Any nation’s economy is inextricably linked to its energy sector.
If that sector is clean, competitive and efficient, and if the nation has enough resources or investment to be energy independent, then that nation is likely to be doing well in other areas.
By these standards, Ukraine has been sickly. It wastes energy. It has allowed oligarchs to monopolize key sectors, stifling competition. Renewable energy sources have provided only a small percentage of the nation’s needs, while Ukraine remains heavily reliant on nuclear power and, until recently, Russian natural gas.
It’s changing for the better, however, and a vision of a brighter future is outlined in Energy Strategy 2035, a vision created by Razumkov Center, the National University of Strategic Research, Energy Ministry and others.
The Cabinet of Ministers is expected to sign off on the strategy by the end of June. But the plan should not be oversold, experts say.
“This is more of a generic policy vision that does not yet answer many questions. An action plan will follow,” says Anna Shumeiko, a member of the Energy Ministry’s expert committee.
The new strategy focuses on the goal of attracting new investment to become energy independent.
“Of course, as soon as imports are diversified and the markets liberalized, new players will appear in the market and, possibly, foreign investors too,” says Gena Kobal, a CEO of Expro Consulting.
Anton Usov, a European Bank for Reconstruction and Development senior communications adviser says, “everything is changing now and the market needs more transparency. The old schemes that were aimed at enriching certain people will not work anymore. But if you do everything openly and transparently, you can achieve great results.”
What needs to be done
The formula for success is easy enough on paper: energy efficiency, development of domestic resources, import diversification, more strategic reserves integration with the European Union and protection of critical energy infrastructure.
Here’s a rundown by sector:
Natural gas
Although Ukraine has one of the largest natural gas transport networks in Europe, the gas sector remains one of the most problematic. Ukraine still consumes more gas than it produces. It must find investment to develop new gas deposits. Gas consumption remains too high and too wasteful. The start of individual home metering has helped people to conserve, but the inflexible central heating system remains a problem. Additionally, heavy chemical and steel users continue to waste gas as well. The document prioritizes conservation.
Oil
The oil sector needs to be diversified. Currently too much oil is imported. In 2013, Ukraine imported 78 percent of its oil supplies, a big rise from 13.5 percent in 2008. The new strategy seeks to reduce and diversity oil imports. In the past, the oil production sector has not achieved European standards. Moreover, Ukraine has failed to attract investment into its oil refineries.
“All Ukrainian oil-refining factories work with losses or very small profits and there is no transparency in the fuel market,” according to the report.
Gennadiy Radchenko, an executive vice president of Ukraine’s state-owned oil producer Ukrnafta, a firm long beholden to billionaire oligarch Ihor Kolomoisky, says he is not yet sure how the strategy might affect Ukrnafta and the oil sector in general.
Coal
The coal industry has been an inefficient drain on Ukraine’s $40 billion state budget, with more than 30 government-owned mines operating with losses or no profits.
“They constantly need state investing to survive,” Shumeiko says, “which is a drain to the budget, of course.”
The report calls for the state to close down all unprofitable state-owned mines by 2035.
Nuclear energy
Ukraine needs to take five steps to improve its nuclear power sector: mine uranium ore; conversion, enrichment and fabrication of fuel; and processing and storing used fuel, the strategy says, with Ukraine now mining only 30 percent of its needs.
But Shumeiko says cutting ties with Russia is not yet possible. Although Ukraine has a lot of uranium ore, it cannot be enriched in Ukraine. The 1994 Budapest Memorandum, which forced Ukraine to destroy its nuclear weapons in return for security assurances, prohibits factories from enriching uranium ore.
“So even if we do increase our uranium ore production, we still have virtually no choice other than to remain being directly dependent on Russia, where we currently enrich and store our uranium ore,” Shumeiko says.
In general, however, many see the main problem as over-reliance on nuclear power, which supplies half of the nation’s electricity. It’s an inefficient source of power, if long-term storage of nuclear waste is factored in. And, as the 1986 Chornobyl nuclear power plant explosion showed, it can be dangerous source of power if not properly regulated.
Renewables
Ukraine, as a member of the Paris Climate Change Agreement, is obliged to do all it can to ensure that global air temperatures do not rise more than by 2 degrees Celsius by 2050.
To reach this goal, participating countries have to gradually increase their renewable energy consumption until it becomes the dominant source by 2050. Renewable energy sources — such as wind, water and sun — accounted in 2015 for only 4 percent of Ukraine’s energy supply, more than three times less than the average in European Union, but the number is projected to grow to 25 percent by 2035.
Shumeiko argues that Ukraine needs to aim higher and reach 80 percent by 2050. She also says that, although Ukraine gives preferential tariffs to green energy sources until 2030, not enough has been done to make renewable energy a priority.
Ukraine might also see a significant transformation into emission-free electric transportation in the next few decades, too, with the strategy saying electric cars might account for 37 percent of the supply.
Implementation
After the strategy comes the action plan. And that will take time, Shumeiko says.
However, some parts of the plan are coming to life on their own.
Ukrainian billionaire oligarch Rinat Akhmetov, who owns the DTEK energy holding, which used to be a key producer of coal energy, has already switched its focus to wind energy.
Ukraine also already started the process of integrating into the European Network of Transmission System Operators, or ENTSO-E, which aims at liberalizing the gas and electricity markets, according to the EU’s Third Engery Package.
“Upon full integration, Ukraine should be able to export and import electricity within the European Union, something that is currently only possible through the Burshtyn Energy Island (in western Ukraine),” Shumeiko says. “This will increase competition in Ukraine’s electricity market, while the very important electricity market law signed by Ukraine’s President Petro Poroshenko on June 8, will, in theory, allow consumers to choose a company that they want to get their electricity supplies from — a practice similar to that of the United Kingdom.”
Radchenko adds a note of caution, pointing out that previous strategies have not been brought to life.
“We need to approach this strategy so that it prospers instead of collapsing, because the 2020 strategy that Ukraine previously adopted has not been realized,” he said.
Shumeiko agrees, but said the declarations are important.
“Some people joke that this strategy is not for execution but for reference, and there is a chance some players will just pick out their favorite parts, ignoring the rest,” Shumeiko says. “But it declares our desire to change our energy sector and says that we are ready for new investors.”
