Obstacles to Energy Reform in Ukraine - Analysis

Obstacles to Energy Reform in Ukraine - Analysis

On July 28, leading Ukrainian experts participated in a webinar organized by the US-Ukraine Foundation (USUF) and moderated by the well-known Washington, DC, based energy expert and USUF board member, Edward Chow.

One of the panelists, Volodymyr Omelchenko, Energy and Infrastructure Programs Director at the Razumkov Center in Kyiv, added a broader geopolitical perspective to the issue in addition to focusing on specific questions.  In short, Mr. Omelchenko argued that despite the substantial efforts and financial support from the West over the past twenty years, Ukrainian reforms are still proceeding slowly.  He noted that corruption and a lack of institutional capacity were a consequence rather than the reasons for such a slow pace of transformation.  To better understand the nature of this failure, current problems should be examined from a strategic perspective.   Below are the key points that Mr. Omelchenko raised in the course of the discussion.  This piece is available in the original Ukrainian at: https://razumkov.energy/meny/news/reform-obstruction.html

  1. Russian influence on the Ukrainian investment climate.

For more than ten years, Russia has been pursuing its strategic plan for destroying the sovereignty of former Soviet republics in order to recolonize them on Moscow’s terms.  Generally, the Kremlin has never tried to hide this.

In fact, Russia has been waging an undeclared war against Ukraine for some time now consisting of the following components:

–  Informational and ideological.  Today, Russia indirectly controls over 60% of Ukraine’s information space and spends huge amounts on distorting Ukraine’s image in the West;

–  Trade and economic: through unjustified trade restrictions;

–  Energy: by building new gas pipelines circumventing Ukraine and through establishing control over key energy sector areas;

–  Corruption:  creating a huge network of agents that reaches up to the very highest politcal levels in the country;

–  Military: by organizing and provoking military acts in Donbas Russia is trying to force Ukraine to abandon its sovereign rights.

While the full-fledged Russian aggression continues, the idea of creating an attractive investment climate in Ukraine seems utopian.

What has led to this situation?

Following the collapse of the Soviet Union, the West made a strategic mistake.  By trying to accommodate Russia it refused to integrate Ukraine into the EU and NATO, thereby leaving Ukraine in ⁴Russia’s zone of influence.  The EU Association Agreement with Ukraine decreases this influence only partially and it offers no prospects for either NATO or EU membership for Ukraine in the future.  De-facto, the West sees Ukraine as a buffer between the EU and Russia.  Given such a policy, no discussion around the investment climate in Ukraine makes any sense.

Until the US and the EU formulate a clear strategy for a greater integration of Ukraine into the Western political and economic zone and increase financial assistance substantially, expectations for effective reforms in Ukraine will remain unfounded.

  1. Evaluating the Prospects for Investing in Ukraine’s Domestic Energy Sources and the Question of Decarbonization.

In the decade between 2010 and 2020, the renewable energy sector (RES) was the most attractive sector for investment.  During this period, the total amount invested was almost $10 billon. RES generating capacity grew from virtually zero to 7GW while the share of electricity produced from renewable sources in the total energy mix increased to 8%.  The fundamental factor driving this sharp increase was the introduction of the highest in Europe “green tariff”.

However, the growth of renewable capacities did not factor-in the actual demand level and available load follow capacity to balance the energy grid system.  These factors led to an increase in the state’s debt before investors beginning in March this year.  An additional factor in the growth of the debt was unjustified administrative interventions by the state in the operations of the electricity market.

In order to manage this problem, a memorandum was signed in June 2020 between the government and investors.  The agreed-to compromise was recently approved by the Verkhovna Rada (and signed by the President).  This is a very important decision that will allow the RES to continue developing.  However, the Ukrainian government must stop intervening in how the market operates, create a system of open auctions, and fully open the market for Energoatom and Ukrhydroenergo state companies.  Additionally, the state should stimulate investments in the energy storage and load follow capacities.

Decarbonization

With respect to decarbonization, it should be noted that Ukraine is a world leader in this area.  Over the past twenty years it has reduced the emission of greenhouse gases by 75%, although this happened largely through the closure of polluting factories and not because of the introduction of environmentally clean technologies.  Ukraine could take on additional responsibilities under the Paris Climate Agreement but only with the necessary financial support from the EU.

Volodymyr-Omelchenko

Volodymyr Omelchenko, Energy Program Director of the Ukrainian Razumkov Center

 

Photos: Razumkov Center