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Energy: Global Trends 2025
Word Energy Production Market Study. Global Context for Developing an Energy Strategy for Ukraine
10 March, 2025
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Without energy sources, there is no economic development and therefore no resources to increase energy production. There is no prosperous country with low energy consumption or a poor one with a dynamic, strong, competitive market for energy goods and services. Where is the way out of this vicious circle?
The Fourth Industrial Revolution, the rapid introduction of artificial intelligence, data centres, electric transport, and the rising living standards of developing countries have challenged the world to ensure a significant increase in the production of energy goods. Meanwhile, most countries support the 2015 Paris Climate Agreement, which regulates measures to reduce atmospheric carbon dioxide. Pseudoscientific conclusions and recommendations of theorists, propagandists of global warming, apocalyptic scenarios of climate change as a result of human activity were put in the basis of energy, budgetary, industrial policy of practically all developed and dozens of developing countries of the world under the banner of "green energy transition". As a result, governments have taken decisions that have dramatically changed the capital structure of the energy sector in particular and investment in general, further increasing the fiscal and regulatory "green" burden for industry, agriculture, and infrastructure sectors.
Contrary to the forecasts of advocates for "clean" energy sources, countries that have significantly increased their share of energy consumption have not seen a decrease in prices for end consumers. Danish scientist Bjørn Lomborg, based on data from the International Energy Agency (IEA), confirms this.
L"Solar and wind power are not cheap when you need electricity 24/7. Based on data from 70 countries, we conclude that the more solar and wind power share is in consumption, the more expensive it is. When people tell you that increasing the share of this energy makes it cheaper, they are just fantasising, not drawing conclusions based on actual data."L
Source: «An Inconvenient Truth: Net-Zero won’t save the environment… so what will?» | Bjorn Lomborg. Alliance for Responsible Citizenship conference. February21, 2025
Example. Thus, inflation-adjusted electricity prices tripled between 2003 and 2023 in the UK. Total electricity costs in 2024 were £90bn or £59bn more than in 2003 prices adjusted for inflation. This “green” policy is equivalent to increasing the cost to the UK economy by 2.1 % of GDP per annum. If electricity prices were formed without “the green transition”, a family of four would pay just £1882 a year for it, rather than £5425.
Source: There is no green energy revolution: pretending otherwise makes us poor. The Telegraph. Bjørn Lomborg January 25, 2025
In his article «Green Energy Transition is a Myth» the mentioned renowned environmental and energy expert writes:
L"On a global scale, we invest nearly $2 trillion annually to create an energy transition. In the last 10 years, solar and wind power use has reached unprecedented levels. However, this increase hasn’t led to a reduction in fossil fuel consumption. In fact, fossil fuel use has grown during this period."L
Taxes on fossil fuels must be substantially increased to realistically achieve the adopted climate energy targets. McKinsey & Co. estimates that the cost of such a transition exceeds $5 trillion a year, and the full cost to households and producers is even higher. This transition means additional costs of ~$13,000 per year for residents of developed countries. The EU countries hardly have the political will and ability to carry out such social and economic subversion.
In light of the Trump administration's decisions on energy and environmental policy (lifting restrictions on oil extraction, withdrawing from the Paris Climate Agreement, cancelling requirements for transitioning to electric transport, development of new technologies in the field of nuclear technologies, LNG, smart grids, batteries, etc.), taking into account the state of the economy, energy sector, and military-industrial complex of EU countries, along with the economic development of China and India, it is critically important for Ukraine to understand the trends in the development of the global energy market to obtain the optimal energy mix for rapid, long-term economic growth, taking into account the latest technologies and the country's resources.
On the one hand, we are seeing a significant reduction in the cost of solar, wind and bio-based energy production sources. These trends open up new prospects for modernisation of Ukraine's energy sector. However, it is important to remember that in 2023, according to the IEA, wind generation was operating at full capacity only 33 % of the time, and only 26 % of the time in summer. Weather-independent power generators - nuclear, gas, and coal - operated at 93%, 60%, and 42% of their full capacity.
On the other hand, nuclear power generation technologies have reached a new level, which can make a significant contribution both to the energy balance and to environmental protection.
According to American scientist D. Spencer, the United States, like other countries opposed to nuclear power, has dramatically increased the regulatory burden on nuclear energy. As a result, the time to commission a nuclear power facility in the United States has increased from five to ten years. However, there are other examples: South Korea built 19 nuclear reactors between 1989 and 2008, reducing the cost of commissioning them by 13%.
Unfortunately, the EU has chosen a different energy and climate policy strategy. As a result, the energy sector has become one factor in the EU's loss of competitiveness in the global division of labour.
L"Unfortunately, the EU has chosen a different energy and climate policy strategy. As a result, the energy sector has become one factor in the EU's loss of competitiveness in the global division of labour. The price disparity stems from the EU’s reliance on imported fossil fuels, contrasting with the United States, a net energy exporter. In 2024, EU gas wholesale prices were on average nearly five times those in the US. Average EU industrial electricity prices were roughly two and a half times higher than in the US."L
Source: Decarbonising for competitiveness: four ways to reduce European energy prices. Conall Heussaff. Policy Brief. Issue n˚31/24 | December 2024
In 2023, electricity prices for industry in the EU were 158 % higher than in the US and gas prices were 345% higher. Among the industrialised countries, only the UK had higher industrial electricity prices.
EU countries’ numerous projects in the so-called "green" industry and energy turned out to be unprofitable and dead-end. A group of Swedish scientists analysed the quality of implementation of several “green” energy and industry projects.
L"In fact, by prioritising energy efficiency and renewable energy targets ahead of carbon reduction targets, the EU and its members have redirected investment towards potentially less efficient technologies... It has not been established that the economic benefits of investment, innovation and employment exceed the costs of energy subsidies, even when environmental benefits are considered."L
Source: Questioning the Entrepreneurial State. Status-quo, Pitfalls, and the Need for Credible Innovation Policy. Karl Wennberg, Christian Sandström. 2022
The EU battery strategy, hydrogen production, the “Biogas and ethanol from cellulose” programme, and the “green” steel programme are clear examples of failed or dubious industrial projects.
Here, for example, is the Swedish government's assessment of a project to produce ethanol from cellulose:
L"It was becoming increasingly obvious that the technology was very raw. The results turned out to be very bad. We were assured that the technology was ready, but we didn't even come close to seeing the required technological level. The calculations were unrealistic, just typical good intentions. Climate change, the hype of peak oil prices, dreams of re-industrialisation and new jobs created a situation where no one wanted to challenge the accepted predictions."L
Source: World Energy Outlook 2024. International Energy Agency. October 2024
Victim of state interventionism: the case of Northvolt
Swedish scientists warn of the dangers of distorting incentives when producing energy, industrial, environmental, commercial projects at taxpayers' expense.
The failure of Swedish battery manufacturer Northvolt, a key EU company in the European Battery Alliance project, was another loud warning to EU countries to rethink industrial and energy policies regarding the “green” transition. In November 2024, this company declared bankruptcy.
L"The impressive collapse of the company highlights, in particular, the need to avoid the classic failures of state interventionism. The lessons of Northvolt should be considered in the EU Clean Industry Agreement."L
Northvolt intended to capture 25% of the European battery market with generous state aid from the European Investment Bank, the EU, and the German government. The largest shareholders were Volkswagen and Goldman Sachs.
L"Europe needs to align its clean technology ambitions with the realities of innovation. Building a competitive high-tech industry requires resilience and risk-taking. Northvolt's story emphasises the need for a culture encouraging experimentation and understanding that failure is part of the process."L
Reasons for stagnation of Ukraine's energy sector
Ukraine has a unique energy balance and production structure. Considering modern technological solutions, accumulated experience of energy modernisation in the EU and the USA, and trends in supply and demand, we need our own long-term strategy of energy market development.
Copying the European "green" energy policy would be a gross mistake, as well as preserving the energy system created in Soviet times or ignoring the positive experience of the USA in the energy sector. Strict state regulation and interventionism, widespread oligopolistic practices, and high regulatory costs of market entry block reforms in the Ukrainian energy sector, which are to the detriment of economic growth but to the benefit of the old beneficiaries (industrial-oligarchic clans).Share
Ukraine's modernisation is impossible without a deep reboot of the national energy system. It should occur in the context of global trends and become an imperative for national and energy security.
World energy resources market
Fossil fuels. The share of fossil fuels in the global energy mix declines from 82 % in 2013 to 80 % in 2023. The decline rate in the share of fossil fuels in energy consumption is reflected in the fact that in 2000 their share was 81.2 %. In the most optimistic "green" scenario for the 21st century, they will account for ~67% of the world energy balance.
Energy demand has increased by 15 % over the last 20 years, but 40 % of this growth has been met by clean energy, i.e. renewable energy, nuclear energy and low-emission fuels including carbon capture, use and storage (CCUS). In developed countries, energy demand declined by an average of 0.5 % annually.
Oil demand peaked in 2005 and coal demand peaked in 2008. Demand for gas also stopped growing. The share of nuclear energy declined by half a percentage point per year.
The share of renewable sources has increased by 3 % per year since 2013.
In 2023, fossil fuels accounted for 60 % of global electricity generation - the lowest share of the total in 50 years. Coal accounts for the largest share of the total at 36 %, with natural gas also playing a significant role at 22 %.
Nuclear Power. Nuclear power's share is down 9%, half of what it was 30 years ago.
Hydropower and renewable energy sources
Despite the decrease in hydroelectric power generation, renewable energy sources have for the first time reached 30% of global electricity production, with wind and solar photovoltaic energy together accounting for 13%, which is twice the level of what it was five years ago.
Forecast. According to IEA estimates, renewable energy sources, primarily solar photovoltaic and wind, will play a much larger role in energy systems in the coming decades. In the STEPS scenario, combined solar and wind generation nearly triples between 2023 and 2030, accounting for over 90% of electricity supply growth and overtaking coal. The peak of its consumption is expected around 2025, after which a steady decline begins. By 2035, solar photovoltaic and wind power plants will account for more than 40% of electricity generation.
Investments. The International Energy Agency (IEA) estimates that):
- global energy investment in 2024 exceeded $3 trillion, of which $2 trillion were spent on “clean” energy technologies and infrastructure;
- global spending on renewable energy reached a new record of $735 billion in 2024, thanks to solar photovoltaic energy and wind;
- China increased its spending on solar photovoltaic energy to $220 billion. For technologies such as solar photovoltaic systems (solar PV), wind, batteries and electrolysers, more than 80% of production capacity is concentrated in the three leading manufacturing countries.
Source: World Energy Investment 2024. International Energy Agency. June 2024
The cost of solar panels has dropped by 30% in the last 3 years. Prices of mineral products and metals critical for energy transmission have fallen sharply too, especially metals needed for battery production. The IEA estimates $320bn in clean energy investment in 2024, up 50% from 2020. Over the 2020-2023 period, direct government support for national producers of these technologies totalled $170bn, almost 10% of total government energy spending over this period.
The largest share of this state support goes to electric vehicles, followed by hydrogen and battery production. Since 2020, about 70% of the support has been provided in developed countries and China. Brazil, India, and Malaysia are starting to close the gap.
Peculiarities of the energy market of developing countries
In 2023, the renewable energy (clean energy) capacity increased by 560 gigawatts (GW), with China accounting for 60% of the new capacity. With this trend, “clean” energy generating capacity will increase from 4,250GW in 2024 to 10,000GW in 2030.
Energy demand is growing primarily due to developing countries.
L"… Despite record clean energy deployment, two-thirds of the increase in global energy demand in 2023 was met by fossil fuels, resulting in another record level of energy-related CO2 emissions."L
Source: World Energy Outlook 2024. International Energy Agency. October 2024
Global energy consumption in 2023 is 445 exa joules (EJ). In the STEPS scenario (see in PDF attachment), consumption rises to 530 EJ by 2050.
In developing countries, growing energy needs continue to drive the use of fossil fuels:
- The population of developing countries has increased by 720 million over the past ten years.
- The economies of developing countries increased by 50%.
- Industrial production increased by 40%.
- The area of buildings increased by 40,000 square kilometers.
- Consumption of fossil fuels increased by 25 %.
Nevertheless, per capita fossil fuel consumption in developing countries remains less than half that of developed economies. If developing countries were to reach the level of developed countries, global fossil fuel use would nearly double from today’s level.
Key economic and energy indicators of selected countries and regions, 2023
| Region, country | Population, mln. | Energy demand, EJ | Electricity demand, (kwh per capita) | Cars per thousand population |
|---|---|---|---|---|
| U.S. | 338 | 92 | 11957 | 680 |
| Latin America and the Caribbean | 663 | 37 | 2225 | 163 |
| EU | 449 | 53 | 5298 | 516 |
| Africa | 1458 | 34 | 500 | 27 |
| Middle East | 269 | 36 | 4190 | 137 |
| Eurasia | 240 | 43 | 5036 | 228 |
| China | 1419 | 170 | 6060 | 202 |
| India | 1429 | 45 | 1057 | 35 |
| Japan and South Korea | 176 | 28 | 8428 | 480 |
| Southeast Asia | 685 | 33 | 1758 | 75 |
Source: World Energy Outlook 2024. International Energy Agency. October 2024
GDP, Investments, Energy: Correlations and Disproportions
Under the STEPS scenario, the correlation between world GDP and fossil fuel consumption observed in previous decades would weaken in the coming years, and demand for each fossil fuel would peak by 2030. Annual investment in fossil fuels falls from just over $1 trillion in 2024 to $650bn in the STEPS scenario in 2050 and $90 bn in the NZE scenario.
According to the International Energy Agency (IEA) research:
L"Government interventions to manage energy prices peaked in 2022, but affordability remains a key concern. Price spikes prompted by Russia’s invasion of Ukraine pushed total end-use expenditure on energy to a record high in 2022 – USD 10 trillion. Short-term consumer support directly from governments totalled USD 940 billion, mainly concentrated in Europe, while other pricing regulations instituted by governments amounted to USD 2.4 trillion worth of fossil fuel subsidies accruing since 2022."L
Over the past five years, solar power generation capacity has quadrupled to 425 GW per year. A sixfold increase is required to reach the level of 1100 GW (zero-emission).
Lithium-ion batteries. The International Energy Agency's STEPS scenario forecasts energy demand to grow to 2,200 terawatt-hours (TWh) in 2035, driven by increased consumption by industry, electric vehicles, cooling costs, data centres and artificial intelligence.
In 2024, energy sector investment in solar photovoltaic (PV) technology is estimated to exceed $500bn, twice as much as other power generation sources. Investments in solar power generation are central to transforming the entire energy sector.
L"In 2023, every dollar invested in wind and solar PV systems generated 2.5 times more energy than a dollar spent on the same technologies a decade earlier."L
In 2015, the ratio of investment in clean energy to fossil fuel power production was about 2:1, and in 2004 it was already 10:1. According to the IEA, the growth in solar and wind power has caused wholesale prices to fall in some countries, sometimes below zero, especially during peak periods of wind and solar generation. In 2024 investments in nuclear energy increased to around $80 billion (almost twice as much as in 2018), accounting for 9% of investments in “clean” energy.
Power grids are the Achilles' heel of the energy sector?
Energy grids are a bottleneck in the transformation of the energy sector. Between 2015 and 2023, the investment in their modernisation was $300 billion; in 2024, it is estimated to be $400 billion. Developed countries and China account for 80% of grid investments. U.S. investments in “clean” technologies in 2024 amounted to approximately $300 billion, 1.6 times more than in 2020 and significantly higher than investments in fossil fuel-based energy. For comparison, EU and U.S. investments in “clean” energy technologies totalled $370 billion, while China’s reached approximately $680 billion.
Leviathan's energy protectionism
Governments around the world are increasingly supporting domestic producers of clean energy technologies. Out of the $2 trillion invested in “clean” energy since 2020, around 10% (approximately $170 billion) has gone to projects that utilize domestically produced resources. Given the advanced manufacturing credits of about $50bn, under the Inflation Reduction Act (IRA), the US government support was almost one third of the total amount. Other regions also pursue policies of industrial, technological, and energy favouritism. For this purpose, $30 billion has been allocated in 2024 through government programmes, such as Future Made in Australia, which provided $4.5bn in tax credits for hydrogen production, Germany - $6bn to implement its National Hydrogen Strategy.
Financial incentives for production to help narrow the cost gap are often provided in the form of support:
- capital expenditure, for example, investment tax incentives, grants, favourable loans and credit guarantees;
- operating expenses, for example, tax incentives for production.
However, the challenges of investing in new production capacity are not limited to the production costs. The size of the domestic market and its political stability, labour force, infrastructure readiness, permitting processes, regulatory regimes, and environmental, social and governance requirements (under ESG all influence corporate investment decisions. Policy measures can help make investments more attractive by ensuring a high political stability, shortening project timelines, strengthening worker training and certification schemes, expanding domestic markets, reducing regulatory uncertainty and introducing higher ESG standards.
Significant fluctuations in the most important mineral markets occurred in 2023. Prices for many materials fell sharply, allowing for cost reductions in clean technology, including a 14% reduction in the cost of batteries in 2023. This price environment has weakened investment incentives to develop new resources, which has implications for future supply diversification.
L"For example, in the case of nickel, three-quarters of the existing or potential projects at risk in today's price environment are outside the top three producing countries. If they close due to low prices, supply will be further concentrated among the largest suppliers."L
From 2019 to 2023, the average system cost per unit of electricity generated, including grid development and maintenance, reached $145/MWh in the European Union, 60 % higher than in the United States and about 10 % higher than in other advanced economies. A key factor in this difference is the cost of repaying past capital investments in the European Union, which is almost twice as high as in the United States. It accounted on average for one-third of total system costs between 2019 and 2023. These higher costs are due to the European Union's expenditure on developing low-emission electricity sources, particularly its work to initiate large-scale deployment of wind and solar PV in the 2010s, when they were only emerging and expensive technologies compared to today.
State of Ukraine's energy system
Ukraine's energy sector operates under unprecedented threats and uncertainty. Russian aggressors have destroyed and continue to destroy the country's energy infrastructure. In such a situation, long-term investments in power generation are highly risky. In the context of a large-scale Russian war, it is impossible to predict the timing of the start of the new normal life, the structure of future energy demand, or consumption patterns. Therefore, it is impossible to outline detailed, specific long-term development programs today. Developing general provisions for the energy policy implementation is important, considering the world experience and our country's comparative advantages.
The Ukrainian energy system is the subject of study by the International Energy Agency, the EU, and the OECD. Let us recall its main characteristics before the large-scale Russian invasion.
- Until 2022, Ukraine's energy system depended mainly on fossil fuels and nuclear energy.
- In 2021, the total energy output was 88 million tonnes of oil equivalent (Mtoe).
- Oil, natural gas and coal accounted for nearly 70 %, and nuclear power about 25%.
- Coal, nuclear power, and most renewable energy sources have been used for the most part in electricity generation;
- Oil and gas were used mainly in end-use sectors.
Source: Ukraine’s Energy Security and the Coming Winter. An energy action plan for Ukraine and its partners. International Energy Agency (IEA). September 2024
Ukraine produced significant amounts of coal and natural gas. However, domestic production was insufficient to cover demand. In 2021 Ukraine's energy production was 55 million tonnes of oil equivalent (55 Mtoe) or nearly two-thirds (62%) of total supply. Although renewable energy sources make a modest contribution to the energy balance, solar and wind energy production has rapidly expanded from a low base.
Ukraine's thermal power plants produce electricity from coal, oil, and gas. Biomass and biogas are categorised as renewable sources rather than thermal sources. In February 2022, twelve thermal power plants (without CHP) with unit capacity ranging from 150 MW to 800 MW were in operation. 8 Soviet-designed power plants were commissioned between 1958 and 1977. Most of the units were modernised after 2000. Some power plants are designed to run on both coal and natural gas, with coal as the primary fuel. Natural gas-only power plants (4.6 GW)have rarely been used over the past decade. About 2.5 GW of installed capacity is mothballed, meaning it is unavailable for power generation. A total of 15.4 GW of the 21.8 GW of installed capacity was actively utilised as of 2021. Ukraine also has three large cogeneration plants, with four 100-120 MW units and five 250-300 MW capacity units.
Ukraine has a relatively high grid density and the electrification rate is almost 100%. However, most grids were built in the 1960s-1970s and require modernisation. According to a 2018 study, 64% of power equipment was over 40 years old, while 22% was between 30 and 40 years old. Consequently, transmission and distribution networks have significant physical losses, which are estimated at more than 14% of transported electricity.
Ukraine has three types of suppliers: free-price suppliers, universal service providers (USPs) and last resort suppliers (LRSs). Before the war, the latter two served approximately 44% of all consumers. Free-price suppliers buy electricity wholesale and sell it to industrial and business customers at freely agreed prices. At the end of 2021, there were 955 licensed electricity suppliers, of which only 30% (287) were active electricity suppliers to consumers. DTEK Kyiv Energy Services, Lvivenergosbyt, DTEK Dnipro Energy Services, Enera Group17 and Kharkivenergosbyt are the largest by customer base.
USPs supply electricity to households at regulated prices set by the CMU and to small enterprises at prices approved by the NEURC. There is one universal service provider per oblast, 25 in total. USPs can also act as free-price suppliers and supply electricity to non-domestic consumers at freely set prices throughout Ukraine. Some of the largest free-price suppliers are in fact also universal service providers.
The state-owned company Ukrinterenergo is subject to LRS obligations and supplies electricity to consumers in special situations, such as supplier cancellation or inability to choose a supplier, and can do so for a maximum of 90 days at a regulated price.
Ukraine has traditionally met its gas needs through domestic production and gas imports from Russia. However, gas relations with Russia have been a constant source of tension and instability. Ukraine stopped direct gas imports from Russia in November 2015, replacing some with indirect imports via the European Union. Coal imports increased after Ukraine lost control of its main coal-mining region in Donbas in 2014 and the country went from being almost self-sufficient in coal to a major importer (40 % of coal supplies).
In the EU in 2020, expenditures on electricity, natural gas, and other fuels accounted for 4.3% of household expenditures, ranging from 9.2% in Slovakia to 2.25% in Luxembourg. In Ukraine, the figure was 2.67% of household expenditures. With the elimination of subsidies and state support and changes in pricing for the commercial sector, these costs in Ukraine may increase to 5 - 7% of total expenditures.
Main participants of the Ukrainian electricity market:
- Ukrhydroenergo is a state-owned hydropower company managed by the Cabinet of Ministers of Ukraine. The Company operates 10 hydroelectric power plants on the Dniester and Dnieper rivers, which produce about 6.7 percent of Ukraine's total electricity output.
- Energoatom is a state-owned company managed by the Cabinet of Ministers of Ukraine. It operates four nuclear power plants that produce about half of the country's electricity.
- DTEK Group of Companies is Ukraine's largest vertically integrated private holding company. It produces, supplies, and distributes natural gas and electricity, as well as producing coal.
- Centrenergo is one of the largest heat-generating companies in Ukraine, which includes three TPPs. Centrenergo is state-owned and managed by the State Property Fund of Ukraine (SPFU).
- Ukrenergo - the only transmission system operator (TSO) in Ukraine. It is responsible for the transmission and dispatching of electricity over high-voltage grids. Under the new market model, Ukrenergo manages the balancing and ancillary services markets, registers bilateral contracts, and administers commercial metering and settlement.
- Distribution System Operators (DSOs) are responsible for distributing and dispatching electricity to end consumers. There are 32 DSOs in Ukraine, 8 of which are controlled by the State Property Fund of Ukraine (SPFU)
- Suppliers (at free prices) - These economic entities buy electricity on the market and sell it to consumers at free (unregulated) prices.
- Universal service providers (USPs) are electricity suppliers required by the Market Law to supply electricity to residential and small non-domestic consumers at regulated prices. There are 25 regional USPs, of which 6 are state-owned.
- Ukrinterenergo (last-resort supplier) is a public supplier that provides supply services to consumers in exceptional circumstance. It can supply electricity for a maximum of 90 days at regulated prices.
- Guaranteed buyer is a state-owned company responsible for ensuring the public interest in increasing the share of electricity production from renewable energy sources by buying/selling electricity from producers eligible for “the green” tariff.
Source: Competition Market Study of Ukraine’s Electricity Sector. OECD. June 2023
OECD and International Energy Agency Recommendations for Ukraine
In autumn 2024, the International Energy Agency (IEA) made several energy policy recommendations to Ukraine.
- Deploy decentralised generation capacity as quickly as possible. Alongside the diesel generators widely deployed already as back-up for grid supply, this should include small-scale gas-fired combined heat and power plants (< 40 MW), solar PV14 and wind systems, as well as batteries and other storage technologies. Solar PV and batteries, including behind-the-meter installations, can be deployed quickly with the right incentives in place, allowing them to help meet energy needs while increasing the physical resilience of the system… Off-grid and mini-grid solutions should be part of the solution. Working with partners to provide back-up generation for water supply, mobile networks, and hospitals will also be key to ensuring the resilience of critical infrastructure.
- Increase electricity imports from the European Union to Ukraine. Ukraine is interconnected with continental Europe through Poland, Slovakia, Hungary, Romania, and Moldova. The current firm transmission capacity for trade towards Ukraine and Moldova is 1700 MW and can be complemented, when the network allows, with a non-firm emergency inter-TSO agreement that can provide additional support for a few hours.
- Expedite the delivery of small CHP (combined heat and power) units, prioritising the worst-hit areas. Reinforcing Ukraine’s heating infrastructure ahead of the winter requires a localised approach, focusing on the most affected regions, such as Kharkiv, Mykolaiv and Sumy.
By the end of July 2024, Kharkiv had installed 22 cogeneration units and 31 autonomous boiler houses. Still, the city needs as many as 140 units (with a total capacity of 340 MW) to ensure adequate heat supply this winter. Kyiv’s municipally-owned Kyivteploenergo has ordered 15 small CHP units (with a combined capacity of 60 MW), but they will not be delivered until December 2025 – too late to supply heat this winter. To the extent possible, Ukraine should expedite and prioritise these deliveries with the help of international partners.
- Prioritise investments in energy efficiency. As of 2021, almost 80% of Ukraine's residential building stock was considered energy inefficient. Increasing the energy efficiency of the existing building stock, particularly by targeting building fabric improvements, could halve their energy consumption. New construction, reconstruction of buildings damaged during the war, and renovation of existing buildings should be carried out to embed high efficiency standards in buildings.
- Accelerate the modernisation of Ukraine’s heating systems. The modernisation of Ukraine’s district heating network is long overdue and needs to be accelerated in conjunction with modernizing the country’s building stock. Much of Ukraine’s heating equipment and infrastructure is close to, or beyond, the end of its design life and network losses (at over 20%, even before the full-scale invasion) are more than double the typical losses in EU countries. According to a government estimate, about 44% of the district heating network is dilapidated. The lack of investment in the heating grid and poor end-use energy efficiency means that more than half of the fuel currently used to produce heat is wasted.
- Utilise Ukraine’s significant potential for biogas and biomethane production. Incentives to promote investment in biogas and biomethane-based installations (including for combined heat and power generation) could provide an alternative to natural gas-based district heating systems and increase the resilience of Ukraine’s heat supply in the face of ongoing gas supply security risks. Ukraine has two operational biomethane plants and several under construction. It plans to open ten new facilities with a capacity of 1.5 million cubic meters per year in 2024-25. A valid proposal for studying the state of competition in the energy market of Ukraine from the Organization for Economic Cooperation and Development (OECD):
L"Ukraine's wholesale electricity market should function as a competitive market where regulation complements competition. Despite the pro-competitive legislative framework enshrined in the Law of Ukraine "On the Electricity Market", most market participants and stakeholders are dissatisfied with the status quo. The reasons for their dissatisfaction vary and are not without individual bias, but one concern shared by the vast majority is the lack of regulatory stability. Entering the electricity market, especially as an electricity producer, requires a significant commitment in capital, time, technical and administrative resources. This sentiment is explained by the long payback period for investments."L
The ILI believes, that it is necessary to abandon the practice of constant regulatory changes that create uncertainty and block investments in the energy market. In addition, under conditions of high concentration of non-market power and capture of the regulator by the dominant entities in force, energy costs for producers of goods and services increase.
L"One of the most important issues identified in this study is price caps in the wholesale market. Market pricing is at the heart of the competitive process, especially for such a homogeneous commodity as electricity. Pricing restrictions should be implemented with extreme caution and only under certain circumstances. From a competitive perspective, price caps can be justified by the risk of excessive pricing and without better alternatives”."L
The main recommendations from the OECD are as follows:
- Promoting competition in the wholesale electricity market by increasing liquidity and changing the pricing procedure.
L"Free pricing is a prerequisite for effective competition. It should be restricted only when absolutely necessary, and then only for the shortest possible period of time."L
- Reducing market segmentation.
L"Significant volumes of electricity are sold in a special section of the Ukrainian Energy Exchange, which is not available to the commercial segments of the wholesale market. This reduces the liquidity of commercial segments and makes them less reliable and more vulnerable to manipulation. Solving the problem of the difference between market prices and regulated prices for the population at the expense of the state budget will not hinder the functioning of the wholesale market. In the medium term, the gradual introduction of market prices for households should eliminate the need for this model of household PSO."L
- Improving the quality of energy market surveillance. REMIT (Regulation on Wholesale Energy Market Integrity and Transparency) should be introduced. It is a comprehensive system for overseeing wholesale market operations. Its implementation can reduce the risk of market manipulation and increase transparency and confidence in the market, which will promote liquidity and competition. The National Energy and Utilities Regulatory Commission (NEURC) should report on market indicators consistently across all market segments. It should develop and publish a methodology for calculating indicators - especially those indicating market liquidity, concentration and power - and appropriate anonymised data to ensure quality. Potential investors should have access to reliable information on the state of the energy market in general and electricity in particular, on the long-term strategy of energy generation development.
- Independent evaluation of bilateral electronic auctions at the Ukrainian Energy Exchange.
L"There are indications that the results of bilateral auctions do not always properly reflect market conditions. This may be because sellers have too much power to set specific auction terms, partly preventing buyers from accessing auctions."L
- Authorization to enter long-term commercial power purchase and sale contracts for new generating facilities.
L"Commercial power purchase agreements (PPAs) are one method of securing financing for new generating capacity. Currently, the maximum duration of commercial contracts is one year. This short term is insufficient to secure financing for new generating capacity. For new power plants, PPAs should not be limited in duration. Restrictions for existing producers may be necessary to ensure market liquidity, but they should be imposed according to clear rules. Removing restrictions on the duration of PPAs for new power plants would be a simple measure to facilitate investment after the end of the war."L
- Promotion of market competition in the retail electricity market.
This involves L"phasing out regulated prices for households. Regulated household prices restrain competition in the retail market and lead to high electricity consumption. Regulated tariffs should be abolished and replaced by more efficient pricing."L
- Facilitating electricity generation from renewable energy sources (RES) and their participation in the market.
L"Integrating RES producers to full participation in market functioning will reduce market concentration and increase competition”. There is a need for "improved pricing in the balancing market by phasing out price caps, which would provide market incentives to increase participation in this market. Any RES support scheme for new capacity should allow and incentivize future RES producers to offer balancing services in the balancing market."L
- Support for new (commercial) RES facilities should be provided exclusively through competitive auctions. Auctions are more efficient than fixed “green” tariffs because competition can reduce the cost of support.
- Ensuring cross-border market integration.
L"Successful synchronization is an important step towards integrating the Ukrainian electricity market with the EU... Integration of Ukraine's wholesale electricity market with EU electricity markets provides a unique opportunity to improve competition in the long term. Increased interconnection capacity and the ability to import and export electricity allow new players to compete, reducing market concentration and introducing competitive dynamics."L
Conclusions of the study
Ukraine will significantly increase its country's competitiveness and national and energy security if it follows the laws of open market competition, ensures a neutral, equidistant from all participants' role of the government in regulating its various segments, and eliminates conflicts of interest in the energy market. This is when the owner, regulator, manager, and controller is the State, albeit in the form of different organizations and agencies.
At the stage of deep transformation of the capital structure and Ukraine's economy as a whole, it is critical to create such a legal and institutional environment in which private investors, rather than the state, choose the sources of energy generation, technologies, locations of new production facilities and their technical parameters. Any forms of state interventionism, including price, technological, financial, regulatory favouritism provision of state guarantees for selected entities to the detriment of uniform rules of competition in the energy market increase the risks of making investment, production mistakes, preservation of production facilities, which in the long term will hamper economic growth and increase labour productivity.Share
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Yaroslav Romanchuk
A well-known Ukrainian and Belarusian economist, popularizer of the Austrian economic school in the post-Soviet space. He specializes in reforms in transitional economies in the post-socialist space.
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