Financial mechanisms for the green reconstruction of Ukraine to be more attractive for European banks and investors
The post-war recovery of Ukraine’s energy sector must go hand in hand with the broader rebuilding of the national economy based on sustainability, decarbonisation, and high energy efficiency criteria. To succeed, Ukraine must effectively mobilise domestic potential and support from partner countries. Investors from partner countries will consider Ukraine attractive upon adoption of a clear long-term decarbonisation policy in line with the European Green Deal, transparent and equal access to auctions for permissions and licences on building and operating energy infrastructure on the national energy market, and effective mechanisms of investment protection from military damages and raiding.
Expected future needs of the energy sector
Ukraine’s energy sector is passing through unprecedented challenges in its modern history due to the full-scale Russian war of aggression and massive targeted attacks on the electricity sector (generation, substations and grids), gas and oil production, transportation infrastructure, and refineries.
The restoration of substations and grids is already well on track due to their universality for current and future green architecture, available spare parts from domestic reserves, and substantial support from partner countries.
Nuclear (13,8 GW) and big hydro (6,3 GW) generation assets will remain relevant for the future sustainable energy sector and subject to investments into maintenance, modernisation, and possible enlargement in the next 20 years. To succeed in these sectors, Ukrainian authorities have to pass legislative and regulatory amendments, which will make possible for domestic and foreign interested parties to attract around $30 bln for large-scale and medium projects. The most sensitive aspects in developing nuclear and big hydro projects are related to massive public special obligations of respective state-owned companies, diminishing their investment attractiveness and state monopoly in those sectors. Corporatization of these companies, supervision councils, and reasonable public obligations can increase investors’ interest and bust inflow of resources.
On a political level, Ukraine must also ensure access to existing and promising future small modular reactor technologies and objectively consider water resource availability and compliance with environmental and sustainability conditions for new large projects. Small hydro generation projects will be a part of energy decentralisation efforts at the local communities’ level to prevent harmful environmental impact and be implemented if respective integrated energy and climate action plans are adopted and communicated to domestic and foreign donors and investors.
Coal-fired 23 GW thermal power plants, quite outdated and significantly damaged, will most probably be repaired and maintained by current owners at a minimum scale sufficient to cover short-term needs. Instead, the Ukrainian energy system must develop fast-starting and manoeuvrable power plants able to cover consumption peaks and intermittent generation of renewable energy sources (RES). Gas-fired combustion engine power plants and electricity storages are among the most promising technologies to be used in constructing a future sustainable energy sector, with starting needs of 2-3 GW. The needed of $2-3 bln might become available upon amendment of electricity market regulation about balancing services to ensure the return of investments.
By the end of 2021, Ukraine’s renewable sector was nearing 10 GW of installed capacities, with 7,5 GW of solar, 1,7 GW of wind, bio and small hydro capacities, and investments of around $12 bln. Despite the current minimum access to RES capacities on temporarily occupied territories and low payment ratio for produced green electricity, this sector is the most promising in terms of development because it is affordable for small and medium private investors, territorial communities, and energy associations. However, rising security concerns regarding China and the supply of PV panels can create substantial burdens in renewable scaling up and increase costs per installed capacity. To turn solar and wind power into attractive investment options, Ukraine must adopt clear support mechanisms, most probably secured access to export infrastructure, all components of the wholesale market, and clear rules for imbalance responsibility.
After the deoccupation and demining of the Black Sea, Ukraine will proceed with the extraction of hydrocarbons, first of all, natural gas, gas condensate and oil, on the shelf. Current assets will most probably be severely damaged or destroyed but can be reopened and restarted at least partially in a short period. However, considerable hydrocarbon reserves, including up to 1583.5 billion cubic meters of natural gas and up to 409.8 million tons of crude oil, will need substantial investments, advanced technologies, and cooperation with leading energy companies from partner countries. Ukraine has advanced production-sharing legislation and will be able to bilaterally negotiate beneficial agreements with leading European and American energy companies.
Ukraine has to prepare a background for the effective deployment of domestic potential and support from external partners for green energy recovery based on a clear long-term commitment to European Green Deal implementation. On the governmental level, the key indicators of Ukraine’s progress seem to be an integrated energy and climate plan until 2030, a decarbonisation strategy until 2050, amendments to regulation for ensuring equal access for all interested parties to the internal energy market and export infrastructure, the protection of investments, including special mechanisms of guarantees, as well as a predictable long-term economic development road map, and the lifting of subsidised prices for certain groups of consumers.
The office of the Deputy Prime Minister for European and Euro-Atlantic Integration of Ukraine can facilitate non-financial support for the green reconstruction of Ukraine. In particular, it shall launch a dialogue with European instruments and initiatives, for instance, assisting local energy communities – Energy Communities Repository and Rural Energy Community Advisory Hub.
Read more in the policy brief below.