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Through the Darkness: The Energy Crisis in Ukraine and the Ways to Overcome It

The world energy crisis, caused by the rapid recovery of the global economy after the pandemic, received a new round of development. The reason is the destabilizing actions of Russia, which resorted to manipulation by stopping the supply of gas to the EU in response to the imposed sanctions. Such actions for the European region, which was 40% dependent on Russian gas, led to an increase in prices on the European gas market, and subsequently a significant increase in electricity prices, 25% of which was produced using gas. Since the beginning of the war, Gazprom has reduced gas supplies to EU countries by 80%. Now the EU's dependence on Russian gas is only 9%.

At the same time, the supply of liquefied gas from other countries (USA, Qatar, Nigeria) increased. This resource is much more expensive. Currently, prices on the European gas market have increased 10 times compared to the weighted average price over the last 10 years. Due to the expensive energy resources, European producers found themselves in a difficult situation. The result was a complete or partial stoppage of half of the zinc and aluminum production capacities.


What is happening in Ukraine?

As a result of massive Russian shelling with missiles and kamikaze drones, about 40 percent of Ukraine's energy facilities have been destroyed or damaged. Both generation facilities and distribution systems and networks were affected. Ukrainian energy workers are trying to quickly restore the damaged, but it takes a lot of time and resources to repair. So for now, the Ukrainian energy system is working at the limit of its capabilities. In order to balance it, the national energy company "Ukrenergo" has to resort to emergency or stabilization shutdowns of electricity to consumers and, in parallel, look for opportunities to increase energy capacity. One of the options under consideration is the import of electricity from EU countries.

However, neither private nor state traders have yet started fully importing electricity. There are two good reasons for this. First, the European Network of Electricity Transmission System Operators ENTSO-E has set capacity limits for interstate networks. Although technically, Ukraine can import or export up to 1.7 gigawatts at the existing interstate crossing with Romania, Slovakia, and Hungary.

Another obstacle to start purchasing electricity abroad is the significant difference in electricity prices in Ukraine and the EU. "This difference between prices is extremely large, in some European countries it is several times more expensive than in Ukraine.

Buying electricity at European prices, traders will be forced to sell it in Ukraine precisely at Ukrainian prices. And these are significant losses for traders, which few people will agree to. "Due to the significant negative difference in prices between Europe and Ukraine, commercial imports remain limited. After reforming the energy market and connecting the Ukrainian energy system to the European one, Ukraine did not change the algorithm for forming the price of electricity. Because until now, energy prices in Ukraine is determined not by the market, but mostly by politicians.


Is there a way out of the situation?

The Ukrainian government has tried to develop a compensatory mechanism for the difference in electricity prices for traders who agree to import electricity, but so far these efforts have not been successful. The Ukrainian side can ask European partners to compensate for the price difference, but this scheme is unlikely to work. Due to the significant difference in electricity prices, it should not be expected that electricity supplies from the EU will be intensively used, because the Europeans themselves lack excess capacity.

By fully synchronizing its power system with the ENTSO-E power grid of continental Europe in March of this year, Ukraine gained the ability to both export and import electricity. Until October 10, the country successfully sold its electricity to EU countries, but after Russia's missile attacks on Ukrainian thermal power plants and substations, Ukraine stopped exporting and started thinking about importing electricity. Several trading companies operating in the Ukrainian energy market, through the auction platform for the distribution of capacity of interstate crossings, booked access to interstate crossings with Ukrenergo and conducted test deliveries of electricity, in particular, from Slovakia, and small trial deliveries of electricity. 


Ukraine can contribute to reducing the EU's dependence on Russian gas

Even during hostilities, Ukraine can become a support for the EU as a supplier of energy carriers in the short and long term. The import of electricity from Ukraine to the EU can reduce the consumption of Russian gas in the segment of thermal generation by 17%. This scenario is possible under the condition that Ukraine realizes its full export potential. Countries such as Romania, Poland, and Moldova are net importers of electricity, with a significant share of thermal generation in their power systems. They are key buyers of Ukrainian electricity.

Ukraine, on the other hand, will receive profit from export revenue. At the same time, a significant part of the profit will be directed to the Guaranteed Buyer and will ensure the functioning of the PSO for the population.

Perhaps the situation will be saved by a drop in gas prices. After all, it is the price of gas that determines the final cost of electricity in EU countries. In 2021, one third of the total amount of energy in Europe, including electricity, was produced by burning gas. So, if gas prices fall, the price of electricity produced from it will decrease accordingly. However, what to do if the shelling of the infrastructure continues and the Ukrainian energy system ends up needing help with electricity supplies from the outside? In this case, there should be an emergency assistance mechanism with electricity supplies.

Ukraine has never resorted to this mechanism so far and would not like to continue to resort to this mechanism. This is an emergency technical flow, when all measures to stabilize the system have been exhausted in the country. Electricity for emergency assistance is many times more expensive than the market price. Emergency care is the most expensive thing that can happen. Considering the unpredictable situation in Ukraine with the energy infrastructure, the EU could offer Ukraine to create a special financial mechanism or coordination platform to ensure humanitarian free electricity import to Ukraine.


What is needed to increase the export of Ukrainian electricity

Currently, the situation in Ukraine is developing more dramatically than in the EU. In addition to the global energy crisis, Ukraine has to ensure the operation of the energy system in conditions of war, the consequence of which is the destruction of infrastructure and the occupation of energy infrastructure facilities, the outflow of the population, as well as the stoppage of the economy.

Since the beginning of the war, the reduction in electricity consumption has exceeded 30% compared to similar values ​​of the previous period. In these conditions, wind generation plays a significant role and, in weather conditions similar to Ukrainian ones, produces power at the level of summer periods, and can also support demand coverage during peak periods in winter.

As of July 2022, the deficit in the electricity market exceeded UAH 35 billion. At the same time, prices in Ukraine remain at the level of 75 euros and are limited by price caps, while the weighted average green tariff is 88 euros, which is almost 5 times lower than the price on the European electricity market.

The increase in prices on the European market, reaching 450 euros/MW, reflects the growth of demand, as well as the cost of electricity production, which is not taken into account today in Ukraine, since since the price caps were established in February 2022, the currency has devalued by 34%, inflation - by the period January-May 19.5%, as well as the destruction of generating capacities in combat zones and front-line zones.

In order for Ukraine to strengthen its energy security and fully realize its export potential, it is necessary to expand the capacity of electricity flows with EU countries; to ensure the completion of wind farms, which were planned to be launched in 2022, but were prevented by the war. View price caps on the electricity market, taking into account the degree of devaluation of the national currency, inflationary processes, as well as the increase in prices for energy carriers and equipment, which are the most significant factors affecting the increase in the cost of electricity production.


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