being increasingly undermined by new geopolitical conditions, electricity market reforms and pressures to include the costs of externalities. In addition, the whole “baseload” concept of the power system is becoming a thing of the past with a new “flexibility” paradigm encompassing integration of VRES, sector coupling and demand response.

Writing on the wall

Although the writing is on the wall, the timely and cost-effective transformation of the power sector is no easy task. It demands coherent governmental policy and strategic investments. To achieve quick and profound decarbonisation of Ukraine’s power sector, a number of conditions need to be met, both internal and external.

Internal conditions include:

• Establishment of a new stable legal framework for the robust development of renewables in Ukraine.

• Reform of the National Energy and Utilities Regulatory Commission into a professional and independent regulator, that can create and maintain a transparent, fair and competitive electricity market.

• Implementation of the Third Energy Package for electricity, especially unbundling of distribution system operators (DSO) and power companies.

• Modernization of transmission and distribution grids and application of cost-effective solutions for the integration of variable RES in line with best available knowledge.

Two external conditions are also vitally important:

• Consistent support and stewardship from the European Commission with a strategic focus on renewables.

• Active support from the Energy Community in enforcing overall coherent climate and energy policy and important environmental regulations such as the Industrial Emissions Directive.

With these steps and strategic investments in enabling infrastructure, Ukraine can receive a significant boost for its economic development, while solving many problems along the way and contributing to the success of the Energy Union project – the most important undertaking on the European continent. With its high potential for deployment of renewables, Ukraine can greatly contribute to the decarbonisation of power supply in the pan-European energy market. The establishment of the Energy Community Climate Action Group with Minister for environment and natural resources of Ukraine Ostap Semerak as co-chair in 2017 is a positive development in this direction.

Considering the escalating climate crisis, getting rid of polluting fossil fuels and moving full speed toward renewables is a practical issue not only for Ukraine or Europe but for the whole planet. Ukraine’s current nationally determined contribution (NDC) to the Paris Agreement was rated by Climate Action Tracker as “critically insufficient”, as it would see country emissions grow significantly from present levels at a time when they should be steadily decreasing.

Being among the top 30 greenhouse gas emitters of the world, Ukraine can contribute to climate change mitigation efforts not only by cutting its own emissions but also by stepping up climate action with a new NDC and showing leadership. If Ukraine becomes the first country to review its nationally determined contribution under the Paris Agreement, it can unlock the global process of rising emission reduction ambitions and accelerate the global energy transition.

About the Author: Oleg Savitsky is a climate and energy policy expert and independent journalist based in Kyiv, Ukraine. He is a board member of “Center for Environmental Initiatives, Ecoaction,” an NGO, which works closely with Climate Action Network and CEE Bankwatch Network.