Leapfrogging to a New Energy Future: Economic Policies for Affordable, Secure and Clean Energy in Ukraine

and | 24 July 2024
Fiscal, Policy Briefs | Tags: Energy, Fossil Fuel Subsidies, Renewables, Ukraine

DOWNLOAD THE POLICY BRIEF. A related blog is available HERE.

 

Russia’s full-scale invasion of Ukraine has caused enormous human suffering and economic damages. Thousands of civilians have been killed or injured and large population displacements have triggered a massive humanitarian crisis. The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) estimates that 14.6 million people need help. Russia’s attacks have also caused large damages to Ukraine’s 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).

The challenges of the war notwithstanding, the government is striving to maintain the operation of the country’s energy system. Before the invasion, Ukraine has been running 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, as well as a workforce skilled in energy technologies. The government estimates that Russia’s strikes have destroyed half of its electricity generation capacity. Daily lives in homes, schools, hospitals and workplaces are disrupted. In the short term, the imperative has been to repair physical damages and expand interconnections with the EU electricity grid, as an effort to secure the supply of energy to people and businesses.

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. 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.

To illustrate:

  • Phasing down fossil fuel subsidies, which lower the tariffs of utilities for all households irrespective of their incomes, can support the switch to renewables and increase fiscal space, in combination with means-tested social support. The recent increase in electricity prices was a crucial step in this direction.
  • Setting a deadline beyond which the sales of combustion engine vehicles and gas boilers will be prohibited would encourage the adoption of electric vehicles (EVs) and heat pumps.
  • Replacing feed-in tariffs with auction-based procedures would help to allocate renewable energy production licenses more cost effectively.
  • Supporting 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, can provide further impetus to investments into clean energy.

Read the full Policy Brief.

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