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1 February, 2018  ▪  Yuriy Lapayev

Baby steps to success

How Ukraine’s joint ventures with EU countries in the energy sector develop

Cooperation between Ukraine and the EU in the power sector has entered a tricky phase. At the strategic level, a slew of projects are going on in this sector that are potentially of interest for Ukraine, but they are not something European partners need. The opposite is also true: projects that are of interest to the EU but not attractive and sometimes even problematic for the Ukrainian side. Mykhailo Honchar, president of the Strategy XXI Center for Global Studies, says one of the main reasons for such a situation is the current political situation.

“The trend seems to be for politics to be more important than a purely commercial approach,” he notes. “All that is currently being undertaken in the EU’s energy sector is projects that were listed in the EU Energy Union, which was formed in February 2015. One of the provisions in this union is to expand cooperation with countries that have considerable significance for the development of the EU energy sector, its security and stability of delivery.

This mostly means ventures in the delivery of natural gas and power. The main accent in the EU is on the 10-year Trans-European Energy Networks or TEN-E plan. Officially approved by the European Commission, TEN-E effectively is a list of interconnectors between current gas transport systems (GTSs) and the national networks of individual countries. This interconnection makes it possible to turn the various national grids of EU member countries into a single system. Honchar says that reaching complete consolidation for all 27 members is nigh impossible, because these grids differ in size, in consumption levels, and in the physical state of the networks. Nevertheless, the main point is to establish a consolidated grid, as complete homogeneity is not necessary. Within these constraints, plans are to set up several regional zones. “In other words,” says Honchar, “instead of a German or French grid, there will be a regional system to which these countries’ grids will belong.”

In this light, Ukraine, as a member of the Energy Community and a country that has signed an Association Agreement with the European Union, can be considered a priority partner for European ventures. This would clearly help the country reach some of its own strategic goals: without being a member of the EU, Ukraine will become part of the European electricity market, because both of these documents provide for equal market rules for both Ukraine and the EU. So far, one major project has been completed, the delivery of reverse gas from Slovakia, which ensures Ukraine some independence from Russia’s Gazprom.

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Alongside these positive shifts and the prospects they bring are certain problems. Nordstream-2 is currently being actively discussed, as well as the second phase of TurkStream. In some countries, such as Germany and Austria, both projects are being considered from a strictly commercial vantage point, without taking into account any political significance.

Other projects are also under discussion. One expert says that importing gas from Poland, through the LNG terminal in the town of Swinoujscie, would benefit Ukraine enormously. The cost of the necessary interconnector between the Ukrainian and Polish systems is relatively modest, and the two countries have a common border, eliminating the need for additional transit. This line could also make use of Ukraine’s underground gas storage system to supply Central European countries going the other way. But given the political strain between the two countries right now, this project could end up postponed for some time.

As to power supplies, Ukraine has a surplus of generating capacity and only a small amount is being exported to the EU. One promising project for Ukraine would be a power bridge to Poland and the reorientation of, among others, the Khmelnytskiy AES to export its power. However, the Polish side has so far shown little interest in this possibility. Indeed, Polish companies have actually been trying to prevent a competitor from entering their market.

The situation is similar with petroleum deliveries. There is a project to expand the Odesa-Brody branch of Ukraine’s pipeline in the direction of Poland in order to connect the Druzhba pipeline and start delivering Caspian Sea oil to Slovakia, Hungary and Czechia. The technical infrastructure is all in place, but, once again, the problem is, who’s at the other end of the pipeline. The only oil refinery in Slovakia’s capital Bratislava is Slovnaft, which belongs 98% to the MOL Group or Magyar OLaj- és Gázipari Részvénytársaság, a public LTD, while the Czech refinery belongs to PKN Orlen, a Polish company. Both companies mostly use Russian petroleum.

One of the options Mykhailo Honchar sees is the expansion of domestic extraction of gas to reach self-sufficiency. He says that this could be realistically accomplished within the next five years. One factor that will help this is recent changes in gas supply rates and extraction fees. This will make the gas extraction sector more profitable, providing the conditions for it to revive and grow. Moreover, this will also require installing more energy-efficient equipment in the industry and gradually moving to alternative sources of energy. Honchar thinks this is another opportunity for real success—especially if joint ventures are moved from all-EU cooperation, which tends to be too large in scale and overly bureaucratized, to more effective bilateral relations at the regional level, including in the context of the Eastern Partnership. One example is how well Ukraine is currently working with Slovakia. Despite a number of obstacles, the decision to supply reverse gas to Ukraine was quickly and positively reached. In addition, the Slovaks have been very responsible in terms of their commitments as part of the Visegrad Four and have been actively assisting Ukraine in making its economy more energy efficient.

At the same time, deputy Minister for Energy and the Coal Industry Natalia Boyko say that a key phase in Eurointegration of the power industry is about to get underway. The Government has approved the first Energy Strategy for Ukraine through 2035, “Security, Energy Efficiency and Competitiveness,” since the signing of the Association Agreement. The program is divided into three stages: now until 2020, 2021-2025 and 2026-2035. Each of these stages involves several major goals that will require several projects to achieve, including regional ones. The first phase will involve completing implementation of the Third Energy Package, which will enable Ukraine to establish properly functioning natural gas and power markets in line with EU energy legislation.

“This means completing the institutional integration of Ukraine into a single European gas supply system—ENTSO-G—and carrying out most of the measures to integrate our power grid to the European one—ENTSO-E,” says Boyko. “Now we’ll be able to bring our own markets up to a completely new level.”

The second phase, 2021-2025, will involve streamlining and innovative improvements to power infrastructure and working under the conditions laid out in the new market environment and the effective integration of Ukraine’s consolidated power market (OES) with the European grid. This should then make it possible to justify the choice of facilities to reconstruct or to greenfield in the power sector. The hope is that energy efficiency will also increase substantially. According to Boyko, the objective in this phase is to come up with measures to attract investments to replace outdated capacities by new power infrastructure and to improve the quality of corporate management. This, in turn, should open the way for Ukraine to join the ENTSO-E system on a use basis and full integration with the European gas transport system, ENTSO-G.

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At this time, development and preliminary work are going on to institute Smart Grids and to set up distributed infrastructure to expand power transport. In the gas sector, plans are to cover all domestic demand entirely with internal resources by expanding extraction and streamlining the operation of the GTS in line with expected load scenarios.

Boyko says that the third phase of the plan, 2026-2035, will be focused on innovative development of the power sector and the construction of new generating facilities. What type of generation is chosen will depend on projection of costs for fuel and the intensity of growth of each type of generation. This should, among others, increase the level of competitiveness among them. The institution of smart technology to level out peak consumption periods will also have a serious impact.

Regional intra-European cooperation was also very important, Lithuanian Sejm Speaker Viktoras Pranckietis told The Ukrainian Week. “We need to bring Europe together not only politically but in very concrete matters,” he emphasized. Although Lithuania is in the European Union, its integration process remains far from complete. At this time, a slew of regional cooperation projects are underway to bring about more global integration. For instance, Lithuania’s power sector remains somewhat isolated from Europe.

“So far, we have remained in the post-soviet BRELL [Belarus, Russia, Estonia, Lithuania and Latvia] system, which is regulated by Moscow,” noted Pranckietis,” although we could have been buying power from Sweden or Poland.” He also pointed out that the recently launched LNG terminal could eventually supply this fuel to Ukraine. That is why he believes that it’s very important to develop all-European projects, including Rail Baltica, which is supposed to link up Estonia, Lithuania, Latvia, Poland, and Germany, and Via Baltica or E-67 in the European road network. Coming up are energy bridges linking Lithuania to Poland and Sweden to deliver power, and a gas pipeline with Poland.

In addition to the obvious economic benefits, since these projects help improve competitiveness both at the company level and at the level of the entire domestic economy, are also the political benefits. “All this helps us get closer,” said Pranckietis.

Translated by Lidia Wolanskyj

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