Blog by Justin Goonesinghe, USAID Energy Security Project (ESP) Gas Sector Lead
Ukraine has traditionally been a major corridor for Russian gas supplies to the European Union (EU), with a large gas supply infrastructure built over several decades to facilitate transit through Ukraine to markets in the EU. The EU’s gas pipeline system’s design reflects the assumption that the transit of Russian gas through Ukraine would remain a major source of supply. However, Russia’s brutal full-scale invasion of Ukraine in February 2022 represents a major inflection point in European energy history. In response to the invasion, the European Commission has rolled out the REPowerEU Plan[1] to rapidly pivot EU energy supplies away from Russia through energy savings, diversification of supplies, and accelerated roll-out of renewable energy[2].
Almost eighteen months after the first tanks rolled across the border, the EU’s approach to shifting away from Russian gas towards liquified natural gas (LNG) appears to have been rather successful, with secure supplies maintained throughout the winter of 2022-2023 and natural gas prices falling back towards their long term ‘normal’ levels in Europe.
The Commission’s plan to pivot away from Russian gas, alongside individual EU Member State approaches to reducing Russian imports, naturally leads to concerns regarding the future of Ukraine’s gas infrastructure. When one considers that UAH 116 billion in taxes and duties (10,7% of Ukraine’s state budget revenue) came from the gas sector in 2021[3],[4], the potential social and economic consequences of the new EU policy on Ukraine’s already faltering economy become apparent.
Despite this, there is reason to be hopeful. The end of European reliance on Russian gas combined with the intention of international donors to support Ukraine’s clean energy transition can provide the sector with an opportunity to reinvent itself as a producer, consumer, and supplier of clean molecules (biomethane, hydrogen, and synthetic gases), which will soon be in high demand as they are fundamental for the clean energy transition and will play a key role where direct electrification is not possible or practical. Such a move can lead to positive welfare effects for both the EU and Ukraine, facilitating inward investment into decarbonized technologies in Ukraine, which will enhance the energy security of the entire European region.
Ukraine’s potential vs. the EU’s need
The REPowerEU Plan envisages 10 million tons of EU renewable hydrogen production and 10 million tons of renewable hydrogen imports by 2030, alongside scaling up biomethane from 3bcm of production today to 35bcm by 2030. To support this ambition, the Commission will support the development of three major hydrogen import corridors, including one with Ukraine, as well as biomethane partnerships with third countries that show potential. To illustrate this point, on February 2, 2023, the President of the European Commission, Ms. Ursula Von Der Leyen, and the Prime Minister of Ukraine, Mr. Denys Shmyhal, signed the Memorandum of Understanding (MoU) on the Strategic Partnership on Biomethane, Hydrogen, and other Synthetic Gases[5]. The MoU acknowledged Ukraine’s “vast potential for the sustainable production of renewable energy, including sustainable biogas and biomethane and hydrogen,” and both parties committed to collaborating at multiple levels to facilitate the green transition.
Ukraine does indeed have good potential to become a significant producer and exporter of clean molecules, but in developing the next steps, both the relative economics of the clean molecules vs. conventional molecules as well as the relative benefits and costs of any necessary short-term policy support should be carefully planned to not unnecessarily distort the market. In addition, biomethane is typically small-scale and localized in its nature, so growing volumes to the level that they make a real contribution to the security of supply will take time.
Ukraine’s biomethane potential comes from the fact that Ukraine is Europe’s largest country, plays a significant role as a food producer, and has a well-developed gas pipeline network. During April 2023, the first Ukrainian biomethane plant was connected to the gas network[6] and, despite the war, dozens of other projects are lining up to produce and export biomethane, capitalizing on increasing demand in the EU.
USAID ESP has recently developed a Levelized Cost of Biogas Model. Early results indicate that the price of biomethane can be comparable with the current market prices of natural gas (and favorable compared to price levels seen in the last two years). This is regardless of the additional benefits of energy security, attracting investment, decentralization, and decarbonization.
In addition to biomethane, Ukraine’s national hydrogen strategy is currently under development and supported by USAID ESP[7]. It is likely to result in a balanced approach between domestic use and exports, which will support the goals of the EU and its Member States. While clean hydrogen will be a longer-term development for Ukraine and the EU, it has more potential to be scaled and completely replace natural gas in the longer term.
Finally, in addition to producing and exporting clean molecules, Ukraine could possibly utilize its clean molecules to produce and consume clean products, such as green steel or green methanol and export them to the EU, providing clean economic growth and further investment opportunities.
Benefits of the switch to clean molecules
So, how can Ukraine benefit from switching to clean molecules? There are several options, which include:
1) diversification of supply routes for clean molecules towards and from the EU;
2) decarbonization of EU and Ukrainian energy systems;
3) post-war reconstruction based on clean energy technologies;
4) reutilization of existing gas network infrastructure; and
5) anchoring integration between the EU and Ukraine through mutually beneficial political and economic development.
Through its Energy Security Project (ESP), USAID is supporting the development of this sector across multiple initiatives to capitalize on the potential of clean molecules to be a key vector of the post-war reconstruction of Ukraine. Efficient and well-designed policy, regulatory, and governance approaches will be an early focus of USAID ESP to facilitate this cooperation and support Ukraine’s long-term clean and sustainable integration into the European energy market.
[1] https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe_en
[2] https://ec.europa.eu/commission/presscorner/detail/en/IP_22_3131
[3] Press conference of Naftogaz CEO, 21 June 2022: https://www.youtube.com/watch?v=X3e_xBwsvDw&t=4660s
[4] https://www.epravda.com.ua/news/2022/01/12/681346/
[5] https://energy.ec.europa.eu/publications/memorandum-understanding-between-european-union-and-ukraine-strategic-partnership-biomethane_en
[6] https://eba.com.ua/en/rgk-pidklyuchyla-pershyj-v-ukrayini-biometanovyj-zavod-do-gazorozpodilnyh-merezh/