An energy transition will be needed to keep the lights on in Ukraine

In the wake of Russian attacks on crucial parts of Ukraine’s electricity infrastructure, the country faces the immediate challenge of keeping the lights on for its citizens, businesses and defense efforts – but must also consider how it can rebuild its electricity system and make it more resilient can make.

Monika Morawiecka is a senior advisor at the Regulatory Assistance Project (RAP)

There seems to be a strong consensus within Ukraine that this future electricity system will be sustainable. As the country moves closer to joining the EU, European requirements and energy and climate policies provide clear guidelines for Ukraine’s future energy system.

Despite the war, the Ukrainian government has maintained its climate ambition and adopted Ukraine’s 2050 Energy Strategy in May 2023, which targets a carbon-neutral energy sector by 2050.

The need for Ukraine to decarbonize and decentralize its energy system has never been clearer. With the falling costs of renewable energy sources, the benefits of resilience and improved security of supply, and the urgent need for European integration, Ukraine has the opportunity to pursue a sustainable and affordable path to decarbonization.

Analysis of decarbonization pathways

A recent study provides valuable insights into long-term scenarios for decarbonizing the Ukrainian energy system. The study confirms that decarbonizing Ukraine’s energy sector before 2050 is feasible, both technically and economically.

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The transition to net zero is achievable without new nuclear reactors, underscoring the competitiveness of renewables in the current market. The results also confirm that a rapid phase-out of coal by 2030 is also possible without endangering security of supply.

Economic implications

The transition to a low-carbon energy sector involves significant capital investments, especially in renewable energy infrastructure. While this presents challenges, the resulting reduction in fuel and CO2 costs largely offsets these costs.

The study concludes that the total system costs of the low-carbon scenarios are almost identical to those of the ‘business as usual’ scenario.

What is also true, however, is that the transition to a low-carbon economy could lead to higher electricity prices in the short term, with consequences for consumers. To mitigate this effect, well-designed support schemes that target vulnerable consumers are essential.

Furthermore, promoting energy efficiency measures during the reconstruction phase can ease the burden on consumers by reducing energy consumption and thus overall bills, even if unit costs will be higher.

Challenges

The journey ahead is full of challenges. The scale of the task is enormous. Investments will not only be needed in new production facilities, but also in upgrading and expanding the networks. Competing investment priorities, including commitments to keep energy prices low for consumers, threaten to deplete resources.

Against this backdrop, it is critical that Ukraine adopts a strategic and prudent approach, guided by principles that prioritize routes to a low-carbon economy with the least costs, highest benefits and lowest risks. Crucially, mobilizing private capital to rebuild energy infrastructure will be indispensable, as public funds and donor contributions alone will not be sufficient.

The need to attract private investment underlines the importance of a supportive regulatory environment. Depending on future global security arrangements, fundamental country risk may remain relatively high, causing investors to demand high risk premiums on the capital employed. It is therefore crucial to reduce regulatory risk, which is firmly under the control of the Ukrainian government.

Guiding Principles for Regulation

Conditions in Ukraine call for a set of guiding principles for decarbonization, centering on transparency, public participation, effective communication, equality and strengthening of institutions, in particular the Energy Regulatory Authority and the Consumer Protection Agency.

Transparency is crucial for building public trust and attracting private investment, while public participation promotes inclusiveness and ownership of the transition process, especially in light of likely future electricity price increases.

Effective communication is crucial to gain the support and trust of both investors and consumers, while equity considerations ensure that the burdens and benefits of decarbonization are shared fairly.

Strong institutions are essential for creating a level playing field for investors, who can trust that their economic interests are being taken into account.

Cautious approach to support renewable energy sources

The deployment of renewable energy sources can best be facilitated by reducing the risks of investments, streamlining permitting processes and improving grid infrastructure. For utility-scale renewable investments, a market-driven support program, such as a two-way contract for difference, will strike the right balance between providing investors with sufficient revenue predictability to finance their projects and protecting consumers from excessive costs.

This is especially important as Ukraine is still grappling with the aftermath of misguided support policies of the past, when overly generous feed-in tariffs were underfunded for fear of overburdening electricity bills.

For the same reason, it is important that supporting prosumer investments in rooftop solar energy follows the principles of fairness and proportionality. While distributed prosumer generation is important for resilience and sense of security at household level, care must be taken not to increase costs for non-prosumers and to maintain incentives for demand-side flexibility.

Working together on a resilient energy system

Implementing these recommendations will require joint efforts from government, private investors, local authorities and communities, with strong support from the European Union and the wider international community.

By prioritizing regulatory clarity, sensible investment incentives and applying international best practices, Ukraine can and will navigate its energy transition towards a sustainable and resilient future.