Ukrainian energy industry: further without russia

Putin's military gamble has accelerated Ukraine's connection to the European energy system. It was planned for 2023 and it is far from certain that it would have taken place at all. However, circumstances have changed.

The official Brussels made a decision, the significance of which for the Ukrainian economy is much higher than the limited visa-free regime for travel of Ukrainian citizens to the EU countries, opened in 2017.

But just at that time, in 2017, an agreement on the conditions for joining the unified energy system of Ukraine (UES) to the European energy system, which is managed by the ENTSO-E consortium, was signed. It is symbolic that after 5 years, the accession itself took place on February 24, the day of the russian military invasion.

Initially, a test connection of the UES to the ENTSO-E networks was planned for February 24 – just for 3 days. So that Europeans can make sure that the UES is able to maintain the required frequency of 50 Hz in its power grids under different operating modes.

But after russian tanks entered Ukrainian soil, and the first russian missiles exploded in Ukrainian cities, it was decided not to return to the unified energy system of the CIS.

Ukraine's accession to ENTSO-E was formalized in Warsaw, where the parties signed the relevant agreement (signed on behalf of Ukraine by head of the board of NPC Ukrenergo Volodymyr Kudrytsky), on April 26.

 

Further – without russia

The UES of Ukraine worked synchronously with the energy systems of the russian federation, Belarus, Moldova and the Baltic republics historically: a single energy space remained after the collapse of the USSR. It allowed to regulate the operation of the energy systems of individual participating countries.

Thus, in the event of a shortage of electricity in the UES, its operator, the state-owned NPC Ukrenergo company, could receive electricity from russia and Belarus through cross-flow operations. And thus, avoid rolling blackouts – for example, in the event of a sudden shutdown of power generator units at Ukrainian nuclear or thermal power plants.

In particular years, electricity supplies from Belarus and the russian federation were quite significant in terms of volume due to commercial imports (when electricity purchases by Ukrainian energy traders for their consumer clients were added to the transfer operations).

The annexation of Crimea and the start of the war in the Donbas, plus the general political course towards European integration, became the motivation for the desire of official Kyiv to leave the CIS energy space and join ENTSO-E.

However, the energy European integration also has economic advantages. Earlier, Prime Minister Denys Shmyhal, referring to the calculations of the World Bank experts, spoke of an economic effect of $1.5 billion.

First of all, by expanding the opportunities for selling electricity on the European market for Ukrainian producers. This is especially beneficial for the state-owned NNEGC Energoatom.

Earlier, Ukraine could export electricity only from the so-called Burshtynsky "energy island", including the TPP of the same name. It was disconnected from the UES of Ukraine and connected to the ENTSO-E networks back in 2003. Now, as part of the connection of the entire UES to the European energy system, the main power line "Khmelnytskyi NPP - Rzeszów" was laid.

Therefore, it makes sense to expect an increase in revenue from electricity exports at least twice this year, given that earlier, the power units of Ukrainian nuclear power plants did not operate at full capacity. Because their electricity was not in demand in such volumes in the domestic market.

Whereas there will definitely be a demand for this electricity in the EU - due to its competitive advantages. Thus, the average February price in Ukraine on the "day-ahead" market was $73/MWh, and in the EU during this period, it cost $231/MWh.

Despite such a difference, the monetary indicators of Ukrainian electricity exports remained rather modest in previous years.

As already noted, this is due to the limited capacity of the Burshtynsky "energy island" and the lack of a direct entry of Energoatom to the European market. Now these barriers are gone.

Ukrainian electricity consumers also benefit from energy integration with the EU. Since now, after Ukrenergo joins ENTSO-E, European energy companies, in turn, can directly enter the Ukrainian market.

The fact is that their electric power is not always sky-high expensive. So, in February 2021, before the record rise in energy prices in the EU, the average cost in the European market was $61/MWh. Therefore, Eurotraders can also compete for sales in Ukraine – not allowing local players to overcharge and "rip off" consumers.

Finally, the political aspect of energy and European integration is that now Ukraine does not need to turn to the aggressor and its satellite to balance the energy system. In fact, this was unacceptable even after the annexation of Crimea.

Now, according to V.Kudrytsky, joining ENTSO-E will allow uninterrupted power supply, even if the aggressor continues to destroy the energy infrastructure of Ukraine.

 

Post-war future: question mark

The cost of connecting Ukraine to the EU energy system is called different. There are experts who talk about more than €700 million. In September 2020, V.Kudrytsky announced half the figure: €350 million.

The discrepancy is due to the fact that as part of the unification of the UES with the European energy system, a number of projects were implemented, which, according to the head of Ukrenergo, would have had to be done in any case. That is, even if entry into ENTSO-E had not taken place at all.

Among such projects, he named the construction of the Kreminna substation with the incoming lines of 500 kV Donbas-Donska and 200 kV Kreminna-Yubileina. "This substation is necessary for a reliable power supply to the north of the Luhansk oblast", - V.Kudrytsky explained.

But there were also projects (they were financed by loans from the World Bank) directly related to the European energy integration. In addition to the above-mentioned laying of the "Khmelnytskyi NPP - Rzeszów" power line, this are the construction of interconnectors (connectivity nodes) for power lines, the adaptation of the UES dispatcher control system, a new cyber protection system, etc.

And it is important that these investments are not "cast to the wind". Official Brussels previously linked the issue of Ukraine's energy European integration with a number of conditions. They concern not only the work of NPC Ukrenergo and the National Energy and Utilities Regulatory Commission (NEURC).

The Europeans did not like how the electricity market reform took place in Ukraine in 2019. It was assumed that the transition to a new model would eliminate distortions, bring transparency to work and so on. In a word, they wanted the best. But it turned out as always.

Price speculation by companies associated with the largest Ukrainian oligarchs has not gone away. On the contrary. It seems that after the reform they it gained even greater scope.

The state represented by NNEGC Energoatom continued to suffer financial losses in this market. Again – it seems even more than before. Accordingly, the rest of the players also did not feel any improvement and did not see an opportunity to develop their business.

Therefore, the elimination of speculations and imbalances in the energy market was one of the main conditions from official Brussels for Ukraine to join ENTSO-E. The NEURC under the leadership of Valeriy Tarasiuk honestly tried to fulfill this condition. To the best of its ability.

But one must understand that not all issues related to the business of the oligarchs can be resolved at the departmental level. There is a higher level of decision-making – political. And just there, there was no particular enthusiasm for reforming the work of the energy market.

Now the Europeans, as they say, put this question out of brackets. But there is no doubt that they will definitely return to it after the end of the war. This is especially important in the context of the statement by head of the Council of Europe Charles Michel.

Speaking at a meeting of the European Economic and Social Committee on May 18, he announced the new approaches of official Brussels to European integration, incl. regarding the access of new members to the single EU energy market.

According to Charles Michel, now the European Union will adhere to the principle of reversibility: a rollback in reforms will affect the level of the country's European integration. "For example, if a country deviates from the rule of law, it may lose some of the benefits gained from integration", - the head of the Council of Europe explained.

That is why the instability in the operation of the Ukrainian electricity market is one of the main risks for post-war European energy integration.

Another important aspect that could become a risk factor is the "green" policy of the EU. It consists in the total rejection of fossil fuels (primarily coal) and its replacement with energy from renewable sources (RES). RES refers primarily to the sun, wind and sea tide.

V.Kudrytsky previously noted that "the Ukrainian energy mix is already 70% carbon neutral". That is, in the total balance of electricity received from all producers (nuclear, thermal, hydroelectric power plants and RES-based power plants), the share of environmentally "dirty" electricity (which is mainly provided by coal-steam plants) does not exceed 30%.

At the moment, this is quite an acceptable indicator. But by 2050, the EU has declared its intention to move to zero greenhouse emissions. Accordingly, by this time, all electricity should be 100% "clean".

Here it may seem that the period of 28 years is too long. However, in fact, it is very fast, if we talk about the "green" transformation of the Ukrainian energy sector. It is quite obvious that in 1 year, you will not close all thermal power plants and you will not launch a new "green" generation instead.

Yes, during a full-scale war, you cannot think about it. But as soon as it ends, the problem will immediately become relevant. And how it will be decided is now unclear. Although the prospect of further membership in ENTSO-E largely depends on this.

The key here is the answer to the question "Will Ukraine receive grants and subsidies from the European Union for the rejection of coal energy – by analogy with Poland?"

Official Kyiv repeatedly raised this issue before the russian invasion. But at that time, the European officials preferred to diplomatically evade the answer.

As already noted, the situation has changed now. And there is reason to hope that the EU approach will be revised in this aspect. As well as regarding the accession of Ukraine to ENTSO-E.

 

Vitaliy Krymov, OstroV