A Turning Point for Ukraine: Full-Scale Energy Transition or Re-established Gas Dependency?

For the Ukrainian energy sector, the beginning of the year was marked by the “Ukrainian Green Deal” proposal developed by the Ministry of energy and environmental protection. According to the Ministry’s vision for 2050 presented draft Green Energy Transition concept, Ukraine is set to step on the energy transition pathway and actively develop energy efficiency measures, phase out fossil fuels and switch to renewable energy sources (RES). But when it comes to near-term plans, further investments of public funds in nuclear and gas projects are still being considered by the government. Kostiantyn Krynytskyi, NGO “Ecoaction”, head of energy department and Oleh Savytksyi, Ukrainian Climate Network, climate and energy policy expert report on a country at crossroads.

(CC BY non commercial, Robert Sperfeld, 2018)


On March 15, renewables output at noon reached 2,98 GW, while the coal fleet was running at 2,3 GW. Even with the surge in of installed capacity of variable RES in Ukraine, which nearly tripled from 2,3 GW to 6,8 GW  just in a year, curtailment of renewables is still negligible in volume. The power system is running smoothly without gas peaking plants, benefiting from the available fleet of large hydro plants (4,8 GW) and pumped hydro storage (1,5 GW). At the same time, the role of natural gas in the power sector is very limited, as it is used primarily for baseload generation at combined heat and power plants in several cities, while major thermal power installations have excluded gas from their fuel mix and run solely on coal.

While the energy transition emerges on the ground, Ukraine’s energy governance is in complete disarray: Recent government reshuffling, followed by the shockwave of COVID-19 pandemic emergency, has left the new integrated Ministry of energy and environmental protection in limbo with a temporarily acting head and no clear policy direction for the power sector. Major state-owned power generation companies Energoatom and Centerenergo are in the same situation, as well as national transmission system operator Ukrenergo. These strategic companies don’t have legitimate and stable top management. At this crucial moment, when the long-term vision for overall energy transition is on the table, Ukraine’s power sector is practically beheaded.

Meanwhile, there have been a number of high-level public discussions in Kyiv over the past few months devoted to natural gas as a remedy to climate change, framing it “transition fuel”. While the gas lobby promotes its interests with new major infrastructure projects and investments, independent energy experts and civil society discuss why Ukraine should not increase its historically adverse dependence on the blue fuel.

Fossil gas VS sun, wind and water

Although fossil gas is currently becoming cheaper on global markets due to the fall in oil prices, the power sector is moving away from gas plants as uncompetitive compared to zero-carbon alternatives. The short term price drop does not mean that investors can forget about risks of stranded assets and carbon lock-in. In Australia, California and many European countries renewables in combination with energy storage systems have proven to have better technical and economic performances than gas plants and increasingly push them out of the market.

The constant cost reduction of renewable energy, combined with the rapid development of battery and hydrogen technologies, will eventually disrupt all business models for gas-powered plants. Investments in new major gas projects will thus only result in higher electricity costs for customers and continued infrastructure carbon lock-in.

Increasing its reliance on gas in Ukraine would be a terrible mistake at times when a comprehensive and cost-effective energy system transformation is at hand with plummeting costs of solar and wind and rapid advancement of energy storage technologies. Digitalization and smart management can help adapt to fluctuating production patterns of renewables and provide additional flexibility in a power system of distributed energy resources.

Balancing the power system without flexible gas-fired capacities

This is what Ukraine was doing perfectly the last ten years since the 2009 “gas war” with Gazprom, as the blue fuel hit 360$ per 1000 cubic meters and became too expensive for power generation. Thermal power plants were retrofitted to run solely on coal without gas co-firing, which was common up to the early 2000s. Meanwhile, battery energy storage systems are rapidly advancing and already becoming economically attractive even without subsidies, while subsidies and co-payments are typical for gas peaker plants. The Wood Mackenzie research has shown that six- and eight-hour battery storage systems, that are starting to hit the market, can meet 74% and 90% of demand in peak hours, respectively.

Variable renewables do increase balancing needs in the energy system and demand more flexibility, but gas is not the only and not the best option for this. The real solution requires balancing responsibility for RES operators, which would incentivize them to invest in proper forecasting of power output from their solar and wind plants and in energy storage systems. Especially for all large utility-scale RES producers, this can open business cases for virtual power plants and aggregators, which in turn can also enact untapped potential of demand side management. Intermittency of solar PV and wind can be mitigated or even fully compensated by distributed energy resources, such as biomass and biogas generators, fuel cells, battery storage, electric mobility, as well as residential and industrial demand response applications.

Pipe dreams eventually turn nightmares in practice

If Ukraine does make a bid to expand its use of natural gas in power generation, it will result in multi-billion dollar investments in gas infrastructure, exploration and extraction and all the destructive environmental and social impact this entails. New pipelines and gas-fired power plants can put additional heavy burden on the economy, instead of revival after crisis. In the end Ukrainian taxpayers and industries will have to pay the bill, if Ukraine were to allocate state financial guarantees for such projects, thus wasting time and resources to combat climate change.

Long-term gas projects (e.g. pipelines, LNG terminals and big gas-fired units) are inherently stranded assets and will lose money and eventually waste capital invested, as climate change is hitting harder and governments of major economies are preparing to introduce carbon border taxes. In this setting, gas-fired power plants will not be commercially viable in liberalized markets. To stay afloat incumbent fossil-fired plant operators will try to push for even more subsidies, capacity mechanisms and other market distortions.

Additional demand for gas in Ukraine driven by undue state support and infrastructure investments threatens both decarbonization and energy security: it will lead to intensification of domestic extraction using hydraulic fracturing (with all its environmental and social impacts) or increased import of gas from Russia, or both. Despite enabled reverse flows of gas from EU and diversification supply contracts, return to reliance on imports of gas is still very detrimental for Ukraine’s energy security and will create political leverages for Russia, where the political class is inextricably linked with fossil fuel industry and has a strong motivation to hinder successful energy transition in Ukraine and in the broader region.

The need for new commitments

The recent attempts to mythologize natural gas as an alternative “transition fuel” in Ukraine, do not stand up to criticism in more detail. If Ukraine really aims to become energy independent and pursue the goals of the Paris Agreement actively combating climate crisis, any government and EU support for the fossil fuel industry is unacceptable. The current breakdown of energy demand in light of the Corona crisis can become a starting point for enhanced energy security by stimulating economic recovery based on efficiency gains and expansion of renewables. In the context of the European Green Deal, it is time for Ukraine to build up a comprehensive decarbonisation partnership with the EU.

Ukraine’s thermal power generation is already entering terminal decline and needs to be replaced by deployment of distributed renewable energy sources, energy storage and digital solutions for flexibility. To reap the benefits of an energy transition, Ukraine would have to apply a step-by-step approach to deeply restructure its power sector.

The first step for Ukraine in this transformation would be to withdraw any commitments to invest in centralised infrastructure and outdated fossil fuel technologies, that can lock the economy into unsustainable – both geopolitically and environmentally – energy supply patterns. Instead of continued investments in fossil fuel infrastructure, rollout of new technologies should be accelerated in line with the new distributed energy paradigm.

 

Further readings

Heinrich Böll Stiftung, Ecoation: Factsheet Ukraine and EU: Towards a decarbonisation partnership www.boell.de/ukraine-energy

https://en.ecoaction.org.ua/

Ukraine: “Renewables must not be a business for few only https://energytransition.org/2020/02/ukraine-renewables-must-not-be-a-business-for-only-a-few/

 

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