Nord Stream 2 should be an impulse to tighten Polish-Ukrainian energy partnership

Besides the dangers posed by Nord Stream 2, it is also an opportunity for a closer energy partnership between Kyiv and Warsaw. It should become an impulse to break the long-standing barriers in our mutual relations. In the coming years, Poland should not only strongly engage in EU, American and German programs, which will be launched as part of improving Ukrainian energy security, but it should also create its own offer, using our geographical proximity, a similar perspective on nuclear power and the dangers of far too radical decarbonization, mutual relationships which have been built for years. Warsaw should promote Ukraine’s approach to a diversified green transformation – based not only on renewable energy but also on nuclear power and gas.

Dark clouds over the Dnieper River

This summer was a breakthrough for Ukraine’s energy security. A controversial statement by the U.S. and Germany was published in July, de facto allowing the construction of the Nord Stream 2 pipeline to be completed under certain soft conditions for Russia and general promises to Ukraine, which the pipeline bypasses. Many expected that Angela Merkel would propose specific compensation during the August visit to Kyiv. In vain.

We only heard empty words and slogans about morality. Following a meeting with Zelensky in Kyiv, Merkel said that gas could not be used as a weapon against Ukraine and if Russia used NS2 in this way, Germany would impose new sanctions on Moscow. Both the statement and the US-German agreement did not outline specific mechanisms for actions in the event of such a situation. In addition, two days before she visited Ukraine, the German Chancellor went to Moscow, a move regarded by many as a consultation of the German stance on Ukraine with Putin.

In the case of Nord Stream 2, Germany proclaims unspecified promises to Kyiv. According to the statement on NS2 of July 21, Berlin committed to “utilize all available leverage” to persuade Russia to extend for 10 years the transit agreement with Ukraine (which ends on December 31, 2024). This is a key point for our eastern neighbour.

The transit of Russian gas through Ukraine increases its energy security due to the possibility of a virtual reverse flow – the purchase of gas flowing through Ukraine’s territory from the countries to which it flows – also in critical situations. Moreover, a substantial amount of about USD 2 billion per year currently goes to Ukraine’s budget.

In response to this request, Vladimir Putin, at a press conference after the meeting with Merkel made it clear that the signing of such a long-term contract by Russia would be subject to a binding declaration by the European partners on sufficiently large purchases of Russian gas.

German continuation, not revolution

However, from the perspective of the interests of Poland and Ukraine, even when looking critically at the above events, one cannot take offence at the reality. After hard work – which delayed the construction of Nord Stream 2 – we should analyze the promises made in the German-American statement and prepare for the future. To what extent can Ukraine rely on them? Can Poland play a role in changes taking place across our eastern border?

The main point of the statement is that Germany would establish a Green Fund for Ukraine amounting to a billion US dollars. Private entities will also invest in the fund, and it will include, among others, resources for the development of renewable energy sources (RES), hydrogen production and energy efficiency. In the beginning, Berlin is to contribute to the fund at least USD 175 million for the green transformation. Another 70 million US dollars coming from Germany is to be at the disposal of the envoy for German-Ukrainian energy projects appointed by Berlin. In addition, Germany will create a Resilience Package for Ukraine to strengthen the country’s energy security (e.g. through energy integration with the EU).

The above amounts, given Ukraine’s potential loss from gas transit of about USD 2 billion per year, unfortunately, are not very impressive. In addition, the money promised would be spent for clearly defined purposes, in line with the German energy policy and calculated to a large extent for the benefit of German companies.

All the more so since these demands have already been outlined in the joint declaration of the German-Ukrainian energy partnership of April last year.

The statement on NS2 also mentioned support for the development of the hydrogen economy in Ukraine. It is also nothing new. In Ukraine, Berlin sees a place favourable to producing green hydrogen from RES, which would later be exported by gas pipelines to Germany. In Ukraine, there are very favourable geographical conditions for the development of RES: a lot of available lands and adequate wind speeds for onshore wind farms, significant solar radiation in the south of the country, and the potential for offshore wind farms in the Black Sea. The Ukrainian government is also considering using its large gas resources (which can also be used to produce blue hydrogen) and some of the largest gas storage facilities in Europe.

2 months before the statement was issued, the German Minister of Economy Peter Altmaier pointed out that Germany wanted to invest USD 2 billion in international hydrogen projects. Ukraine reported that as much as €600 million from this pool could go to Kyiv. The advantage of Ukraine, compared to the countries of North Africa, which are also considered in this context, is its geographical proximity and already existing gas connections which could potentially be adapted to hydrogen transfer (retrofitting).

Impressive green trend is in danger

Kyiv officially supported the European Green Deal and in response to it announced the goal of achieving carbon neutrality by 2060. According to the IRENA report, Ukraine has the potential for 16 GW of economically viable wind power. As regards photovoltaics, the real capacity is estimated at 4 GW. Due to its vast, often undeveloped area, Ukraine also has the potential to produce energy from biomass, e.g., for heating.

The decarbonization in Ukraine, since independence, has been the fastest in the world – by 342 million tonnes of CO2 per year (61%) between 1990 and 2018. It should be noted, however, that it was largely due to the deindustrialization of the Ukrainian economy, and only for the last 10 years it was linked to the deliberate action related to the development of RES. At the end of last year, the share of RES in Ukraine’s energy mix was over 12%, and by 2035 Ukraine plans to double it at least. This increase is to be financed from the profit from the sale of cheap energy produced by nuclear and hydropower plants.

However, the further development of RES in Ukraine is very uncertain. There is not sufficient money in the whole Ukrainian energy sector; producers have liquidity problems. The situation was exacerbated by the COVID-19 pandemic, which lowered energy demand last year and affected the wealth of Ukrainians.

Nuclear power – the foundation of independence?

The future of renewable energy may depend on the further fate of the foundation of the Ukrainian electricity system – nuclear power. More than half of the electricity produced in Ukraine comes from this source – it is the 7th largest producer of nuclear energy in the world.

Here too, we can see a pro-Western course. As Paweł Kost points out, despite the slow resurgence of Russian influence in the nuclear sector, the hitherto diversification effort of Ukraine’s Energoatom and the reduction of the dependency on Russia in the supply of nuclear fuel have been successful.

This does not mean that the future of the nuclear sector as a foundation for the independence of Ukrainian energy is certain. Ukrainian reactors are getting older and there are no sufficient funds to modernize them. The scenario for the development of nuclear energy in Ukraine would be incompatible with the German policy and Kyiv could face resistance from this side. For years, Germany has been pushing for Ukraine’s energy transition to be in line with their Energiewende policy, which involves a shift away from nuclear power.

However, it is the use of nuclear energy that has a positive impact on the development of RES. It is from the profits from the cost-effective and stable nuclear energy in Ukraine that attractive conditions for the spread of photovoltaics and wind energy are funded.

The Americans are aware of this. During a visit of Volodymyr Zelensky to the White House on August 31, Westinghouse signed an agreement with the Ukrainian Energoatom on the construction of the AP1000 nuclear reactors in Ukraine.

This preliminary agreement can also be of benefit to Poland. By building our nuclear power industry, we can also promote the further development of this technology from the same partner in Ukraine. The nuclear partnership of Kyiv with the countries of the CEE can bring about cost reductions through economies of scale for this technology also in Poland.

EU’s carrot and stick

Faced with serious internal problems, Kyiv will have the difficult task of adapting to the increasingly ambitious climate policy of the EU. The package of proposals announced by Brussels on July 14 to amend Fit for 55 (about which I have recently written) calls for the introduction of the Carbon Border Adjustment Mechanism (CBAM) in the EU in 2023. The tax on CO2 emissions released during production is to be levied on imports of selected goods from third countries (i.e. steel, fertilizers and electricity), where the carbon tax does not exist or is significantly lower.

Although Ukraine already has a carbon tax in force, it is one of the lowest in the world. Such a low level will cause problems for the Ukrainian economy in the event of the finalization of the EU CBAM. The Ukrainian government estimates the costs of the CBAM for its domestic economy (e.g. exporting steel) to be as much as €4 billion per year.

The intention of this solution, in the opinion of EU officials, is probably to motivate Ukraine to act more quickly to decarbonize its economy, but with its current problems, if the CBAM is too rigorous and costly, it may have the opposite effect – it may worsen the decline of Ukraine’s already under-invested energy sector and cause a shortage of capital for new investments and infrastructure modernization.

However, there is also a very positive offer of Brussels for an energy partnership with Kyiv. In the EU hydrogen strategy, it is Ukraine that is mentioned as one of the priority partners in the green transformation using these technologies.

In addition, Ukraine can be an important source of raw materials for the EU industry. Most of the key rare metals (such as lithium, cobalt and neodymium) are mined in Ukraine. On July 13, the Prime Minister of Ukraine Denys Shmyhal and Vice-President of the EC Maroš Šefčovič signed a strategic partnership in this field.

China accounts for 98% of the supply of rare metals to the EU – even those extracted in other countries are first sent for refining to China. Rare metals are necessary for the production of, i.e., renewable energy and electric cars, so the EU’s large dependence on Beijing is a threat to the further sustainable development of green technologies – Ukraine can help the EU reduce them.

What is more, the synchronization of electrical systems can be the another crucial expression of the strengthened EU-Ukraine energy collaboration. In the U.S.-German statement on NS2 there was a promise that, in partnership with the EU and the U.S. Agency for International Development (USAID), Berlin will provide Ukraine with technical assistance in carrying out this integration.

Ukraine is planning to synchronize with the Continental Europe Synchronous Area (CESA) by 2023 to be able to freely trade electricity with the EU. This would be another major step of Ukraine toward energy independence from Russia. Imports of electricity from the West would also allow for faster decarbonization of the Ukrainian energy industry by reducing the coal reserve for RES. It could also be beneficial for Poland because of the possibility of importing energy from Ukrainian nuclear power plants producing cheap electricity.

However, many doubt the integration of electricity networks over the next 2 years – the Baltic states hope to achieve this goal by 2025. According to analysts, Georg Zachmann and Lukas Feldhaus, it will require investing more than one billion dollars in infrastructure modernization, including in building new connections with EU countries.

Energy bridge linking Poland to Ukraine

Yet another element of the potential energy partnership between Kyiv and Warsaw, after the connection of electricity systems and nuclear power, is natural gas.

At present, about 1/3 of primary energy consumption in Ukraine comes from coal, which is particularly important in the industry. The Ukrainian government is trying to achieve gas self-sufficiency thanks to its significant deposits, but it has been unsuccessful for years. In this respect, Polish companies are trying to help.

On August 30, PGNiG signed an agreement for the acquisition of a controlling interest of a company holding a concession for exploring and extracting hydrocarbons near the border with Poland. If the project is successful, gas from these deposits may flow already in 2023. The progressive liberalization of the gas market and privatization in the energy sector offers an opportunity for Polish companies to become even more involved in investments in Ukraine.

However, Ukraine’s gas self-sufficiency is still a long way to go. In the era after the completion of Nord Stream 2, Ukraine will need to increase gas imports from the West to ensure its security. This can be achieved by strengthening relations with the Three Seas group, and above all with Poland, which can supply raw material from the LNG terminal in Świnoujście, as well as from Norwegian deposits through the Baltic Pipe, which is nearing completion, or from the European pipeline network. This direction of development is also indicated by the Road Map of the Lublin Triangle, signed by Poland, Ukraine and Lithuania on February 7.

It is also worth returning to an investment that has been planned for a long time – the expansion of the Poland-Ukraine interconnector. In the face of the threats posed by the future cessation of Russian gas transit across the Ukrainian territory, the project is becoming attractive to Kyiv.

In addition, through the same pipelines, Poland can also engage in German hydrogen projects in Ukraine, especially in the reconstruction of gas pipelines transporting it between Ukraine and Germany.

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Poland should promote Ukraine’s approach to a diversified green transformation (as advocated by Maciej Zaniewicz), which targets not only RES but also nuclear power and gas (as a transitional fuel), which will ensure the stability of the system during the socially responsible and sustainable transformation. With the help of Western partners and the Polish government, our companies should already try to become involved in the energy transformation beyond our eastern border (e.g. in the transformation of coal facilities into gas ones and RES projects or German hydrogen projects in Ukraine, such as the reconstruction of gas pipelines). Let us not take offence at the reality – it is better to try to use it as much as we can.

Polish version available here.