Electricity tariffs in Ukraine could be much lower if auctions were used

July 27, 2021

Humankind puts much hope in renewable energy. This means renewable sources to replace fossil fuels, thermal power stations and nuclear plants. This is a strategy that most countries have already endorsed. Ukraine is planning to increase the share of renewable energy in the country’s energy balance to 25% by 2035, as envisaged by the Energy Strategy of Ukraine. Here Allen Eisendrath, an expert from the USAID Energy Security Project, shares his vision of renewable energy, its prospects in Ukraine and the introduction of energy storage systems – an issue that is being widely debated in this context.

Is it realistic to increase the share of renewable energy in Ukraine’s energy balance to 25% by 2035, as envisaged by the Energy Strategy of Ukraine? What RES and in what regions of Ukraine are the most promising?

It is realistic to increase the share of RE in Ukraine’s energy balance to 25%. Moreover, I’ve been told that in the Ministry of Energy many believe that this 25% share can be achieved five years earlier!

Many countries are now achieving high levels of renewable generation. For example, the shares of renewable energy used in gross final consumption in selected EU countries include:

  • 2% Sweden
  • 2% Portugal
  • 38% Germany
  • 8% Finland
  • 2% Spain
  • 9% Italy
  • 2% Ireland

Source: https://www.statista.com/statistics/782663/renewable-energy-shares-electricity-european-union/

However, to achieve these higher levels, it is necessary to follow the best practices, including auctions, grid modernization and location of renewables in zones with the best renewable resources.

It is recommended that Ukraine concentrate RE in locations with the lowest production cost. This depends on the quality of solar and wind resources, and cost of land and transmission. These are often considered RE zones, and they often require enhancement of transmission and other infrastructure to develop the maximum amount of low-cost renewables. These areas of the country are identifiable at the higher level on existing wind and solar maps of Ukraine. However, to date, there have been no concrete plans to create expanded RE zones in the best locations.

The green tariffs in Ukraine are a bit too high, to put it mildly. Are there any ways to make green energy cheaper? 

Ukraine has much higher green energy tariffs than most countries that are scaling up renewables. For example, Bloomberg New Energy Finance says: “For the first time since we started tracking costs in 2009, we estimate it is now cheaper to build typical utility-scale PV farms in China, India, France and Spain, rather than running state-of-the-art existing coal- and gas-fired power stations. Similarly in Brazil, the UK and Sweden, investment in new onshore wind farms today is more cost-effective than operating already amortized fossil fuel power plants.” (Bloomberg NEF 2nd Half 2020 Global LCOE report).

Ukraine’s green tariffs are high because they were set at high levels, and because Ukraine did not shift to renewable auctions as most of the rest of the world has. Most countries now use competitive procurement in the form of auctions to contract renewables. This drives down prices, discloses real costs of renewables and encourages innovation in the industry. It is almost certain that Ukraine’s renewable tariffs would be much lower if auctions were used, and if resources were concentrated in locations with the best renewable resources.

In summary, scaling up renewables using best practices such as auctions is highly likely to reduce electricity costs in Ukraine. However, there also need to be actions that concentrate renewable capacity in locations with the best renewable resources, and steps need to be taken to implement least cost renewable integration.

Renewable energy sources (primarily solar and wind) are characterized by dependence on weather conditions and, accordingly, fluctuations in electricity production. Why, despite these fluctuations, they are considered as a balancing tool for the Ukrainian power system and how electricity produced from RES can be stored?  

RE is variable because wind and solar resources are variable. This is an inherent characteristic of RE. Wind and solar require efforts and investment to integrate them successfully into the national grid. The main solution is not storage; storage can play a small role, but it is a relatively expensive method to increase power system flexibility. Most countries rely on a range of flexibility options, and they use them all according to their power system characteristics and costs. And they often use market mechanisms to procure flexibility services.

Some of the more common sources of flexibility include: simple cycle gas turbines, storage hydro plants, combined heat and power plants, and ramping up existing thermal stations. Often, substantial ramping and balancing capacity exists in the national thermal fleet. For example, India studied its coal fleet and found that almost 1/3 of coal plants can ramp 1% or more per minute. Similarly, USAID ESP conducted tests of Ukraine’s large coal, gas, nuclear and hydro generation units, and found that almost all of the flexibility reserves required in the national power system are already available in the existing generation fleet. There just needs to be the right markets and incentives for generators to make these available.

Is it realistic to balance Ukraine’s huge energy system by storage? How many storages will be needed in Ukraine for the balanced operation of the energy system, when the share of renewable energy reaches 25%?

Storage can definitely play a role in providing flexibility services, particularly fast-dispatchable services. Once the renewable generators are integrated into the electricity markets, many renewable generators are likely to add storage to shift energy output to peak demand periods, and to avoid curtailment.

Estimating how much storage is needed should be determined by the ancillary services and balancing markets in Ukraine. Investors will determine whether it is more economical to build new simple cycle gas plants for balancing, or to build storage, or to find ways of ramping the existing thermal and hydro plants. There is no way to know in advance how much the optimal storage capacity is; this should be a result of private parties selling services in competitive markets.

How badly and urgently does Ukraine need storage law adoption, given that in the medium term the lion’s share of its electricity will still be produced by thermal and nuclear power plants, not RES? 

ESP has estimated that by the end of 2021, about 11 gigawatts of renewables will be operational, with most of this being wind and solar PV. This is a large enough capacity of variable renewable energy (VRE) to have a significant impact on the operation of the Ukrainian Integrated Power System (IPS). Storage can and should play a role in providing the flexibility that is needed in the IPS, however it should be provided in competitive markets for flexibility services. This is the most efficient and lowest cost approach to procuring necessary flexibility services.

Provisions in the Ukraine Electricity Markets Law are needed to ensure that there is a level playing field in the electricity markets for storage. Given that storage is one of several sources of flexibility, amendments to the Electricity Markets Law should be introduced as fast as possible. However, the amendments would not solve the problem of flexibility by repeating the experience of high Feed in Tariff PPAs through the practice of conducting storage construction auctions. The amendment should be generally in alignment with the EU policies on both storage and resource adequacy. This is not because it is mandatory to adopt these policies, which are part of the 4th Energy Package; it is because (a) the GoU has stated its intent to align energy policies with the EU’s policy framework, and (b) because EU policies on storage and resource adequacy are good policies from a practical point of view.

What impact on the environment will the development of the storage systems have for Ukraine? In other words: can the development of energy storage systems have a negative impact on the environment, given the limited term of their service and the need for further disposal?

Answering this question would require a properly conducted environmental impact study. However, there are major efforts ongoing in places like the US and EU to develop approaches to managing renewable technologies and storage facilities when they reach the end of their useful lives. These approaches generally seek to recycle components. For example, USAID’s Scaling Up Renewable Energy (SURE) Project offers technical support for end of life management of renewable energy facilities.

One may observe multiple discussions around EU storage policy and Ukraine’s obligations under the Association Agreement. It seems Ukraine has hit a stumbling block, and it is rather big regarding energy storage. What is it in your opinion?  

My opinion is that Ukraine should adopt policy approaches to both storage and to resource adequacy that are similar to the policies in the EU. This is for three reasons:

  • These are sensible policies that are oriented toward minimizing the cost to consumers and solving energy sector challenges through market mechanisms. You will see similar policy approaches in a wide range of countries, including Australia, the UK, the US and Canada, among others. These are just good policies.
  • The Government of Ukraine has stated its intent to align energy policies with those of the EU.
  • Even though the 4thEnergy Package is not yet binding on Ukraine, eventually there is an intent on both sides that the provisions of the 4th Energy Package will be adopted in Ukraine.

Ukraine’s storage law provisions should be reasonably consistent with the European Union’s approach to storage, right? EU Directive 2019/944 and EU Regulation 2019/943 states that transmission and distribution companies are prohibited from developing, owning, or operating storage facilities except under very limited conditions and with the approval of the regulator. What are these limited conditions?

Yes, Ukraine’s storage law provisions should be reasonably consistent with the EU’s approach to storage and also to resource adequacy. These limited conditions include:

  • When the storage facilities are integral parts of the transmission or distribution networks.
  • The TSOsand DSOs do not use these storage facilities to participate in flexibility services markets.
  • Or in situations where there is a resource adequacy shortfall, the regulator has approved and supervised implementation of a plan to procure necessary resources through changes in markets and regulations related to market solutions, and that the procurement of storage facilities is a LAST RESORT to solvethe resource adequacy problem.

And the next question is: transmission and distribution companies are not allowed to sell storage services in the electricity markets, so will there be a separate storage market to be developed in Ukraine? If so, what key features is it expected to have? 

There need not be a separate storage services market. Such a market is unnecessary. The purpose of the amendment to the Electricity Markets law is to ensure that storage owners can participate fully in electricity markets, to prevent distortion of electricity markets by TSOs and DSOs owning or operating storage.

Currently, matters that are related to the ancillary services functions and purposes of electricity storage are addressed in the Electricity Markets Law.  An amendment concerning storage in the Electricity Markets Law is pending and is assigned to bill #2582. What is the ESP’s position on the current legislation?

There are now three draft laws concerning storage. Our view on all three is that they should be aligned with the provisions in the EU Directive 944 and EU Regulation 943 concerning storage, electricity markets, resource adequacy and capacity mechanisms.

Does ESP foresee any anti-corruption measures related to storage auctions, allowed under bill #2582’s Article 29? 

Definitely. Provisions for storage construction auctions in the storage amendments without the conditions and constraints that are in the EU Directive 944 and Regulation 943 presents a major risk of corruption and market disruption. Removing the provisions related to storage construction auctions is without a doubt an important anti-corruption measure. ESP has written a short paper describing the risks associated with holding storage construction auctions.