Power policy

Ukraine reached its 2020 target of an 11% share of renewables in power generation. A generous feed-in tariff, tax incentives for the import of renewables-related equipment and a break on corporate tax for sales of electricity from renewable sources spurred a surge in build since 2017.

Over 2011-2020, Ukraine awarded new renewable energy projects with a feed-in tariff. The rate of these tariffs was among the most lucrative offered in Europe, at around $170/MWh. Projects awarded feed-in tariffs must commission by the end of 2021 for solar projects and by the end of 2022 for wind energy projects. In July 2020, feed-in tariffs for projects commissioned before this date were retroactively cut by 2.5-15%, depending on the project technology and size. In March 2022, the Ukranian energy ministry published an order that specified the tariff levels according to technology, with wind and solar receiving lower feed-in tariffs that for example biomass.

Feed-in tariff payments have been delayed several times, with payments arriving several months later than scheduled. Renewable energy plants also have the right to curtailment compensation, but these payments have also seen delays. One explanation for this is the debt of Ukrenergo, the main utility which buys the renewable energy at guaranteed rates. These issues emerged prior to the war.

Ukraine’s Electricity Law, which came into full effect in July 2019, established a framework meant to support continued growth of renewables through a tender/auction program, but auctions have been delayed. An auction for 365 megawatts of renewables in 2021 was announced but had not taken place by early November 2022. The auction timeline has now been put on hold for an undefined amount of time as a result of the Russian invasion.

Power prices and costs

Power prices in Ukraine were regulated until the introduction of a wholesale market in 2019. New market rules have not brought full liberalization, however, as some state-owned power is price-capped to keep residential electricity tariffs low. The wholesale market is still heavily concentrated, and dominated by fossil fuel plants owned by DTEK. To avoid excessive volatility, the wholesale market is operated with price caps.

Wholesale prices rose by 50% over 2020-21, as demand rebounded after Covid. The average wholesale price of $71/MWh (UAH1928) was also some 30% above the 2019 price-level. Residential prices were capped at around $60/MWh in 2021, below the cost of wholesale power.

Power market

The new electricity law of 2019 liberalized the power market, clarified the offtaker’s role and established a framework for standardized power purchase agreements. This boosted investor confidence, which had been undermined by political instability over the past decade and territorial conflict with Russia.

The biggest single investment so far has been by Norwegian wind developer NBT, with a $210 million loan for the first phase of the Syvash wind project. Local developers, led by Ukraine’s largest non-state utility, DTEK, have played a large role in the development of the sector.

The new power market structure will require further price liberalization to incentivize independent power producers to enter the market. Generation is only partially privatized, and DTEK is by far the largest single player.

Nuclear plants supplied more than half the electricity generated in Ukraine in 2021 – a proportion that has remained fairly stable since 2015. Solar and wind accounted for around 7% of generation in 2021, and this share has more than doubled since 2019.

Both thermal and nuclear plants need investment for renewal and life extension. It is unclear how this will be funded and how retail prices will change if and when price caps are lifted. Ukraine’s situation is further complicated by a shortfall in coal supplies from the east of the country, which has been destabilized by conflict with Russia. Coal imports have partially compensated for this, while some plants are retrofitting to run on gas instead.

The Ukranian power grid was synchronized with the European power network in March 2022, after ENTSO-E (European Network of Transmission System Operators for Electricity) granted an emergency approval. Ukraine and neighboring Moldova had prepared to start operating grids in synchronization with Europe since 2017. At the time of the Russian invasion, the Ukranian grid operator had disconnected the power system from the Russian grid for what was meant to be a 72-hour trial to prove that Ukraine could retain grid stability without being linked to the larger Russian grid. To support the stability of Ukraine’s grid, the system was synchronized with the European grid. However, cross-border trading opportunities remain restricted by limitations in the physical grid connections.

Doing business and barriers

The war has severe implications for the stability of the Ukranian power system. For example, Russian forces took control over the 5.7-gigawatt Zaporizhzhya nuclear power plant at the start of the war, and the plant has been intermittently fully or partially disconnected from the Ukraine grid since then.

Ukraine’s renewables sector was facing challenges already over 2020-21 before the war. Regulatory and legislative reforms spurred a boom in clean energy financing in Ukraine over 2018 and 2019, with more than $5 billion invested. The European Bank for Reconstruction and Development has gone to great lengths to present Ukraine as lower risk than previously perceived. Cuts to the feed-in tariff, which is backed by a sovereign guarantee, are likely to undermine this confidence.

Power demand in Ukraine fell after the 2014 Russian annexation of Crimea. Ongoing militarization of eastern Ukraine has led to major economic volatility and a longer-term slowdown. Demand has revived somewhat since 2016, as parts of the country have stabilized and returned to growth. However, power demand after the Russian invasion in 2022 is estimated to have dropped by as much as 30% from 2021 levels.

The current generation fleet has been adequate to serve the national market, but Soviet-era nuclear assets must either be upgraded or replaced. Wind and solar resources are attractive, but the distribution and transmission system will require major investment to integrate growing renewables capacity.

There are restrictions on the use of agricultural land for renewables projects and on the production of bioethanol by foreign companies. There also are untested rules around the ownership of strategically important energy assets by foreign companies.

Probably of greater concern are risk perceptions. Before the war, political fears subsided after national elections in early 2019 took place with relative transparency and uncontested results. The retroactive cuts to feed-in tariffs, introduced in 2020, were based on a Memorandum of Understanding with local renewable energy associations but faced opposition from many power producers. The country still ranks poorly in international corruption assessments. Currency fluctuations have been a barrier to renewables deployment, though the feed-in tariff was linked to the euro to circumvent this issue. The administrative burden on foreign companies remains onerous.

EV market

Electric vehicles, including plug-in hybrids, made up 4% of passenger vehicle sales in both 2020 and 2021, with total passenger car sales and imports growing during this period. Sales of battery electric vehicles (BEV) grew by almost 20%, from 7,190 to 8,540.

The electric passenger car fleet in Ukraine amounted to around 18,000 cars in 2021. In addition, the country has a fleet of around 30,000 plug-in and mild hybrid cars. In total, these cars make up 4% of the Ukranian passenger car fleet. However, purely electric cars made up only 1.2% of the 2021 car fleet, up from 0.9% in 2020.

EV policy

Ukraine has set a goal to increase the share of electric vehicles in domestic traffic to 75% by 2030 as part of the national transport strategy. The Ministry of Infrastructure approved a plan of new measures to support electromobility in January 2022. The plan includes support for a charging network on national highways. The plan was developed together with British experts and is supported by the European Bank for Reconstruction and Development, according to a ministry statement.

A new draft electric vehicle law from September 2021 suggests that electric buses will be mandatory on all public transport routes after 2030. The draft law also suggests banning import of diesel and gas vehicles from 2030. The draft law was still under public consultation in May 2022.

Purchasing support for electric vehicles is limited to companies, excluding private persons. Ukraine introduced a 0% interest loan for the purchase of electric vehicles, with the support of the European Bank for Reconstruction and Redevelopment (EBRD) confirmed in August 2021. The loan scheme also includes a grant of up to 5,000 euros or 10% of the car’s price, whichever is higher.

Private persons can still receive a hefty discount on electric vehicle purchases, as these are exempt from VAT and customs duty. The VAT exemption for EVs imported to Ukraine was in force already since 2020, and in March 2022 a new law widened the tax benefits so that electric vehicles are also exempt from import duties.

Ukraine has no national fuel-economy standards for vehicles but adheres to European Union standards with a few years delay. As of 2018, vehicles are required to adhere to the Euro 5 emissions standard. The EU implemented the Euro 5 standards for passenger vehicles in 2009.

Buildings market

Just over 50% of residential heat consumed is produced by natural gas in Ukraine. Natural gas prices in Ukraine are the cheapest in Europe. The second most popular heating technology is district heating, which delivered around 20% of residential heat consumed in 2020. Natural gas is also the main fuel used in Ukraine’s heating plants as well as combined heat and power plants, which supply heat to Ukraine’s district heat networks.

Ukraine is very dependent on natural gas for heating, while gas produces less than 10% of electricity. In 2014, after Russia’s annexation of Crimea, the Ukrainian government decided to no longer buy gas directly from Russia. Instead, it relies on domestic production and imports from Slovakia, Poland and Hungary. However, these countries still buy much of their natural gas from Russia so Ukraine is indirectly still buying much of its natural gas from that country.

Buildings policy

As of September 2022, Ukraine does not have a national heat decarbonization strategy, as the previous strategy expired in 2020. An updated NEEAP is currently under development, which should provide a roadmap out to 2030. Energy efficiency improvements are of strategic importance to reduce the reliance on imported natural gas.

The expired Ukraine National Energy Efficiency Action Plan (NEEAP) included measures for increasing energy efficiency of buildings and reducing greenhouse gas emissions, but the plan is outdated as all targets are set for 2020. It included a target for 9% lower energy usage in 2020, than under a “business as usual scenario”, although the target was revised to 20% in 2019. Ukrainian residential energy use dropped by 22% over 2010 to 2018. The 2020 energy efficiency targets were achieved, partly due to economic recessions and loss of territory during the conflict with Russia.

There is some support for energy efficiency improvements in buildings. The government’s "warm loans" program supports homeowners making energy efficiency improvements to their homes, including for installations of heat pumps and small-scale renewable energy generation. Under the scheme, the borrower must apply for the loan through a bank and provide evidence of the intended use of the loan as well as relevant invoices. The State Energy Efficiency Association will then review these documents/evidence and then transfer the rebate amounts to the bank so that the borrowers can be reimbursed.

There are minimum energy performance standards for buildings, which are enforced through an auditing process. The standards align with the 2010 EU directive for the energy performance of buildings.

Some local governments have implemented regional heat decarbonization plans and cut natural gas reliance by installing heat pumps. Examples of this are found in Drohobych western Ukraine and Kremenchuk in central Ukraine.