Energizing Peace: Economic Policies for Affordable, Secure and Clean Energy in Ukraine

This weekend, Switzerland is hosting the first Summit on Peace in Ukraine to discuss pathways toward a comprehensive, just, and lasting peace. Restoring Ukraine’s energy capacity and establishing a framework for its longer-term energy trajectory will be essential for reaching this objective. With well-designed reforms, international support, private investment – and, crucially, peace – Ukraine can leapfrog to a sustainable energy future. Anhelina Dombrovska and Patrick Lenain outline key elements of a path towards this goal based on a forthcoming CEP Policy Brief.

The full-scale Russian invasion of Ukraine in 2022 has caused enormous human suffering and economic damages. Thousands of civilians have been killed or injured, livelihoods and vital social services have been disrupted, and large population displacements have contributed to a massive humanitarian crisis. The UN office for the coordination of humanitarian affairs (OCHA) estimates that 14.6 million people need help. Russia’s massive attacks have also caused large damages to the housing stock, transport infrastructure, industrial facilities, and energy capacities. The total cost of reconstruction and recovery has been estimated at US$486 billion (230% of pre-war GDP) over one decade (World Bank, 2024 and IMF, 2024).

Despite the war and numerous additional challenges, the government is striving to maintain the operation of the energy system. Before the invasion, Ukraine has been operating a sizable energy system consisting of multiple power generation plants (150.3 TWh in 2019), district heating facilities, networks of natural gas pipelines and gas storage, and a workforce skilled in energy technologies. The government estimates that Russia’s strikes have destroyed half of its electricity generation capacity. Ukraine has installed air defence batteries and rebuilt wherever possible. Significant support has also been provided by EU countries by scaling up electricity grid interconnections, thus providing an alternative supply of electricity. Financial support is being provided by the G7+ and the EBRD, among multiple donors. Nonetheless, power outages are still disrupting daily lives in homes, schools, hospitals and workplaces.

Energy consumers increasingly pay for reconstruction efforts. To cover current operations and pay for rebuilding costs, the Ukrainian authorities have hiked electricity prices several times. In the past, Ukraine had typically kept retail electricity prices below cost-recovery levels in an attempt to fight energy poverty. Electricity distribution companies have been required to sell electricity at a single tariff set by the Cabinet of Ministers, irrespective of consumer’s location and income level, under the regulations of the Public Service Obligation (PSO). In addition, Ukraine had maintained energy taxes at levels too low to generate significant government revenue, and too low to reflect environmental externalities. This has begun to change with rapid price hikes: electricity tariffs for the population were kept until mid-2023 at the equivalent of US$0.038/kWh – among the lowest in the world. In June 2023, in the midst of Russia’s invasion, they were almost doubled to the equivalent of US$0.07/kWh. In early June 2024, they were once again raised to the equivalent of US$0.107/kWh. These higher electricity tariffs will generate revenue helping energy producers to invest in repairs.

Safeguarding energy affordability is critical. Ukraine’s electricity prices are now close to levels observed in some EU countries. To alleviate that these price hikes aggravate energy poverty, especially in war-torn regions where humanitarian conditions are most difficult, Ukraine has introduced a policy of cash transfers targeting the most vulnerable, in line with best practices in other countries.

To strengthen energy security is equally vital. Reducing Ukraine’s dependence on imported fossil fuels is a key step in this direction. To this end, prior to Russia’s invasion, Ukraine had already introduced feed-in tariffs to incentivize the expansion of renewables. As a result, in 2021, renewable electricity production reached 10.2 TWh out of a total production of 150.3 TWh.

Further shifting Ukraine’s energy consumption to electricity as the primary source of energy is key. Reducing the dependence on fossil fuels involves a fast increase in the share of electricity in final energy consumption from its level of 18.5% in 2022. This would involve, inter alia, switching from combustion engine vehicles to electric vehicles, and from gas boilers to heat pumps. It would also include manufacturing industries switching from coal, oil, and gas to electricity. All these changes would lead to a large increase in electricity consumption. As an illustration, the International Energy Agency estimates that a rapid increase in electrification will be required worldwide to achieve net zero carbon emissions (Figure 1).

Figure 1: Share of electricity in final energy consumption, %

Source: Enerdata and International Energy Agency

To that end, Ukraine could considerably increase its supply of renewable electricity. The country has a vast and diverse renewable energy potential encompassing wind, solar, biomass, hydropower, and geothermal resources – some of which, however, located in regions currently occupied by Russia. With continued investment and development, Ukraine could significantly increase its renewable energy capacity and reduce its reliance on fossil fuels. Hydropower plants would provide the flexibility required to match the supply and demand of electricity in a system with a large presence of intermittent renewables.

The role of nuclear power should be scrutinised in comparison with renewable options. Before Russia’s invasion, Ukraine operated 15 Soviet-designed pressurised water reactors. Ukraine’s comparative advantage in nuclear energy is supported by a local supply chain that includes uranium mining and processing, as well as facilities for spent nuclear fuel storage. Nuclear energy may have a crucial role to play in Ukraine’s future energy system, particularly if electrification is to be expanded. However, this does not mean constructing a large number of new reactors. The primary focus should be on enhancing security, ensuring proper maintenance, and extending the operational life of existing nuclear power generators. Building new nuclear plants should be considered only based on careful scrutiny and a comparison with renewable sources, which are benefiting from rapidly declining levelized costs, according to the International Energy Agency.

Aligning economic policies with the objective of affordable, secure and clean energy will be essential. To illustrate:

  • Ukraine’s fossil fuel subsidies were estimated at 6% of GDP by the IMF in 2021 (before the recent electricity price increases). Further phasing down these subsidies would discourage the use of fossil fuels and increase fiscal space.
  • Setting a deadline beyond which the sales of combustion engine vehicles and gas boilers will be prohibited would encourage the adoption of EVs and heat pumps.
  • Feed-in tariffs could be replaced with auction-based procedures to allocate renewable energy production licenses more cost-effectively.
  • Allowing multiple forms of contracts in the electricity market (such as contracts for difference, power purchasing agreements, spot and forward market transactions, net metering, net billing, and a market for electricity storage) would provide the flexibility for different players to cooperate.
  • Establishing a national Emission Trading System (ETS), eventually linked to the EU ETS, would increase the cost of emitting greenhouse gases relative to clean energies.

With well-designed reforms, international support, private investment – and, crucially, peace – Ukraine can leapfrog to a sustainable energy future. At present, decisionmakers in the energy sector are fighting day-to-day battles to keep the lights on and houses warm. The Cabinet of Ministers is also introducing ambitious reforms to put the system on a more solid financial footing. Winning these daily battles and setting course towards a long-term vision will be critical to pave the way for affordable, secure, and clean energy in Ukraine.


The views expressed in this blog are solely the authors’ and do not necessarily reflect those of the board, staff, and members of the Council on Economic Policies, and do not necessarily reflect the official views of the OECD or its member countries.