Chapter 2
GENERAL OVERVIEW
OF ENERGY SUPPLY CONDITIONS AND ENERGY SECURITY PROVISIONS IN UKRAINE
The Ukrainian energy securing governmental policy
Upon gaining independence, Ukraine has faced a number of new challenges and targets, and amongst those was the energy security. Being a part of the USSR, the problem of guaranteeing reliable energy supplies of energy carriers has not been vital, and its drastic appearance after 1991 showed the absence of experience related to the development and implementation of corresponding energy-security policies and of understanding the problem depth and threats due to neglecting these aspects.

As a consequence, already in 1993 the country has faced tensions in relations with the major supplier of energy resources – the Russian Federation. However, the fact of occurrence and demonstration of threats to the national security with regard to securing the energy supply reliability has not caused comprehensive consciousness of these and has neither shaped the state's position to build up equal partnership relations with foreign partners with regard to energy relations and activities aimed at protecting national interests. During the following years, the country has not created a balanced internal and foreign energy policy strategy, which would meet national interests and contribute to decreasing the dependence on the foreign energy resources' suppliers. Actually, all activities in the energy security sphere over the years of independence were concentrated on eliminating critical and short-term threats, which existed for electricity supplies, and in separate cases – on energy independence (in particular, in relation to diversifying energy supplies from the Russian Federation). Quite often, private and corporate interests have dominated over the nationwide ones. Current situation is the consequence of that: the country's energy branch is specific for the high level of its moral and physical deterioration, non-transparency, and the international position of the country with regard to its energy relations is acutely descending. Therefore, the recently started process of reforming the energy sector, the ultimate goal of which is to enhance the energy security, require quite urgent solutions for a wide range of problems and securing against critical threats of reliable energy supplies in the country.

The coordination level between governmental authorities, whose activities are related to energy security, and major economic entities responsible for the energy resources supply and distribution remains on an extremely unsatisfactory level, and attempts of elaborating such legislative mechanism are practically absent. Systematic activities related to the development and implementation of guaranteeing the Ukrainian energy security policies and mechanisms was absent, which has finally resulted in accumulating critical scope of today's hazards, which require clear and coherent work with the goal of neutralizing those hazards in the nearest future, as well as to create a vision of the domestic energy industry's future and development of the energy security system for the coming years.

Extraction and supply
of natural gas
The Ukrainian gas sector is featured by several problems available on all phases of the resource deriving and consumption: the physical infrastructure is obsolete, current conditions slow-down investments and renewal of the corresponding infrastructure, low ability of population to pay and inefficient use of resources cause unsatisfactory payment discipline in settlements for resources consumed and unprofitability of many sector's participants. Despite this, the extraction, transportation and supply of natural gas sector are one of the most promising within the domestic energy industry and have a considerable potential for the country's energy security. A biggest European system of underground gas storage facilities is located in Ukraine (total volume of over 32 bio. m3), as well as one of the most powerful mainstream system for transporting this resource integrated to the corresponding systems of neighboring countries, and considerable, however comparatively hard-to-access natural gas deposits (over 900 bio. m3). But the full-scale use of mentioned domestic gas sector potential requires immediate implementation of several important changes. Currently, the sector is going through the transformation process, which is first of all conditioned by reform processes of the natural gas market in respect to current legislative changes. Nevertheless, the current speed of these processes does not meet requirements and threats, which are to be neutralized in the closest perspective.

Non-transparency during privatization of gas distribution assets caused creation of still non-transparent and relevantly non-competitive market. Only the responsible and absolutely transparent actions of monitoring and regulatory authorities are able to create the required conditions for the full-scale transformation of the gas market and the successful reforming of the gas sector within the domestic energy industry.

Liberalization of operational conditions for subsoil users, as well as demonstration of predictability and transparency of institutional environment for involving potential investors is a prerequisite for strengthening the national energy independence through enhancing the scope of energy resources' self-sufficiency. Unpredictability of the governmental policies in the energy sector and excessive regulation of procedures related to investors entering the gas extraction markets do not contribute to generating the feeling of confidence and security by potential investors, and therefore decrease the investment attractiveness of the branch, as well as negatively impact the potential of strengthening the energy independence and security of Ukraine.
Delivery and consumption
of power generating coal
in Ukraine
The coal mining section of Ukraine is the most vulnerable segment of the national energy industry. Over a long period, the coal mining industry was an important component of Ukrainian production sector and the energy industry, however over the past three decades, problems accumulated by the industry have exceeded the speed of the industry restructuring, modernization and development. Over the past three years, Ukraine has faced several qualitatively different problems and critical hazards related to military actions and occupation of separate Donbas regions, and as a consequence of this – interruptions in the coal supply, first of all of the anthracite group coal.

Currently, the major unsolved issues related to the coal supply are the anthracite coal sources, absence of the strategic vision of further role of the coal within the domestic energy industry system, unsolved financial problems (all state-owned mines are unprofitable), environmental (both the functioning and pits closure require series of expensive environmental efforts) and social (considerable share of population depends on the coal mining functioning) issues related to the coal industry functioning. Despite this, coal remains an extremely important resource in supporting the functioning of the domestic energy sector. Jointly with the necessity of considerable expenses and the need to solve social issues, this factor considerably complicates the process of reforming the Ukrainian coal mining sector. Moreover, the further faith of the industry to some extend depends amongst others on the current global tendency related to intentions of reducing the share of coal in the energy consumption, as well as on the prices for other energy resources, principally for gas.
Extraction and supply
of crude oil and
refining petroleum products
As of today, supply of oil products to Ukraine is an extremely vulnerable side of energy security: demands for these products are manly covered by imports, which cover about 85 % of the total consumption, and the structure of these supplies is uneven. During 2016, over 7.4 mil t of oil refining petroleum products have been imported to Ukraine, 80.3 % of which were imported from Belarus, 11.3 % - from Lithuania and other countries.

Over time, the degree of import dependence on separate suppliers of petroleum products' to Ukraine has aggravated. At that, there were no prerequisites for such dependence on external suppliers to arise in Ukraine at the moment of independence acquisition, as a powerful oil reprocessing park existed in the country. However petroleum products are currently refined only by Kremenchug oil refinery (owned by Ukrnafta PJSC, the total refining capacity is up to 18.6 mio.t. of crude oil per year) and by Shebelinka gas GPP (owned by the state company Ukrgazvydobyvannya, the annual capacity is up to 1 mio.t. of crude oil).

A powerful system of mainstream crude oil pipelines exists in Ukraine, the total length is 4 700 km, its transmission capacity is at the entrance is 114 mio.t / year, at the exit – 56.3 mio.t / year. However, only 15.22 mio.t of oil has been transported via oil pipelines, that is a considerable transit potential is not used properly.

Ukraine owns considerable potential resources in the oil extraction: as of the end of 2016, deposits of crude oil, including gas condensate amounted to 102.2 mio.t. However, due to the depletion of the developed deposits and obsolesce of production assets, extraction is decreasing each year. Thus, extraction of oil and gas condensate amounted to 2 236.6 th.t in 2016, and the annual decrease of the extraction volume is about 10% in average.
Nuclear industry of Ukraine
The nuclear energy industry sector with its 15 reactors operating at 4 NPP's, uranium mining and other facilities supporting reliable operation of the nuclear energy generating industry is one of the most developed amongst the European countries and has an extremely important role in the Ukrainian energy supply scheme, thus ensuring over the half of the electricity generation and covering over the half of all country's needs in electricity. By having generated 81 183.5 mil KWH of electricity out of 154 817.4 mil .KWH total volume generated by Ukrainian power plants in 2016, the sector demonstrates its importance for the energy security of the country. However, the strategic vision of the branch in the future power generation remains still undecided; thereupon, the future of other branches of the domestic energy industry will depend.

The operating lifecycles of nuclear power units are to be over soon, and therefore it is essential to determine the directions for the development of the nuclear fuel cycle in the short-term and the long-term outlook.

The major issues to be solved within the next years are decisions concerning the nuclear fuel supplies, as well as the prospects for using the domestic uranium raw materials, perspectives for the construction of new power units, solving the spent nuclear fuel management issues.

Until 2020, Ukraine has to finally consider its position concerning the development of the nuclear sector. The available infrastructure and human resources are definitely able to provide as operation of currently operating capacities, as well as their extension, and therefore the decision concerning the faith of the nuclear sector might be transferred in the level of political speculations. Provided these circumstances, the key issues are neutrality, professionalism, and pragmatism: one has to clearly understand what is standing behind the shutdown of each NPP power unit and which consequences it might have for the energy sector in general.

The issue of provisioning the nuclear fuel will be topical until 2055 as a minimum (lifetime of currently operating NPP power units will expire then), and Ukraine has to correspondingly further undertake activities related to diversification of the nuclear fuel supply and shall in parallel create prerequisites for the development of the own infrastructure related to the nuclear fuel manufacturing on its territory. And if the fabrication issue can be postponed until the final decision of the branch development is taken, the increase of the uranium ore output has to be transferred to the practical plane already during this year, allowing Ukraine to not only support own needs, but also to export raw materials.

Issue of the spent nuclear fuel management is also topical. The centralized spent nuclear fuel storage facility has to be fully operable by 2020. In parallel, an approach to the radioactive wastes disposal issue has to be determined.

Construction of the storage facility will not only be important step in decreasing the dependence on the Russian Federation, but will actually also enhance the energy security of the country through diversification of approaches to the spent nuclear fuel management.

The nuclear industry is the source of high-tech scientific researches and allows Ukraine to remain within the "club" of scientifically advanced countries. As long as the final decision concerning the branch's future is under consideration, Ukraine has to continue the researches of "atom for peace", to undertake the research developments in the nuclear and radiation spheres, which would provide potentially new and advanced knowledge's in this sphere and could contribute to the determining the branch future.
Renewable energy in Ukraine:
current state, priorities
and development problems
Despite international obligations, the national strategic schedules and the development programs of the renewable energy industry, as well as despite the considerable potential, this branch is developed in Ukraine at a rather slow pace.

The state-of-the-art of the renewable energy industry in Ukraine does not meet the current domestic and global challenges, such as: high Ukraine's dependence level on external suppliers of energy resources, the global warming and climate change threats etc. Thus, the renewable resources' share in the total generation of Ukrainian electricity remains on a critically low level, which was 1.25 in 2016. At that, the share of the renewable energy industry in the total primary energy domestic supply amounted to ca. 3 %, and in the final power consumption – ca. 2 %.

The technologically achievable potential of the renewable energy industry is about 100 Mio.t. of fuel equivalent (t.f.e.), whilst the energy consumption in Ukraine in 2015 was 128.7 mio.t.f.e. In 2016, the renewable energy sector increased due to the commissioning of 120.6 MW of new capacities (operating under the "green" tariff), which exceeded the previous year indication for over four times. As of today, the total installed capacity of the renewable energy branch's facilities amount to 1 117.7 MW, which allowed to provide 1.25 % of the total electricity generated during 2016. Above that, the biomass use as the traditional fuel source is also considerable, this practically being a decentralized heat supply based on the biomass use. Despite the increase of the renewable energy branch capacities, its pace is considerably behind the goal of 11% of the total energy consumption, which have been determined by The Energy Security Strengthening Plan for Ukraine until 2020. The reason for that is the absence of real political will, of the conceptual and strategic vision, the legal and technological support.

Power sector of Ukraine
The current condition of the electricity market in Ukraine is featured by high level of the market concentration, and its separate sectors are entirely managed by private and state-owned monopolists. This correspondingly influences negatively other market participants, the efficiency of their cooperative activities, as well as restricts possibilities for the new players to enter. This situation does not create proper conditions for investments and improvement of investment attractiveness of the sector. These are the factors, which have determined the expediency of the electricity market reforming and introduction of the new system of relations, which is finally aimed at liberalizing the market and to positively impact the behavior of the other market participants (primarily those involved in the electricity generation).

The domestic electricity generation system is related to similar systems as of eastern neighbors, as well as partially to the ENTSO-E system of western countries. Extending integration with the European electricity networks with the goal of extending the electricity export opportunities, as well as for balancing and enhancement of the domestic electricity supplies is an importation priority.

Successful reforms to be performed on the market and its operation according to new principles will mostly be determined by availability of the good will when accepting and implementing all the required new provisions, by rehabilitation of engineering capabilities of the power infrastructure, as well as by the transparency and responsible actions of certain regulatory authorities. Prevention of non-competitive actions of the energy industry market participants is only possible on the account of assuring the absolute transparency of the market members' and regulatory authorities' operations.

Efficient use of energy resources
and its determinants
The high energy intensity and inefficient use of energy resources and of energy generated of those represents one of the most acute problems of the domestic economy, which is the most energy-intensive in Europe and is listed according to this indicator as one of global anti-leaders. Bringing the energy intensity of the Ukrainian economy to the European level would allow decreasing the energy consumption volumes and the level of dependence on the external energy supplies. High level of the Ukrainian energy intensity is due to reasonable causes (when high energy consumption volumes are required and absolutely naturally-occurring), as well as caused by the subjective reasons (related to inefficient energy consumption and existence of considerable possibilities for its saving).

No less important and difficult task compared to the increase of economic effectiveness of energy carriers is the increase of environment efficiency of energy consumption, which is practically resulting in decreasing the environment pollution intensity in the process of extraction, reprocessing, transportation and consumption of energy carriers. Considering the level of pollution calculated per GDP unit, Ukraine is also taking the anti-rating's top-positions. Decrease of energy intensity and environment pollution resulting from consumption of energy carriers can be achieved by introducing the comprehensive set of measures as within the energy industry sphere, as well as in the national economic and social spheres. The goal of enhancing the environmental acceptability of power supply in Ukraine is of a long-term character, and concerned solutions require systematic approach (to be aimed at all energy industry sectors) and considerable investments.

Obligations to carry out activities aimed at decreasing the greenhouse gases emissions have been accepted by Ukraine in the frameworks of the Kyoto protocol and the Paris Agreement. However, considering low greenhouse gases emissions' volumes compared to the basic for mentioned agreements in 1990 due to the decrease of industrial production, implementation of obligations undertaken earlier is not critical and urgent, and can consequently be prolonged in time, being some advantage considering shortage of resources for the immediate implementation of corresponding measures.

Both objectives – the decrease of the economy energy consumption level and increase of environmental acceptability of power supply provisions – are long-term, in difference to the reforming and restructuring of separate sectors: considerable decrease of energy intensity could take up to 10 years, as being related to modernizing the production and housing stock of the country.

Enhancement of environmental efficiency of the energy consumption is closely related to the process of solving problems existing for the domestic energy industry.
Hazards existing for
Ukrainian energy security
problems related to solving these
Based on the overview of the Ukrainian energy sector functioning conditions, major internally and externally caused problems become understandable, those jeopardizing provisioning of the reliable power supply in Ukraine in the future and the energy security in general. Consideration of mentioned hazards has to be reflected in the national energy security restructuring lines and in creating the governmental management system related to the Ukrainian energy security sphere.

Based on major national energy-related interests, vital problems of the national energy sector, the following is considered as major internal threats for the reliable operation of the energy sector and the energy security of Ukraine:

  • considerable moral and physical obsolesce of fixed assets of the Ukrainian fuel and energy park, as well as their slow upgrade;
  • unsatisfactory financial situation and low investments into the fuel and energy sector, its modernization and rehabilitation, as well as absence of sufficient incentives for investing into the power sector;
  • low efficiency of the current system stimulating the Ukraine's energy self-sufficiency, and of the renewable energy industry in particular;
  • absence of an effective system to manage strategic stock of energy resources;
  • low efficiency of using energy resources and extremely high energy consumption of the economy in general;
  • inefficient and slow introduction of governmental policies related to energy preservation and enhancing the energy efficiency; population incompetence related to the energy-saving issue (especially of those consumers, whose energy consumption is subsidized), as well as governmental activities related to generating these; the imbalance in financing the energy saving programs and subsidizing the households' expenditures for energy supplies;
  • high level of the population's fuel poverty and uncompetitive high prices of energy resources for business entities;
  • insufficient transparency (including unpredictability in activities of certain authorities) in the branches of resources' extraction, supply and reprocessing; criminal and corrupt practices within the energy sector;
  • inefficiency of the governmental management system of the country's energy branch; imperfection of the governmental tax and tariff policies in the energy field;
  • absence of a single mechanism for coordinating activities aimed at reinforcing the energy independence and safety; absence of the required methodological and regulatory support to the energy independence and security;
  • absence of a consolidated development strategy for the national energy industry;
  • threats of terroristic acts, cyber-attacks, sabotages and other types of subversive activities directed against the energy generating facilities and energy infrastructure, and especially the nuclear industry facilities, as well as improper current protection level of such facilities;
  • loss of the research and development potential and low innovative activity within the energy industry;
  • high levels of the market concentration in the sphere of energy resources and energy use production, reprocessing and distribution;
  • conflict of interests between the private owners of fuel and energy park facilities and separate aspects of guaranteeing the energy and economical security of Ukraine;
  • threat to loosing control and assure the full-scale governmental regulation of separate strategically important facilities of the energy sector, which provide for the extraction and transportation of energy resources, accumulating and management of their strategic reserves.
Major external threats to the energy security of Ukraine are:

  • high energy dependence of Ukraine on external energy resources' suppliers and insufficient diversification level of their supply sources, and in this context – discriminative nature in actions of separate suppliers of external energy sources;
  • threat of irregular supplies and interruptions in supplies of energy resources from abroad;
  • external information attacks aimed at undermining the country's image of a reliable transit partner and in relation to maintaining the safety standards on the power industry facilities, first of all on nuclear facilities;
  • probability of deteriorating relations with partner countries in the energy industry sphere, threat of loosing the status of a critically important transit country of energy resources (of not only gas) and decrease of the interdependence level between Ukraine and the EU related to the energy potential;
  • absence of the single country's external policy in the energy supply sphere, which would meet the actual requirements of the energy security and would be agreed with major subjects of the energy security arrangements.
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