ENERGY INVESTMENTS TOWARDS SUSTAINABILITY

The Investor Ukraine 2021  I  Analysis  I  Energy

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“AFTER UKRAINE HAS BEEN NAMED AN EU PRIORITY PARTNER IN THE EU HYDROGEN STRATEGY, THE GOVERNMENT, BUSINESS ASSOCIATIONS AND PRACTITIONERS HAVE BEEN DEVELOPING THE UKRAINIAN HYDROGEN STRATEGY.”

A LEGAL PERSPECTIVE
IN PARTNERSHIP WITH:

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ENERGY INVESTMENT TRENDS

The Ukrainian energy sector holds interest in developing and attracting investment in the new energy technologies in the next few years. This ambition is supported by the needs of the electrical grid, which requires new flexibility instruments due to the growth of the renewables' share in generation. The aims to decarbonize will promote the reduction of the use of combustible fuels while encouraging the use of clean fuels instead. Some of the trends may be seized already, and others need regulatory framework changes to become more attractive to the investors.

 

ENERGY STORAGE

Ukraine's recent demand for new energy accumulation facilities was caused by the rapid growth of the renewables sector in the last few years. In 2019, the transmission system operator Ukrenerho has forecast the need for 2 GW of new energy storage capacity to be constructed in the next years. Last year, the forecast remained the same. The energy storage facilities are expected to be utilized for electrical grid balancing and frequency control.

 

Currently, several pilot projects are being implemented in Ukraine. The regulatory framework allows the construction of energy storage facilities on the consumer's or producer's side to benefit from the market fluctuations and to regulate one's own imbalances. To create comprehensive regulation and attract bigger projects, two draft laws are introducing the concepts of energy storage facilities into the Ukrainian laws. Both draft laws envisage similar rules for energy storage in the market. The concept is to allow the energy storage services to be traded at the ancillary services market and at the same time to allow the storage operators to opt for buying and selling energy at the day-ahead and intraday markets. The expected legal changes shall provide for the launch of the tenders for the independent power projects (IPP) for the energy storage facilities. Until the legal changes are effected and IPP tenders are held, the larger-scale projects may already benefit from the public-private partnership (PPP) mechanism. It allows to construct and operate the energy storage under a PPP agreement and trade the services to the transmission system operator under a direct contract.

 

FLEXIBLE GENERATION

Similar to the energy storage, the Ukrainian transmission system operator estimates needing at least 2 GW of new flexible power generation capacity to back up renewables and to avoid curtailment of nuclear generation. The legal framework for constructing the new electric generation capacities is already in place. The IPP tenders' mechanism is also present, as well as the procedures for holding the tenders. Last year, the government has announced its intention to hold the first IPP tenders for the construction of flexible generation facilities this year.

 

Per the existing regulation, the tenders shall not demand a certain technology or energy source to be used for the facility and shall have the price as the main criterion for defining the winners. Thus potentially, the flexible generation may be based on extractive fuel, such as gas, or biomass fuels, landfill gas etc. The choices of energy sources will also be influenced by Ukraine's intention to support and follow the goals of the European Green Deal and limit carbon dioxide emissions.

 

NATURAL GAS

Although the European Green Deal sets goals to gradually eliminate the use of extractive fuels, including natural gas, the latter is named to become a transition fuel to facilitate the shift to the renewables-based energy system. This may be even more true for Ukraine, since there is a lot of coal generation to be replaced soon, and access to the natural gas resource to introduce instead of coal. This will require building up natural gas production and attracting investment in the industry. In late 2020 and early 2021, eight production sharing agreements (PSAs) were signed between investors and the government, which shall mark a new stage in the investor-state cooperation in the extractive industry. Apart from the PSA mechanism, gas extraction rights are normally obtained by participating in the auctions for the special licenses, which are open to foreign investors as well.

 

Natural gas remains an important energy source as it is. If the gas extraction is further developed, Ukraine's considerable gas resources allow it to cover the domestic market and supply it to the neighboring countries, for which there is enough pipeline capacity.

 

HYDROGEN

After Ukraine has been named an EU priority partner in the EU Hydrogen Strategy, the government, business associations and practitioners have been developing the Ukrainian hydrogen strategy. Ukraine's priorities are expected to lie in the production of hydrogen in the southern regions of Ukraine, as well as options to adapt the existing gas infrastructure to transport the hydrogen. At this stage, it is too early to define how the legal framework will change to adapt hydrogen as a constant part of the Ukrainian energy system. Yet the current framework is enough for the potential investors to start planning their pilot projects in the production and transportation of hydrogen both as a private project or as a PPP endeavor.

 

And finally, the investment options are not limited to the projects mentioned above. Despite the recent changes in the feed-in tariff support, Ukraine intends to introduce the support quota auctions and to attract new and more cost-efficient renewable energy production. There is place for non-renewable projects as well, for example, the waste-to-energy projects due to the upcoming changes in the waste management laws.