Ukraine’s energy mix and its potential to move towards a low carbon future

As the second largest country in Europe, Ukraine holds a variety of mineral resources, including oil, natural gas and coal. Due to its significantly high population and elevated energy consumption, it acts as one of Europe’s largest energy markets (IEA, 2019). It is also currently the largest transit country for natural gas in the world. In relation to the low-carbon transition, Ukraine has large hydro and biomass potential, and the option to develop other renewable energy sources. Despite this, Ukraine remains heavily dependent on energy imports from Russia, its energy system is highly inefficient and it faces distinct regulation difficulties. This report will analyse Ukraine’s current energy mix and the challenges it faces in order to evaluate its prospects in a low carbon future. Looking at Ukraine’s CO2 emissions from 2010 to 2020, it can be noted that they have dropped by almost 50% from 266Mt CO2 to 170.4 Mt CO2 (IEA, 2019).

This article is also available in French –> Le mix énergétique de l’Ukraine et son potentiel pour évoluer vers un avenir décarbonné

1 History

1.1 Liberalisation and independence

Ukraine’s modern history is strongly characterised by foreign domination up until the dislocation of the USSR in 1991, enabling a sustainable democratic and sovereign state to be formed, which followed the occidental model (IEA, 2019). Their independence represented the beginning of border openness and economic liberalisation, which allowed Ukraine’s fast development between 2000 and 2007; its GDP growth was one of the highest in the European region (IEA, 2019).

1.2 Historical dependencies

However, due to Russia and Ukraine’s territorial proximity and post-Soviet-era economy, Russia continues to have a major influence on Ukraine’s economic health and political stability. 2004 marked a civil disobedience movement, due to the assumption of fraudulent election and dissatisfaction over the country’s lack of economic and political transformation (Guillemoles, 2005). This event led to the pro-occidental candidate, Viktor Loutchenko, being elected as president, whose aim was to create new partnerships with the European Union (Goujon, 2021). This event also led to sanctions imposed by the Russian Regime; for the first time, they halted their natural gas exports to Ukraine (figure below), highlighting Russia’s continued influence over Ukraine in terms of energy supply (Ukrstat, 2021).

Source: Ukrstat, 2021

After 2007, political instability and deteriorating macroeconomic trends due to the 2007-08 global financial crisis strongly affected Ukraine’s ability to develop further. In 2009, the country entered into recession for the first time since its independence, from which it never fully recovered. It entered a second recession period between 2012 and 2015. These two financial crises can be explained by Ukraine’s strong exposure to foreign markets, which caused, according to the IEA (2019), insufficient capital investment, lower steel demand, high energy import prices but also high political instability.

1.3. Revolution of dignity, a turning point for Ukraine’s development

The overthrow of Viktor Ianoukovich from the presidency in 2014, known as the revolution of dignity, led to a 20% loss in Ukraine’s GDP and a 60% drop in their currency in addition to several sanctions from Russia (Linklaters, 2021). It also resulted in some loss of territory due to the Russian annexation of Crimea (a key strategic area for oil exchange) as well as strong disruptions in the Donbass region where Ukrainians and Russian separatists have been engaged in a conflict that continues to this day (Goujon, 2021). Most coal resources are located in Donbass, which has affected energy production as well as steel production (Enquête. L’embarrassante filière du charbon du Donbass, 2016). Steel production has indeed dropped by 40% in this period (Crude Steel Production, 2021). While the forced divestment from coal can be seen as a good thing for the environment, steel production is a necessary tool to develop infrastructure in the event of a low carbon economy.

However, this new situation has allowed Ukraine to form new partnerships with the EU via the EU4energy development program and it is now acknowledged by worldwide institutions such as the IMF, who gave them several billions of US dollars between 2014 and 2020 in exchange for several structural reforms such as the liberalisation of the price of natural gas (Ukraine, 2021).

2. Ukraine’s energy mix

2.1. Ukraine’s energy profile at a glance

Ukraine produces all fossil fuels; oil, coal, natural gas and crude oil, but its supply is insufficient to meet total energy demand (IEA, 2019). This is related to Ukraine’s extremely high levels of consumption; it is considered a top energy consumer by the IEA. Energy intensity for GDP at purchasing power parity (PPP) is extremely high: at 0.25 tons of oil equivalent (toe) per thousand USD, over twice the world average (0.11 toe/1000 USD) (IEA, 2019).

That said, almost 65% of Ukraine’s total demand for energy is covered by domestic production. This is mainly due to nuclear energy production; Ukraine is the world’s seventh-highest producer, with over half of the country’s electricity being produced with nuclear power (IEA, 2019). In addition, Ukraine’s energy mix is relatively diversified, with each type of fuel representing no more than 30% of the energy mix. Despite this, renewables only account for 5% of the energy mix in 2018, and for 9% of electricity generation (IEA, 2019).

Ukraine’s Energy Mix:

Type of energy used	gCo2eq/ kwh (electrical) from direct use, IPCC 2014	2010 energy supply in TJ	2010 in % of energy supply	2019 energy supply in TJ	2019 in % of energy supply	Change in energy supply 2010-2019
Coal	820	1 597 194	28.7%	↓1 091 735	↑29.3%	-32%
Natural gas	490	2 313 205	41.7%	↓978 988	↓26.3%	-58%
Nuclear	12	978 980	17.6%	↓911 525	↑24.5%	-7%
Hydro	24	47 347	0.9%	↓23 430	↓0.6%	-51%
Wind, Solar, etc.	-Solar: 41-48 -Wind Turbine:11 Geothermy: 38	184	0%	↑17 831	↑0.5%	+9591%
Biofuels	230	66 862	1.2%	↑140 215	↑3.8%	+110%
Oil	704 (ADEME,2013)	551 762	9.9%	↑564 186	↑15.1%	+2%
Total	N/A	5 555 534	100%	↓3 727 910	100%	-33%

Source: (IEA, 2019), (IPCC, 2014) and (ADEME, 2013)

2.2. Current developments in renewable energies

Despite renewables only counting for a small percentage of Ukraine’s energy mix, they are growing fast in Ukraine, as shown in the table above. These renewable energies include, among others, biofuels, wind turbines and solar panels, which led to a small reduction in CO2 intensity of the energy mix by 5% from 84.2 to 80 Tonnes of CO2 / TJ in the 2010-2019 period (IEA, 2019). However, whilst it is true that clear advances are being made in the renewable sector, fossil fuels continue to make up the majority of energy supply in Ukraine.

3. Challenges

Since independence, Ukraine’s energy situation has been characterised by two main issues. Firstly, the country’s dependency on imported energy sources, in particular from Russia, and secondly, its low levels of energy efficiency. Furthermore, Ukraine has faced difficulties with implementing certain regulations and laws in place and having a competent regulator for the energy market.

3.1. Dependency

Despite Ukraine’s high endowment of natural resources and a growing renewables sector, demand significantly exceeds supply; there is an energy gap of around 35%, covered by imports (EIA, 2021). As shown in the table below, Ukraine’s total energy dependency is one of the highest in the Central-East European (CEE) region.

 Ukraine’s Total Energy Import Dependency in Comparative Perspective (in percentages)

Source: Energy in Europe, 2001. Available at www.iea.org/statist/key2003.pdf.

This energy gap issue is exacerbated through the fact that energy import diversification in Ukraine remains low. It is widely accepted that energy diversification is assured through receiving energy supplies from at least three different geographical sources (Balmaceda, 2004). However, Ukraine relies heavily on a single geographical source; Russia, for a vast share of its energy imports. 

3.1.1 Oil

Due to the fact that Ukraine’s refinery system dates to the Soviet era, it is reported that Ukraine only has relatively small stocks of oil, and there is no emergency oil supply legislation in place that would regulate the use of strategic oil stocks in the case of supply disruptions (International Energy Agency, 2020). The total capacity of the refinery system largely exceeds oil product demand, and as a result, Ukraine meets almost all of its oil demand via imports. In 2018, Ukraine’s energy balance highlights that total final consumption of oil products was 10 599 thousand tonnes of oil equivalent (ktoe) while oil product imports were 10 365 ktoe (IEA, 2019).

As estimated by the State Fiscal Service (SFS), in 2018, the cost of oil product imports totalled USD 5.5 billion (as cited by IEA, 2019). Data from SFS also highlights that 38.7% of oil products were imported from Belarus, 37.3% from Russia, 10.3% from Lithuania and 14.2% from other countries in 2018. Due to the fact that Belarusian refineries depend on crude oil from Russia, Ukraine’s heavy dependence on oil imports amplifies the risk of an oil product supply shortage should Russia decide to induce a crisis in the Ukrainian oil market (IEA, 2019).

3.1.2 Gas

Historically, Ukraine received the majority of its natural gas imports from Russia. However, following Russia’s annexation of the Crimean Peninsula, Ukraine stopped importing natural gas directly from Russia and replaced those imports with natural gas from European countries. Despite this, again, significant amounts of the natural gas imported from Europe has its origins in Russia and makes its way into Ukraine through reverse flows from central and eastern European countries (Cohen, 2019).

In addition, Ukraine remains reliant on Gazprom, a multinational energy corporation headquartered in Russia, for natural gas transit fees. Ukraine is Russia’s primary transport route for Europe-bound gas and receives USD 3 billion dollars in annual revenues, which is around 2.5% of Ukraine’s GDP (Cohen, 2019). This is set to change with Nordstream 2, which is a project to transport natural gas directly from Russia to Germany through the Baltic Sea, completely bypassing Ukraine (White, 2020), highlighting further Ukraine’s need to reduce reliance on gas transit fees.

3.1.3 Coal and uranium

Furthermore, Ukraine relies on Russian imports for two key staples of the Ukrainian energy sector; over 64% of Ukraine’s coal and 55% of its enriched uranium (Cohen, 2019). In particular, Ukraine has increasingly begun to rely on coal imports. In 2019, almost half (45%) of the coal consumed in Ukraine was imported, an increase of 27% from 2010. In 2020, 70% of Ukraine’s coal imports came from Russia, followed by coal from the United States at 20% and from Kazakhstan at 8% (EIA, 2021).

3.2. Energy sector issues at home

In addition to issues of dependency, Ukraine also has a highly inefficient energy production system and high energy intensity (Balmaceda, 2004).

Ukraine’s energy production system is outdated; 54% of pipelines in Ukraine, which are built for use over 25 years, are twenty-one years old or older, and the fact that they remain unrepaired and unrefurbished increases the risk of an accident (Balmaceda, 2004). As well as this, pipeline gas pumping units are inefficient and in bad condition, meaning that the amount of gas needed to pump gas through the pipelines is growing (Balmaceda, 2004). This is highlighted through the fact that in 2001, almost 10% of Ukraine’s yearly gas consumption was used solely for this purpose (Balmaceda, 2004).

Moreover, Ukraine’s energy efficiency remains low. This is evidenced through the fact that it has one of the highest levels of energy intensity (energy consumption per unit of GDP) in the world (International Energy Agency, 2020). This figure actually increased by almost 50% from 1991 to 1999 (Balmaceda, 2004). Therefore, despite having a population of less than 50 million, Ukraine is the 7th largest consumer of gas in the world, with yearly consumption totalling at 75-78 billion cubic meters (bcm) per year (EIA, 2021).

3.3. Carbon tax

Ukraine currently has the lowest carbon price in the world (0.36 USD/TCO2) (Carbon Pricing Dashboard., 2021), and carbon tax instruments have not been a central aim of Ukraine’s government. This is the result of several factors, firstly due to the composition of Ukraine’s energy mix relying heavily on fossil fuels, a highly inefficient energy production system, and the current Covid-19 sanitary crisis.

Ukraine’s coal industry weighs roughly between 30% to 40% in the production of electricity in the country, and is the major source of CO2 emission and air pollution. Therefore, the risk of applying higher carbon prices would significantly increase the cost of production of energy and its cost for individuals, since the energy sector in Ukraine is quite polluting. However, maintaining the current situation is economically not viable either. The production of coal is costly, with 29 state-controlled coal mines out of 33 not profitable (Ukraine and EU: Towards a decarbonisation partnership, 2019), poor energy efficiency and dependence on imports. As such, energy and carbon intensity of GDP is three times higher than the OECD and EU on average, and in 2016 Ukraine had the highest mortality rates from air pollution per capita in the world, up to 66,000 people every year.

3.4. Regulatory challenges

During recent years, Ukraine’s legislation relating to energy markets has been streamlined in compliance with the Energy Community Treaty membership undertakings and to meet its obligations imposed by the Paris Agreement, which was ratified by the Verkhovna Rada (Ukrainian unicameral legislature, “supreme court of Ukraine”) in 2016, and the European Union in general (International Energy Agency, 2015).

One of the main challenges for Ukraine with respect to regulation is the lack of competition until recent developments. The electricity, natural gas and heat markets had been closed markets, where generating companies sold their electricity to a single operator, the state-owned company Energorynok, until the beginning of the electricity market liberalisation in 2019. Since then, the electricity market has been under strong regulatory control (Low Carbon Ukraine), but as the electricity market is new, there is a lack of competent people working for the regulator, NEURC (Supponen, 2021).

Another main challenge for Ukraine is the lack of transparency as information on the products and prices should be available for market participants in order to make their decisions precisely and efficiently (Supponen, 2021). The European Union established the Regulation on Wholesale Energy Market Integrity and Transparency (Regulation (EU) No 1227/2011, “REMIT”) in 2011 in order to support open and fair competition in the European Union. In 2020, the Ministry of Energy of Ukraine announced that they would implement REMIT as a part of their legislation during 2021 (CMS, 2020) but this has not yet taken place. As long as REMIT is not implemented in Ukraine, there will be no regulation in the area of insider trading and market manipulation, which makes Ukraine an unattractive investment choice within the European Union.    

The Association Agreement with the EU became a part of the National Legislation in 2014, which led to the Ukrainian laws being more similar to the EU laws than earlier, especially with respect to the policies in energy efficiency, renewable energy, energy products taxation, waste treatment, and climate change (United Nations Climate Change, 2017). Consequently, in 2017, Ukraine approved the Energy Strategy of Ukraine “Safety, Energy Efficiency, Competitiveness” until 2035, which stipulates for the new structure of energy needs in Ukraine. In accordance with the aforementioned strategy, by 2035, Ukrainian energy mix should consist of 50% of nuclear power, 25% of renewable sources, 13% of hydropower and the rest by thermal electric power stations. Another goal is to reduce Ukraine’s energy consumption by half until 2030 (State sites of Ukraine, 2017).

3.5. Sanctions

Since March 2014, the EU Council has adopted sanctions in response to the illegal annexation of Crimea by Russia. These measures include, among others, an import ban on goods from Crimea and Sevastopol and restrictions on trade and investment related to certain economic sectors and infrastructure projects, particularly in the oil sector (COUNCIL REGULATION (EU) No 833/2014). As the status of Crimea is still being debated, these sanctions might not be relevant when thinking of Ukraine since they are targeted against Russia but it is worth mentioning that nothing in the oil sector can be carried out in Crimea without the risk of violating the sanctions imposed by the EU.

4 FUTURE PROSPECTS FOR UKRAINE

4.1. A renewable energy future

As highlighted in the previous sections, the key challenges related to Ukraine’s energy mix include a continued dependency on Russia, a highly inefficient energy system and regulation challenges. Despite dependency described in chapter 3, Ukraine has clearly taken steps to lessen its dependence on Russian energy imports. For example, in 2015, it stopped importing natural gas directly from Russia (Dickinson, 2020). Instead, US liquefied natural gas exports provided Ukraine with an alternative to Russian gas (Dickinson, 2020). However, these alternatives have proven simultaneously more expensive and carbon intensive (Joly & Mossé, 2021). In addition, according to the International Energy Agency (2020), Ukraine is actively aiming to reduce its dependency on gas imports whilst simultaneously diversifying its supply sources and routes. The government has put several emergency measures in place in order to reduce gas demand, increase domestic gas production and expand reverse-flow import capacities from more competitive European markets (International Energy Agency, 2020). However, it is clear that bolder steps are needed in order to greatly improve the country’s security of supply.

A clear opportunity for Ukraine relates to moving from the current dysfunctional system, towards a system with foundations in renewable energy. This transition would reduce Ukraine’s dependency on Russian imports of gas, coal and uranium, therefore largely improving the security of Ukraine’s energy supply.

Ukraine has already taken steps towards the right direction and we can see the development of use of different sources of energy from the below chart (IEA, 2020). Notably, the use of coal has been a decreasing trend together with a rise in nuclear and hydro.

4.2 The transition to a new conceptual basis

Recent changes in Ukraine’s energy mix indicate that the government is aiming to boost the generation of renewable energy as well as reduce dependency on energy imports. In order to solve their problems of dependency and energy inefficiency, Ukraine needs to transition towards a new conceptual basis – one with foundations in renewable energy, as well as technological innovation and with clear energy saving potential (Beckman, 2016). This would mimic Germany’s policy shift towards renewable energy, which is one of the best known energy transitions in the 21st century (Schöning & Zubaka, 2018). This energy shift is highly applicable in Ukraine’s case, as the main motivation between Germany’s energy shift was the wish for communities to maximise energy self-sufficiency and to become independent of big utilities (Schöning & Zubaka, 2018). The German story has similarities to Ukraine, whose main challenges lie in regaining independence in their energy supply and improving energy efficiency.

New partnerships with the EU could be instrumental to reducing Ukraine’s dependence on Russia. For example, Savitsky (2015) has highlighted the possibility for the EU and Germany to set up a plan in order to push Ukraine towards an energy transition, rather than it staying as a failed gas transit country. However, this would not solve the problem in itself. Due to the high inefficiency of Ukraine’s energy system, the amount of energy spent to produce one dollar of GDP is three times higher than the EU-average (Beckman, 2016). This means that there needs to be major renovations in the infrastructure providing Ukraine’s energy supply; as highlighted above, most of Ukraine’s energy infrastructure was built years ago. As Ukraine battles with overcoming the recent Covid-19 crisis, they must also focus on developing technological breakthroughs in both energy and infrastructure.

Through this energy transition, Ukraine’s objective should therefore be to significantly lower the country’s future consumption of fossil fuels and achieve greater energy autonomy. Ukraine already has a national strategy in place encouraging solar- and wind-generated electricity production, as well as renewable energy sources in general (Dickinson, 2020). The country should now continue to strengthen its commitment to facilitating the continued adoption of these renewable energy sources. This is because this transition represents the obvious answer for Ukraine’s energy problems, in economic terms as well as in environmental terms. According to Beckman (2016), renewable energy prices will continue to be stable, or they could even decrease, as there are no fuel costs for wind or solar and equipment costs will continue dropping as the technology becomes increasingly more established. On the other hand, fossil fuels’ real cost will continue increasing, especially through the carbon tax introduction. This highlights the clear economic potential for focusing on developing Ukraine’s renewable energy base. According to Beckman (2016), this transition will require the EU’s close cooperation with Ukraine’s civil society groups in order to develop a pioneering economic program based on a rapidly enforced energy transition in Ukraine.

The transition to renewable energy in Ukraine will provide a clear opportunity to solve the energy crisis in Ukraine, avoid any conflicts over fossil fuel extraction, and build cooperative energy security infrastructure. Through channelling its renewable energy sources, Ukraine will be able to increase its independence both politically and in terms of energy. Savitsky (2015) therefore highlights that Ukraine’s energy crisis can be transformed into a huge opportunity, with an extensive renovation of their infrastructure and large-scale implementation of renewable energy, which would simultaneously provide green jobs across the country and become a basis for new economic standpoints in Eastern Europe.

In addition, in terms of nuclear energy, it is vital that the infrastructure is renovated to prevent potential threats of nuclear accidents and the spread of radioactive materials. Nuclear energy offers a viable alternative to fossil fuels in that it produces less carbon dioxide, however as highlighted above, infrastructure remains highly inefficient in Ukraine due to the fact that it has been left unrenovated for so long (Balmaceda, 2014).

To comply with international treaties and consequently its GHG emissions, Ukraine must still make significant efforts in the field of carbon transition and carbon taxes could be one of its instruments to achieve it. Since 2018, Ukraine’s parliament has therefore voted a law to slowly increase the price of carbon every year (Policies & action, 2021), and is currently discussing implementing new types of instruments for the taxation of carbon emissions with for instance a fuel-based one. However, the Covid-19 crisis has severely impacted Ukraine’s economy with a 4% decrease of its GDP in 2020 (GDP growth (annual %) – Ukraine, 2020), questioning its capacity to attract investments in its energy sector (which are mandatory for its low carbon transition considering the state of its infrastructures), with an economic stimulus fund focused on stabilizing the economy with short term measures favourable to fuel fossils.

Furthermore, with respect to the regulation and laws, Ukraine has already engaged many professionals from the academic and professional community into task forces that will draft new legislation and other strategic climate change related documents (United Nations Climate Change, 2017). The main steps for Ukraine to take, in order to attract more investments from abroad and be less dependent, in relation to the regulation and legislative changes are the following (International Energy Agency, 2015):

• incorporating and implementing some Energy Community Treaty provisions into legislation
• reform of the upstream oil and natural gas regimes
• diversify gas supplies via interconnections with European markets and reverse pipeline flows
• simplification of the tax code to support investments in the energy sector

5. Conclusion

In conclusion, Ukraine’s main energy problems include their dependency on Russia, their highly inefficient energy system and major governance problems – characterized by monopolisation and lack of transparency. Despite these challenges, we have shown that Ukraine has a clear potential in forming new partnerships with the EU in order to push their transition towards a low-carbon economy, through the implementation of a new conceptual basis. This basis represents technological innovation in the energy sector at home and clear development of their renewable energy capabilities. This goes hand in hand with developing existing energy infrastructure, especially nuclear and hydro power plants. In order to achieve this low-carbon transition, Ukraine must focus on becoming an attractive investment choice and prioritise renewable energy sources, through implementing REMIT regulation as soon as possible and drafting and adopting all necessary laws required for this shift.

Ultimately, Ukraine’s ability to transition to this low-carbon future depends on its ability to regain energy independence from Russia. This is imperative in order to allow Ukraine to gain energy security and advance to a low-carbon future.

Contributors

This article is the result of a group work done by students from the MSc in Sustainable Finance of Kedge Business School on the subject of emerging markets.