By Fitch Solutions
Key View
- Long-term government ambitions to decarbonise power will lead to a gradual decline in coal-fired power in Ukraine over the coming decade
- Low carbon power generation will increase over the coming decade as the power mix diversifies, however, significant risks remain.
- Deepening power ties with Europe will present opportunities for the Ukrainian power sector.
Long-term government ambitions to decarbonise power will lead to a gradual decline in coal-fired power in Ukraine over the coming decade. The Ukrainian government has set out long-term goals to reduce carbon emissions in the country and decarbonise the power sector. Earlier this year they have updated the Ministry of Energy and Environmental Protection targets, including pushing up the target to achieve national carbon neutrality to 2060 while supported the aim for net zero emissions by 2050, which is closer with Western European targets. The government set out its aims in the 2050 Green Energy Transition Concept which seeks pathways for carbon reduction through improving energy efficiency, increasing renewables generation and phasing out high emitters, such as the coal-fired power sector.
It has been identified that the country has a large ageing and inefficient coal-fired power fleet. The country’s transmission system operator, Ukrenergo, outlined in its generation adequacy report that the market could reduce its coal fleet from 18.5GW to 2.5GW over the next decade. The report is being reviewed by the National Commission for State Energy and Public Utilities Regulation of Ukraine (NERC). While we believe it is unlikely that such a sharp reduction will come into effect over the coming decade, we do expect to see older, less efficient units become increasingly unprofitable and see the coal sector’s decline as alternatives forms of generation rise. As such, we forecast the coal sector’s share of total electricity generation in the market will fall from 30% over 2021 to 22.6% by 2030.
Ukraine – Share Of Total Generation By Power Type, %
f = Fitch Solutions forecast. Source: EIA, Fitch Solutions
Low carbon power generation will increase over the coming decade as the power mix diversifies, however, significant risks remain. The market’s leading low carbon form of generation is nuclear power, with its share of total generation over 2021 at 51%. We expect Ukraine’s 15 nuclear reactors will continue to generate more than half of its electricity throughout our forecasts period, rising to 55% by 2030. In November 2020, the preparatory stage of the project to complete units 3 and 4 of the Khmelnitsky nuclear power plant in Ukraine was completed and construction work resumed with a slated completion date of 2025. Ukraine’s project to build the two units, which was put on hold, is part of Ukraine’s ‘Energy Bridge’, according to which it would be supplying clean electricity to the EU amid deepening energy ties.
In addition to the nuclear power sector, we note that the non-hydropower renewables sector is Ukraine’s fastest power capacity growth segment, with an annual average rate of 5.3%. Ukraine has one of the most favourable climactic conditions for wind and solar in the region. We highlight that the wind sector will bring on the majority of the 5.5GW of capacity growth through 2030 with 60% of non-hydro renewables additions, followed by solar with 39% and a marginal role for biomass growth. Additionally, a gradual uptick in investor interest and a burgeoning project pipeline in the Ukrainian solar sector indicate that there is significant upside potential to our 10-year forecast. We highlight that ongoing project activity is being seen across both the wind and solar sectors with activity from leading developers. Among recent project developments, we highlight:
- In June 2021, DTEK Renewables awarded Vestas Wind Systems a contract to provide turbines for the second phase of the 500MW DTEK Tiligul wind project in Ukraine. The contract will see Vestas providing 62 units of V162-6.0MW turbines for the 372MW phase. In March 2021, Vestas was also contracted to provide turbines for the 126MW first phase of the complex. The wind project is likely to be commissioned at the end of Q322.
- In July 2021, Norwegian developer Scatec grid connected a 150MW solar PV project in the Mykolayiv region. The project was delivered under the markets Feed in Tarrif (FIT) scheme and will supply 184GWh of power per year to 76,000 homes. Also in July 2021, Scatec also brought online a smaller 55MW project in the Cherkasy region.
Ukraine – Generation Output From Major Non-Hydropower Renewables Source, TWh
f = Fitch Solutions forecast. Source: EIA, Fitch Solutions
Risks Rising For Renewable Growth
While the Ukrainian renewables sector has seen ongoing progress from a generous FIT scheme, we note that the program has proved to be more successful in attracting developers than the government had initially budgeted for. The FIT scheme payments due to developers were a reported USD4.5bn over 2019, approximately double the amount that had been allocated. This has contributed to the electricity sector building a debt burden on the state that has risen to USD1.9bn by 2021. Without reform, this system faces significant pressure which has been exacerbated by the ongoing Covid-19 pandemic. As such, over August 2021, the government introduced new legislation to reduce the FIT payment scheme. The new system will a tiered system of partial reductions for projects ranging between 1-75MW brought online over 2021 and part of 2022. We highlight that the payment reduction will pose a downside risk to our forecasts due to the less attractive nature of payments. That said, while it is unclear whether this action will be enough to stabilise the balance of payments, it does represent some level of effort from the state to sustain the FIT payment schemes.
Deepening power ties with Europe will present opportunities for the Ukrainian power sector. The Ukrainian grid network is set to be synchronised with the EU’s by 2023 which will lead to increased levels of electricity trade and impact the market’s and region’s power dynamic. As we have previously outlined, improved interconnection enables markets to become more flexible with their power supply, which leads to faster growth in renewables while also decreasing cost due to the larger pool of electricity. Support for improved cross-border trade has been given by the World Bank through an extensive set of funding packages. The latest package, which was announced over July 2021, is a USD212mn fund for developing better grid flexibility and synchronisation between Ukraine and the wider European grid.
Hydrogen To Offer New Growth Potential
The EU has outlined the Ukraine as a potential external partner for large-scale hydrogen electrolyser development. Furthermore, the market’s extensive gas infrastructure could play a role in delivering green hydrogen to the EU. It has been outlined that 10GW of electrolyser capacity could be developed in the market by 2030. The low land and labour costs, extremely high availability of solar and wind resources, and the proximity to Europe are aligning to work in the market’s favour. While we do not currently see any hydrogen production projects arising in the market yet, we do highlight that the likehood is rising. Our view is supported by the fact that the German government is looking to provide EUR600mn in funding for Ukrainian hydrogen projects.
The associated renewable capacity required to supply the electrolyser capacity proposed would present a large upside risk to our forecasts. However, our Country Risk team outlines the ongoing issues with the Ukraine’s non-transparent business environment and the slow pace of structural reforms in the energy industry. Furthermore, they believe that the Zelenskiy administration will remain on a reform-minded path despite the recent large-scale government re-shuffle, the Covid-19 pandemic might disrupt the government’s ability to speed up much-needed structural reforms as the country’s economy plunges into recession.
This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.
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