Energy Strategy: Attempt No. 5

Experts about reform27 2017

Ukraine has a new Energy Strategy. This is the fifth such document independent Ukraine has seen. Unlike all previous versions, the new Strategy is not merely a collection of all available statistics and analytical data available to the government. This time, it sets clear goals, identifies key extremes, and defines the principles of state policy. What can our industry expect in the near future?

From Reform to Development

The strategy is divided into three stages. Goal: To move from the period of active reforms to the stable development of a self-sufficient energy market.

1. 2017-2020 – market reforms

This stage is already underway, and we are its active participants. The main goal is to bring what has begun to a successful completion. To be more precise, we need to implement the main part of the reforms, thereby creating an attractive investment environment.

The fundamental documents for the reforms – the laws on the natural gas market and the electricity market – have already been adopted. Currently, officials are considering the Third Energy Package, requirements for merging the networks of ENTSO-G and ENTSO-E, and the recommendations of the IMF and the Energy Community.

Then it will be necessary to prepare subsidiary laws and implement reforms. In this regard, the Energy Strategy is a landmark and an incentive for the government and business that will promote the reform process. The government has set the clear goal of creating free markets. And from this point of view, the biggest challenge is that the state itself be able to give up its role as administrative manager.

2. 2021-2025 – optimization and innovation

After the implementation of reforms, the main task will be to attract investment to the industry. At this stage, the Strategy has ambitious goals for the construction of new facilities for generating electricity. It will be impossible to implement these plans without the creation of incentive mechanisms and the participation of international companies.

In these five years, the final synchronization of the Ukrainian power system with the European ENTSO-E must be completed. In addition, we will start to introduce environmental requirements to bring the Ukrainian market closer to European standards.

3. 2026-2035 – sustainable development

In the long term, Ukraine will have to implement strict environmental requirements to reduce emissions. New generation facilities will replace obsolete ones that have low energy efficiency.

Balanced Energy Independence

The strategy is quite balanced. On the one hand, it takes into account global trends in the transition to renewable energy sources; on the other, it takes a reasonable approach to resource balance. It is predicted that traditional energy sources will continue to play a significant role over the next 20 years.

Thus, the Strategy involves increasing the share of RES in the energy balance to 25% (about 25 billion kWh). Renewable energy is an unstoppable trend, and Ukraine won't stay on the sidelines. Our country is already showing good dynamics that can allow us to achieve good results. In the first half of 2017, the volume of commissioned green generating facilities exceeded the figure for the entire previous year. With the introduction of a full-fledged power market, distributed generation will develop: small solar power plants, biogas farms, etc.

At the same time, there is no doubt that nuclear energy will continue to play a leading role. In absolute terms, power generation at TPPs/CHPPs will be the same as in 2015-2020, amounting to 60-64 billion kWh (45 billion kWh will be generated by TPPs, and 15 billion kWh by CHPPs). This implies a stable demand for fossil fuels until 2035.

With this in mind, the full provision of Ukraine with its own gas and coal is one of the main priorities at the initial stage of the Strategy (until 2025). To do this, it is necessary to increase production by creating stable and attractive fiscal conditions, reducing rent, stimulating innovation, and liberalizing licensing. In the coal industry, a full reset is needed. Unprofitable facilities will be decommissioned. The industry will focus on G-grade coal.

Unaccounted risks

The Energy Strategy is not perfect. A number of problems remain unsolved. They primarily concern the modernization of grids and generation facilities, as well as environmental protection and energy efficiency. The document does not specify who will pay for the modernization of the coal industry and the renovation of thermal power plants.

The situation surrounding energy efficiency is similar. There are plans to reduce Ukraine's energy intensity by more than half – to 0.13 tonnes of oil equivalent per thousand dollars of GDP.

As for environmental protection, the goal is to achieve the 100% compliance of Ukrainian thermal power with EU standards for SO2 and NOx emissions. Overall, CO2 emissions need to be reduced to 50% of their 1990 level. This will require investment and new technologies.

The authors of the Strategy could not take into account every possible economic consequence of the integration of the power grids into the European ENTSO-E system. The Ukrainian market is undergoing structural reforms, so there is a risk that it might quickly become dependent on European power. Nevertheless, the gradual transformation of the power market and proper risk assessment will allow the Ukrainian energy system to integrate into Europe's in the most beneficial way possible.

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However, the main risk is always in implementation. The Strategy has been adopted. It is a balanced document that was prepared with the participation of a wide range of experts. It was necessary for the industry and the country as a whole. This Strategy can be implemented! It does not pose unrealistic challenges, with the exception of individual risks that need to be addressed through regulatory instruments. The next step is to develop a detailed road map. The Ministry of Energy and Coal Mining is responsible for this and needs to take European experience and the needs of the Ukrainian market into account. The discussion of the road map should be at least as open and transparent as the preparation of the Energy Strategy.

The successful implementation of the Strategy will be possible only if the government, business, and civil society make the necessary efforts togther.