Subsidies may threaten 16GW coal phase out in Ukraine

Author: Aura Sabadus

2021/02/25

LONDON (ICIS)--Plans in Ukraine to phase out almost 16GW of coal-fired capacity over the coming decade may be threatened by the current subsidy regime according to Oleh Savytskyi, board member of Ukrainian climate organisation Ecoaction.

According to the latest generation adequacy report drafted by the electricity transmission system operator (TSO) Ukrenergo, which is currently under review by regulator NERC, Ukraine could reduce coal-fired capacity from 18.4GW to 2.5GW by 2030.

Savytskyi said: “Closing down old and inefficient coal plants is the only economically feasible way to comply with the Large Combustion Plants Directive and the Industrial Emissions Directive, which are enshrined in the Energy Community Treaty [to which Ukraine has signed up], since installation of the full set of required pollution control equipment is not viable for these depreciated assets.”

EMISSION REDUCTION TARGETS

Last year Ukraine, one of the world’s most carbon-intensive economies, set a target for net zero emissions by 2070, 20 years later than the EU deadline.

Economy minister Igor Petrashko said in January the deadline could be brought forward to 2050.

In December last year Ukraine’s largest utility DTEK adopted a 2040 target for carbon neutrality. The company has the largest renewable portfolio in the country, with 1GW of installed wind and solar capacity.

On 15 February it signed a trilateral memorandum of understanding with the UAE’s Mubadala Investment Company and its renewable energy subsidiary Masdar to support new projects.

NATURAL GAS

Despite Ukraine’s growing interest in aligning with EU emissions targets, questions have been raised regarding what type of plants will replace the coal-fired generation, which currently makes up 40% of installed capacity.

Gas may be an option to add flexibility to Ukraine’s electricity system, as the country is in the process of exploring and producing volumes from on and offshore reserves. Ukraine’s conventional and shale gas reserves are estimated at five trillion cubic metres.

Savytskyi said the gas sector was more responsive to supply and demand following the liberalisation of the market.

Including gas into the equation would allow easier modelling of load curves, although to date only one detailed study has been carried out by Finnish energy technology firm Wartsila, he said.

The study found the need for Ukraine to install gas-fired plants to balance out intermittent renewable production and cover for peak load consumption.

The report published last year found that the Ukrainian power system was highly inflexible, with 15 nuclear units covering up to 55% of consumption alongside 26 coal and gas-fired district heating combined heat and power plants (CHPs).

Balancing is mostly provided by large hydro plants and pumped storage.

Thanks to generous incentives wind and solar capacity has increased in the last three years, soaring from less than 2GW in 2018 to just over 6GW in 2020.

RENEWABLES

The Wartsila study found that to reach a fully decarbonised power system, Ukraine would need to scale up its solar and wind capacity, but this would need to be complemented by methane.

Methane could be produced in power-to-gas processes and combined with renewable energy as a means to store excess supply.

Wartsila compared two scenarios and concluded there would be an overbuild of wind and solar capacity, which would start after 2025 once renewable prices decrease because of falling equipment costs.

The study anticipates in a 2050 scenario that generating capacity in Ukraine would range between 105-129GW, with solar and wind comprising between 80-105GW,

Gas-fired capacity by this point was forecast at 15-18GW, with the remainder including CHP and hydro installations.

The large renewable potential may attract investors in the hydrogen sector that would be keen to take advantage of the country’s wind and solar capacity to generate electrolysed “green” hydrogen.

Energy transition advocates in Ukraine believe that hydrogen has a role to play in cooperation within the framework of the European Green Deal initiative and decarbonisation of Ukraine’s economy.

However, Savytskyi said energy efficiency and renewable energy must come first.

SUBSIDIES

Savytskyi also pointed out that current arrangements in the electricity sector make it difficult for investors to estimate costs for hydrogen projects.

This is because a third of electricity consumption is regulated with households paying subsidised tariffs.

The distortions caused this are creating problems for generators struggling to cover costs, which are lacking incentives to invest in new renewable generation, energy storage and other flexibility options.

They also make it difficult for companies to model demand and supply projections over a longer period of time, Savytskyi said.

This may also impact the policy-making process, because Ukraine is expected to take a long-term view on plans to scale up hydrogen production from renewable sources.