Among the former republics of the Soviet Union, there are many oil rich countries, but unfortunately, Ukraine is not one of them. Ukraine has historically been an energy dependent nation and that dependence has primarily been based on Russian supplies. However, the Russian annexation of Crimea and war in the Donbass changed all of that.
Following the Russian military aggression against Ukraine in the spring of 2014, the new government began searching for ways to stop its energy addiction to Russian natural gas. In what has become one of the government’s greatest achievements, Ukraine stopped buying Russian gas and instead began to utilize “reverse gas supplies” from friendly, neighboring countries (Poland, Hungary and Slovakia).
Since most gas transit from Russia to Europe passes through Ukraine, the reverse supplies of gas from Poland, Slovakia and Hungary benefited Ukraine. Poland, Hungary and Slovakia received an approximate 10 percent markup on the resale of Russian gas to Ukraine, and Ukraine received substantially less expensive energy to help it keep citizens warm through the harsh winters. As an example of the price differential, in April 2014 the Russians were demanding Ukraine pay $486 per 1,000 cubic meters of natural gas. Thanks to reverse supplies from Eastern Europe, Ukraine paid an average of $350 per 1,000 cubic meters, resulting in a cost savings of 28 percent. Due to these reverse supplies, Ukraine has not purchased a drop of Russian gas for more than 800 days, which is a stark contrast to the country’s more than 90 percent dependence on Russian energy as recently as December 2013.
While Ukraine’s recently won a victory in the Stockholm Arbitration Court against Gazprom’s extortionist “take-or-pay” rules, the ruling also requires Ukraine to buy 5 billion cubic meters of Russian gas as part of the settlement (but far less than the 40 billion cubic meters under former President Viktor Yanukovych). This gas will be purchased at a price less than the European level – a dramatic improvement from astronomical prices charged by Moscow in the past. In addition, the gas purchased – as early as next month – will be pumped into Ukraine’s vast underground storage facilities to prepare for next winter.
What options are available to avoid having Ukraine renew its past addiction to Russian gas? Prime Minister Volodymyr Groysman has advocated the development of Ukraine’s domestic gas industry. Ukraine currently produces around 21 billion cubic meters of gas annually, which supplies two-thirds of its consumption. However, developing Ukraine’s gas industry beyond its current levels will take time and investment. Last year Ukraine imported around 14 billion cubic meters of gas from reverse supplies in Eastern Europe. Now with the Stockholm ruling, Ukraine can import gas at below the European price which will be cheaper than the cost of reverse supplies.
Natural gas is just one part of the energy equation. Electricity supplies are also critically important and Ukraine is making progress in this area as well. Currently, nuclear energy provides Ukraine with almost half of its domestic electricity supplies. Given the legacy of the of the 1986 Chernobyl disaster, neither Ukraine nor its European partners are enthusiastic about expanding its usage. In addition, almost half of Ukraine’s nuclear fuel still comes from Russia. Thus, nuclear energy is a part of the equation, but not an exclusive solution.
Coal has historically been the second largest source of Ukraine’s electricity, providing around 40 percent of the country’s supply. However, the country’s coal industry is controversial for environmental and health reasons and multiple incidents of unsafe work conditions. Many of the coal mines in the Donbass are now under defacto Russian military occupation, which creates legal and ethical obstacles to the use of this coal. As a result, Ukraine’s has resorted to importing anthracite coal from the United States and South Africa; but, this is an expensive option for a country currently surviving on a financial lifeline from the International Monetary Fund. A third energy resource, hydroelectricity, provides around five percent of the country’s supplies.
However, a new source of energy has emerged thanks to positive developments in the Ukrainian renewable market. While Ukraine may not be an oil-rich, Middle Eastern nation, it does have abundant solar and wind energy resources. These forces of nature can be harnessed using modern technology to provide electricity to meet the country’s energy needs – and without the risks of another Chernobyl and ecological concerns presented by coal. To support the development of renewable energy resources, the Ukrainian government approved ‘green tariffs’ for projects ranging from 6 to 17 cents per kilowatt. The ordinary electricity tariff is just two cents per kilowatt.
The legislation mandates the electricity grid must accept renewable energy first which further encourages its production. The government has set a target of receiving 11 percent of its electricity from renewables by the year 2020, a dramatic increase from the current level of just under two percent. The goal is ambitious, but the tariff is already working and attracting much needed foreign direct investment to Ukraine. For example, last month the Swedish company Vindkraft completed a wind project worth $64 million in Kherson and TIU-Canada opened a $13 million solar facility in Nikopol. Domestic investors are also getting involved with UDP, owned by businessman Vasyl Khmelnitsky, completing a solar plant outside Kyiv. Rinat Akhmetov’s DTEK has announced plans for large-scale solar projects in the east.
While renewable energy will never be Ukraine’s primary energy source, diversification of energy supplies and expansion of the renewables market is wise economically. Every percentage of Ukraine’s energy production from domestic renewable resources is a percentage less of costly, imported energy from a hostile neighbor. Smart countries use their domestic resources to their maximum advantage and Ukraine must use its available renewable resources to meet its energy needs as well as protect its national security interests.
Renewables will play an important role in Ukraine’s energy independence in the coming years.
Michael Getto is a public affairs and business consultant who lived and worked in Ukraine for over four years and the Eurasian region for 16 years. He is now based in Aliso Viejo, California.
