Power to Ukraine: Rebuilding Ukraine’s Electricity System

This piece was co-authored with Dr.-Ing. Manuel Sánchez Jiménez, the former Team Leader for Smart Grids at the European Commission and currently Senior Advisor to European Union Agency for the Cooperation of Energy Regulators (ACER).

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On the 16th of March, the EU and Ukraine electricity systems were in sync. It was a first step to support the stability of the system. But it was significant enough for European Commission President Ursula von der Leyen to mention it in her speech and for newspapers to report it. 

Since the war started, the Ukraine power system has been badly damaged by the Russian invasion. The EU has pledged funds to support Ukraine in the reconstruction of the country, which costs will be counted in billions of euros. Rebuilding Ukraine will take time and will require sustained private and public efforts, coordination, and planning between the EU, other donors, and the Ukrainian government. This blog post presents ideas on how to approach one of the most pressing tasks: the reconstruction and reform of the Ukraine electricity system. 

These actions should be seen as a stepping stone in Ukraine membership of the EU. The road to EU membership is long and bumpy but the ideas presented here will contribute to Ukraine’s efforts to further its integration with the EU. These actions will align Ukraine and the EU energy system – an energy system that will become net-zero, and more integrated, digital, and consumer centric over time – so the Ukrainian and EU electricity system are compatible. 

Before the war, Ukraine approved policies that follow EU regulations to reform its electricity market. The process was slow and fraught with difficulties. Yet, Ukraine should double on these efforts, so its electricity market is governed by the same rules as the EU. That’s the shortest way towards integration into the EU energy system and a powerful tool to get the investments that its electricity system badly needs. 

To achieve these objectives, we propose a 10-points action plan. These measures are not independent of each other but are part of a jigsaw puzzle which pieces need to be put together for the whole system to work.

1. Re-build the national grid and generation infrastructure. In the post-war era, main efforts and funds will flow to guarantee the generation, transmission, and distribution of electricity. The reconstruction of the electricity infrastructure and power generation should be based on smart grids and an energy mix with large integration of renewable resources and modular power plants.

2. Support renewables to replace gas and lower CO2 emissions. Ukraine’s share of renewables in its energy mix was 5 percent which is relatively low as compared to the EU share of renewables which was equal to 22 percent. The contribution of renewable energy to EU energy consumption will continue to grow as the European Green Deal set an EU-wide target of 32 percent of renewable energy by 2030. A target that, as a result of the Russian invasion of Ukraine, the European Commission is considering raising to 45 percent. These figures indicate the scale of the challenge for Ukraine to match the EU share of renewable energy. This effort is worthwhile as renewable energy will lower Ukraine’s dependency on Russian hydrocarbons and will strengthen its autonomy.

3. Maintain nuclear power plants. The strong role of nuclear power in Ukraine’s energy mix, which represented 54 percent of electricity production, will support the roll-out of variable renewable energy sources, as well as lowering Ukraine’s imports of Russian coal and gas for electricity generation.

4. Increase electricity interconnection between the EU and Ukraine. The EU has set an interconnection target of at least 15 percent by 2030 to encourage EU countries to interconnect their installed electricity production. These interconnections are essential for security of supply: they lower the risks of blackouts, reduce the need to build new power plants, and make it easier to manage variable renewables like solar and wind. Moreover, without such infrastructure it is impossible to buy and sell electricity across borders. If Ukraine follows the same target, it should invest in interconnections that allow for at least 15 percent of the electricity produced on its territory to be transported across its borders to Poland, Romania, Slovakia, and Hungary.

5. Connect Ukraine with the EU electricity markets. This will allow Ukraine operators to buy and sell electricity from and to the EU. Participating in EU electricity markets will also help Ukraine to boost its security of supply and the integration of more renewables into its energy consumption. Ukraine’s energy mix – where nuclear power plays a significant role – has the potential to sell electricity to the EU, making a positive contribution to EU efforts to decarbonize its energy consumption.

6. Establish a price of electricity that reflects its cost. During the latest attempt to liberalise Ukraine’s wholesale energy market, electricity prices went up. It’s not unusual that markets which have been heavily regulated in the past, experience price increases when the system is overhauled. In many cases, regulated electricity prices are set artificially low either by cross-subsidisation between users or by mandating public electricity generators to sell below production cost, making up for this loss with public debt. These behaviours result in chronic under-investments in the electricity system. After the war, Ukraine will need significant investments in its generation, transmission, and distribution of electricity. These investments should support a higher take-up of renewable energy and the reconstruction and modernisation of transmission and distribution of electricity. An electricity market that reflects the true cost of electricity will elicit critical information to channel public investments efficiently and stimulate foreign companies to invest in Ukraine’s electricity system.

7. Encourage competition between energy providers. While Ukraine has already taken steps to adopt legislation that follows EU principles, it should continue the path to liberalise its electricity market borrowing from the Clean Energy Package, the latest wave of EU energy law, which includes a new Electricity Directive and the Electricity Regulation. Ukraine should continue implementing regulations to promote market competition including, among others, unbundling of generating and distribution of electricity, free of choice of suppliers, market-based supply prices and third-party access, as well as strengthening the institutional framework that governs its electricity markets to guarantee the neutrality of the regulator and the non-discrimination and transparency of the system.

8. Support energy affordability. Electricity fulfils basic needs that all citizens should be able to meet. The market liberalisation advocated here is likely to lead to higher electricity prices, hitting all households but especially the poor. It is possible to compensate low-income households for higher electricity prices without tinkering with electricity markets. This is important since the true cost of energy informs and supports investment in the generation, transmission, and distribution of electricity which will lead to growing supply, more competition, and a sustainable energy system. Low-income households with high energy expenses could be compensated for higher electricity prices through public interventions that do not distort the electricity market such as social transfers. Ukraine should continue working in this direction since electricity prices are likely to increase. In 2021, Ukraine electricity prices were among the lowest in Europe and five times lower than the EU average.

9. Put consumers at the centre of energy systems. Households and energy communities should be allowed and encouraged to produce electricity to contribute to their own consumption and to feed this electricity to the national grid when their production of electricity exceeds their demands.

10. Rebuild houses (and the economy) with an emphasis on energy efficiency. Ukraine’s energy intensity is staggering, consuming much more energy than many of its neighbours. Dwellings and residential areas should be reconstructed following the highest standards of energy efficiency to lower energy demand while maintaining or improving thermal comfort. Investments in the building stock will benefit everyone but will have the potential to improve the lives of low-income households suffering from energy poverty. The reconstruction of houses and residential areas should be done with the view of supporting the electrification of heat and transport, which will lower CO2 emissions and Ukraine’s dependency on Russian hydrocarbons.

Each individual action of this plan requires a detailed and technical discussion. Our aim for this blog is to start a conversation about Ukraine’s electricity system and its integration with the EU, which is a crucial element in the reconstruction of Ukraine. We know that implementing this 10-action plan is not easy. But Ukraine does not start from scratch. Many of these actions were already ongoing before the Russian invasion. In the same way as the synchronisation of the EU and Ukraine transmission system was not an easy task but it was achieved at a record speed, we believe the reconstruction of the country could provide the political energy to reform Ukraine electricity system and support Ukraine’s EU ambitions.