As the European Union steps up its energy transition Ukraine is being forced to accelerate its plans at the risk of damaging its rapprochement with Brussels. The inauguration of the Nord Stream 2 gas pipeline could add to the pressure being piled on Kyiv by its neighbours in the region. However, Ukraine has been offered the chance of a major role in the production of Europe’s green hydrogen. Decisions about the EU’s energy future have geopolitical consequences that extend well beyond its borders.
In Western Ukraine, in Galicia, lies the small town of Staryi Sambir. Nestled at the foot of the mountains, this town marks the end of the great Ukrainian plain and the beginning of the Carpathians. The Dniester, which rises close to the town and winds its way to the Black Sea, carves out a valley whose two sides overlook the town. It is on these heights that the first – and for the moment, the only – wind turbines in all of western Ukraine have been installed: three in 2015, then six more in 2017. Their blades turn peacefully amid wheat fields just 20 kilometres from the Polish border, as if signalling to the neighbouring European Union.
The EU has been paying increased attention to its Ukrainian neighbour for some years now and sees it as an important partner in the energy transition. As Europe’s second-largest country, Ukraine has great potential for the development of all types of renewables. The signing of the EU-Ukraine Association Agreement in 2014 marked an important step in Kyiv’s commitment to green energy. The share of renewables in the Ukrainian energy mix subsequently jumped from 4 per cent to more than 11 per cent by 2021. In 2019 alone, more than 3.7 billion euros were invested in the sector. Currently, the main renewable source is hydroelectric power, which accounts for 8 per cent of the energy mix. The remaining 3 per cent comes primarily from solar power, which is spread throughout the country. For now, the potential of wind energy remains largely untapped.
President Volodymyr Zelensky has restated Ukraine’s climate ambitions and its desire to move in concert with Brussels. “Ukraine is seeking to align its climate policy and legislation with the European Green Deal, he said at the 2020 Climate Ambition Summit. In April 2021, deputy energy minister Yuriy Boyko even announced that Ukraine was on track to meet its target of 25 per cent renewable energy by 2030, five years ahead of the original target date. However, there seems to be a disjuncture between the Ukrainian government’s words and its actions on the ground. While Brussels insists on the need for a “green” recovery, Kyiv has gone back on a number of projects since 2020 and has even redirected its aid towards fossil fuels. The main measure here is an exceptional aid package of around 1.2 billion US dollars to Naftogaz, the energy giant fully owned by the Ukrainian state. It aims to keep gas prices, which are exploding all over the world, below the market price. Gas is an important part of the energy mix, making up around 28 per cent, and is largely imported from Russia. The country is also heavily dependent on coal, which accounts for around 30 per cent of total energy consumption and is also primarily of Russian origin.
Beyond the potential geopolitical challenges implied by Ukraine’s dependence on Russian raw materials, Brussels cannot afford to have polluting neighbours. One of the major challenges of the European energy transition and the objective of carbon neutrality by 2050 is to avoid the carbon leakage effect, whereby emissions reductions are accompanied by the transfer of carbon-emitting activities outside Europe. But while EU member states struggle to agree on exactly how the Green Deal will work – notably the place of gas and nuclear – can the EU still hope to have enough influence on its Ukrainian partner to guide it in its energy transition?
An atmosphere of mistrust
The last few years have shown a clear willingness on Kyiv’s part to meet the requirements of the association agreement and European standards, thanks to the various options offered by the EU. In particular, Ukraine has been a member of the Energy Community – an organisation that aims to create a unified energy market among EU members and some neighbouring states – since 2011. Following the Russian annexation of Crimea and the outbreak of the conflict in the Donbas in 2014, the EU also revived the process of integrating the European and Ukrainian electricity grids. In 2023, a step forward will be made with Ukraine’s synchronisation with the European network ENTSO-E. Ukraine will then be able to import and export its electricity to and from EU member states. Above all, this connection means a separation from the former Soviet grid, which Ukraine still shares with Russia and Belarus.
However, the completion and probable opening of the Nord Stream 2 (NS2) gas pipeline puts a question mark over Ukraine’s rapprochement with Europe. The debate surrounding the construction of this pipeline reveals how the Ukrainian energy issue is inextricably linked to geopolitics, and to the relationships that the EU wishes to maintain with both Kyiv and Moscow. The pipeline, constructed by Russian energy giant Gazprom, bypasses Ukraine through the Baltic Sea. It received its final go-ahead in August 2021 after an agreement was reached between Washington and Berlin. The situation has cast a pall over relations between Europe and Kyiv. Despite Berlin’s assurance that Ukraine will be supported if Moscow uses the pipeline for geopolitical purposes, as well as the announcement of the financing of a billion-dollar “green fund” to contribute to Ukraine’s energy transition, Kyiv remains sceptical.
Kyiv is seeking to strengthen its partnership with the EU and its member states to avoid adding energy isolation to its geopolitical isolation.
A key reason for Ukraine’s distrust is that it will lose out on the substantial transit revenues paid by Moscow once the current contract with Gazprom expires in 2024. “The Ukrainian distributor received 1.66 billion US dollars in transit fees in 2020. As soon as the gas no longer passes through Ukraine, the projects declared by Berlin and Washington will hardly be able to replace this windfall,” explains Olena Pavlenko, President of DiXi Group, a Kyiv think tank specialising in energy issues. Above all, however, Kyiv sees the completion of NS2 as a serious geopolitical threat. “The biggest risk posed by the completion of NS2 for Ukraine is the loss of a form of guarantee against any new Russian aggression since Russia would no longer be afraid of losing the European market by attacking Ukraine. No compensatory mechanism, including Germany’s willingness to finance a green fund, can address this risk,” explains Anton Zorkin, director of energy at the Better Regulation Delivery Office (BRDO) in Kyiv. In other words, more than the financial losses caused by NS2, it is the heightened military threat that worries Ukrainian decision-makers.
A complex regional picture
Ukraine’s geopolitical and geo-economic challenges are not limited to its eastern neighbour. To the north, Belarus, with its highly developed capacity for refining crude oil from Russia, is Ukraine’s main supplier of hydrocarbons, providing more than two-thirds of Ukraine’s diesel needs. In addition to the authoritarian nature of Belarus’s government, made clear by its violent repression of the protests arising from the 2020 elections, Lukashenko’s regime is accused of waging a “hybrid war” against Lithuania and Poland while moving ever closer to Moscow. Ukraine’s dilemma is clear: it must try to maintain good relations with its neighbour to continue benefiting from cheap hydrocarbons while conforming to the EU’s wish to isolate Minsk internationally.
In the south, a dispute is threatening relations with Moldova, a traditional ally of Kyiv and a partner of the EU. Since 2016, the Ukrainian authorities have been planning to build six new hydroelectric power plants on the Dniester River, which also irrigates Moldova, where it is one of the country’s main sources of water. For Ukraine, the river is also an important source of energy. It supplies the largest hydroelectric power station in Europe, located in Novodnistrovsk, which the local authorities would like to expand. Many experts warn that the construction of additional dams could cause environmental damage downstream or even the silting of the Dniester, which could drastically reduce the quantity of water released into Moldova. For the moment, the slow pace of construction and the ongoing negotiations between Kyiv and Chisinau are keeping the problem in check. But this proffers a reminder that even the development of renewable energies in Ukraine is not exempt from potential disputes between the country and its neighbours.
To the west, tensions with Viktor Orbán’s Hungary have persisted since the introduction of a 2017 law stopping secondary school teaching in ethnic minority languages including Hungarian. Orbán’s government saw the move as an attack on the Hungarian minority living in Transcarpathia. This grievance is now combined with a pronounced Russophilia in Budapest, which has joined Moscow’s plan to bypass Ukraine. This strategy does not only have a northern dimension: in the south, TurkStream also transports Russian gas to Europe, this time via Turkey, Bulgaria, and Serbia, and has been connected to Hungary since 1 October 2021. At a time when gas prices are skyrocketing around the world, Budapest has negotiated a 15-year contract with an advantageous option for a 10-year price freeze. Kyiv has not hidden its “surprise” and “disappointment” and says that it will ask the European Commission to examine the legality of the move.
Making partnership a priority
Under these circumstances, Kyiv is seeking to strengthen its partnership with the EU and its member states to avoid adding energy isolation to its geopolitical isolation. As compensation for NS2, Brussels seems to have offered a credible avenue that could help bring Ukraine closer to the EU. In July 2020, as the details of the European Green Deal were being laid out, the Commission published a strategic hydrogen roadmap which highlighted the need to involve the EU’s international partners in green hydrogen production. There are plans for half of the EU’s hydrogen needs to be sourced from neighbours and partners. Ukraine “in particular” is listed as a priority partner. Under such a system, Ukraine could export up to 8 gigawatts to the European market by 2030, or nearly one-eighth of the EU’s needs. Since green hydrogen is produced with electricity generated from renewables, the production of this precious gas in line with the requirements of the Green Deal could shift the Ukrainian energy sector towards an increasing use of renewable sources. For Andreas Umland, a research associate at the Swedish Institute of International Affairs, this partnership forms part of “a trend that will – and should – continue, in order to both protect Ukraine’s importance as a geopolitical player in eastern Europe, and to match the expected further rapid growth of green energy demand in Europe.”
The Ukrainian government wasted little time in responding to this opportunity. In July 2021, President Zelensky approved a directive of the National Security and Defense Council aimed at “neutralising threats in the energy sector”, which includes plans to build a hydrogen-capable EU-Ukraine pipeline network. In August 2021, a memorandum of understanding on cooperation along the green hydrogen value chain was signed between Germany’s RWE and Ukraine’s Naftogaz. And September 2021 saw the launch of the Central European Hydrogen Corridor initiative, which brings together four gas suppliers from Czechia, Germany, Slovakia, and Ukraine to organise the future transport of hydrogen from the east into the heart of Europe. The beginnings of a partnership are taking shape, one which Ukrainian Foreign Minister Dmytro Kuleba considers to be “a very serious tool for Ukraine with a view to its European integration”. He goes as far as to say that “the challenge of developing hydrogen in Ukraine is not just about energy. It is a major European political project that can radically change the balance of power on the European continent. In the long term, if Ukraine seizes its chance, it could take the place that Russia currently occupies as a gas supplier.”
To fully understand the stakes of the energy transition in the region, we must not ignore the elephant in the room: nuclear power.
Becoming a green hydrogen supplier to Europe, and primarily to Germany, would not be without its drawbacks. First, Ukraine may itself soon need large quantities of locally produced hydrogen to replace the coal used by the steel industry. Second, there is a risk that exporting electricity to the EU at high prices in the form of hydrogen will increase the price of electricity on the Ukrainian market. Third, the development of green hydrogen is still in the planning stages, and Ukraine will have to invest considerable sums to renovate its electricity network, improve its energy efficiency – the worst in Europe – and above all develop its renewables. For many experts, this need for funding makes the loss of transit fees due to NS2 all the more regrettable.” The energy transition, in Ukraine and elsewhere, is a long process. In the short term, it involves a shift from coal to gas. Only after the complete abandonment of coal can we begin to consider the replacement of gas by renewable energy. Nord Stream 2 is therefore far from being a good reason to embark on the energy transition, since its construction contradicts all of Ukraine’s interests while strengthening Russian influence,” says Anton Zorkin.
To fully understand the stakes of the energy transition in the region, we cannot ignore the elephant in the room: nuclear power. Decisions over its future will have important consequences in Ukraine. With just over half of the country’s electricity produced by nuclear power, the Ukrainian government is seeking to modernise and even expand its network of ageing Soviet-era plants. If nuclear power were recognised as a form of renewable energy and therefore eligible for subsidies under the European Green Deal, Ukraine could potentially receive European funds to finance the renovation of its power plants. Europe could support Ukraine’s energy transition while promoting the country’s energy independence, thus helping secure this part of Europe’s neighbourhood.
However, as the EU has still not decided on the role to be played by nuclear power within the energy transition, Kyiv has turned to other partners, primarily the United States. At the end of August 2021, Zelensky visited Washington, D.C. for several days, an invitation largely due to the American agreement authorising the completion of Nord Stream 2. Over several meetings, the Ukrainian operator Energoatom signed a cooperation agreement with American nuclear power company Westinghouse for the development of new-generation reactors in Ukraine.
The energy debate illustrates the geopolitical significance and the material consequences of the decisions taken by Brussels, especially for a neighbour and partner such as Ukraine. This is yet another reminder for the EU, if one were needed, that its influence goes beyond “normative power” and that it has decisive geopolitical weight. With the European Green Deal and the energy transition, the EU has the potential to guide Ukraine in its quest for energy independence, and to anchor its neighbour geopolitically in the years to come. It is now up to both parties to live up to their commitments.