Global Ukraine News

The External Energy Policy of Ukraine: The Past and the Future

In 1990 Ukraine did not negotiate effectively in order to disconnect its GTS from being part of the international gas shipment system.  This excluded Ukraine from the international contractual system in the area of gas transmission, slowed the reform of the gas sector and is a major reason for the political and security challenges Ukraine faces in the second decade of the XXI century.  Until now, European companies have been receiving Russian gas from representatives of Gazprom Export on the western Ukrainian border, notwithstanding the legal requirements of the EU on the separation of gas output systems from transportation systems and from sales to consumers.  The anticipated changes could not be implemented prior to the Stockholm arbitration court’s judgment respecting the claim of Naftogaz Ukraine concerning the non-compliance of existing transit contracts involving Russian Gazprom with the EU’s gas marketing and other applicable legislation.  But Ukraine has not done its homework to begin gas throughput metering at the entrance to the national GTS, which is necessary to conform to the European principle of “input-output” and to switch to direct contractual relations with European network operators.  Reforming the domestic gas market is also running to difficulties:  political populists together with the owners of regional gas structures (and these structures are mainly concentrated around a few oligarchs) are trying to maintain their monopoly.

Kremlin leaders have skillfully used Ukraine’s lack of initiative and the greed of Ukrainian politicians and businessmen, to receive political concessions in prolonging the presence of the Black Sea Fleet in Crimea in 1997 and 2010, corrupting officials and taking control of industrial assets (RUE and rejection of Euro integration in 2004, change of course from the European to the Eurasian vector in December 2013), blackmailing and threatening with a gas blockade in 2006 and 2009.  The systematic work to counter the Russian Federation in using energy as measure political pressure of began only in 2014.

Article 274 of the Association Agreement between Ukraine and the EU provides for close cooperation in the formation of an energy agenda, but since Ukraine has shown mediocre results in reforms, the EU has not been too firm in defending its common interest with Ukraine, of building a civilised energy market with equitable conditions and fair prices.  2019 will become the Rubicon following which Ukraine either can maintain a key position in transit and ensure the expansion of the single European gas market to its eastern borders, or will face a drastic reduction in transit, the elimination of most of the gas transport infrastructure with a corresponding negative impact on a significant part of the gas market in Central and Eastern Europe.  Ukraine began the movement towards self-sufficiency in gas and is the only European country that is able to increase gas production in the future and become an exporter.  Naftogaz Ukraine with its assets is able to turn into a major regional energy company that would do business in the EU states and subsequently apply to participate in mining projects abroad.  Domestically, Naftogaz Ukraine can become one of the locomotives of energy efficiency, promoting an open gas market and maintaining strategic assets in state ownership, setting an example of effective governance.

Electrical Energy

Ukraine has significant capacities for generating electricity, including nuclear power plants, thermal power plants, hydro stations, and PSP.  Four nuclear power plants with 15 reactors provide almost half of the electricity produced and managed by Energoatam, a public corporation.  Most of the thermal power plants and CHP are privatized, using mainly Ukrainian coal mining and providing electricity during peak and half-peak periods and are involved in exports to the EU (for example the Burshtyn TPP).

Full-scale reforms are expected in the electrical energy market, aimed at bringing it to EU operating standards.  This means the elimination of the redistribution system involving generated electricity, the introduction of direct contracts between producers and consumers and improving the operator’s network, which at the present moment is represented by Ukrenergo.

The disadvantages of privatisation and control over public enterprises by oligarchic groups have become obstacles for the development of the industry, the modernization of its infrastructure and introduction of modern technologies. In September 2016 the law on the national regulator in the energy sector was adopted, the relevant legislature on the energy market only has passed its first reading in the Verkhovna Rada of Ukraine.  This shows, how powerful is the opposition of oligarchs against structural reforms in the energy sector.

Adopted laws contain too many regulations that complicate and slow modernisation, impeding systemic changes and the creation of a competitive and open energy market.  The oligarchic opposition is the cause of the absence of Ukraine’s Energy Strategy to 2035, which has repeatedly tried to implement a state program in support of the industry.

Read more: Syria, Brexit and migrants – is there any place for Ukraine on the international agenda?

Russian aggression in the Donbas and the Crimea annexation exposed a large number of problems in the energy sector, but several competing oligarchic groups failed to unite to solve them.  While the state owned Energoatom is step by step is diversifying nuclear fuel supply and reducing dependence on the Russian Rosatom, the owners of coal generation facilities are relying on administrative resources, using the blackmail of fuel and electricity supply, boycotting through various repair and emergency stoppages, and conducting trade with members of illegal armed groups in the occupied territories of Donetsk and Luhansk regions.  A difficult period of reform redistribution of property and changes in the structure of generation are expected in the industry.

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