Connecting Ukraine to Europe’s Electricity Grid

Big Political Words, Small Concrete Steps

Synchronisation of electricity grids has been on the agenda for some time. Nego­tiations began with the first memorandum of understanding (MoU) between the EU and Ukraine on energy cooperation, signed in 2005 and reconfirmed in 2016. The MoU aims at “full integration” of the EU and Ukrainian energy markets.

Moreover, Ukraine has been a member of the European Energy Community since 2011. As such, it is obliged to gradually adopt the energy-relevant parts of the EU’s acquis communautaire. Harmonisation and convergence of the energy markets is driv­ing the energy community process.

The process has implications for all neigh­bouring countries. Synchronisation with the European continental grid would require measures on the EU side; Ukraine would also have to decouple from the post-Soviet Integrated Power System/Unified Power System (IPS/UPS), specifically from Russia and Belarus. Last but not least, Mol­dova – along with Transnistria – would almost inevitably have to switch from the IPS/UPS to the continental grid as well due to its geographical location.

In June 2017, the grid operators of Ukraine (Ukrenergo) and Moldova (Mold­electrica) signed an agreement on their future connection to Europe’s grid with the European Network of Transmission System Operators for Electricity (ENTSO-E). The agreement sets out the technical steps that must be taken in order to complete their synchronisation with the continental grid. According to Ukrenergo, the synchronisa­tion is planned for 2023.

However, even though the agreement has initiated a process at the technical level, this does not automatically lead to direct and immediate synchronisation and market integration.

Reasons for Connecting to the European Grid

The connection of the Ukrainian grid to ENTSO-E’s grid is also a topic for discussion at the highest political level. During Ger­man Chancellor Merkel’s last visit to Kyiv in August 2021, even Ukrainian Prime Minis­ter Denys Shmyhal promoted the syn­chroni­sation of the Ukrainian with the con­ti­nent­al European grid.

Synchronisation is the most far-reaching form of connection, since the networks are not only interconnected but operated as a common system with synchronous phase sequence (that is, frequency and voltage). While this increases the possibilities for mutual support, it also increases the poten­tial for contagion in the event of problems.

Ukraine is pushing for a connection by 2023 and initially wanted to break away from the Russian IPS as early as winter 2021–2022. At first, the Ukrainian power grid will be operated in island mode, mean­ing that it will be isolated from all neigh­bours and controlled and balanced by itself. Only after several test runs will it be syn­chronised with the continental European grid.

There are four main reasons why Ukraine is striving for synchronisation. First, it would improve its energy security: its power grid is technically dependent on frequency maintenance, which is organised by the Russian grid operator. It thus depends on the Russian electricity system, even when there is no electricity trade between the two countries. In the short term, this depend­ence increases the cost of disconnecting from the Russian system, as the relevant capabilities would first need to be built up in Ukraine. In the long term, however, Ukraine’s connection to the continental European grid would deprive Moscow of the opportunity to use this dependence to exert political influence in Kyiv.

Second, Ukraine could benefit from lower electricity production costs. The con­nection to continental Europe would give foreign electricity suppliers access to the Ukrainian electricity market. The resulting competitive pressure would create the conditions for competitive pricing in the cur­rently highly concentrated and over-regu­lated Ukrainian electricity market. A solvent East-Central European electricity market would not only break up the system of monopoly pricing, but also send market-based investment signals in the longer term. Moreover, connectivity would dampen electricity price effects associated with the Ukrainian coal phase-out. If cheaper im­ports from the EU replaced elec­tricity from Ukrainian coal-fired power plants at certain times, the impact on electricity prices of the phase-out (which the EU is in favour of) could be reduced to a politically acceptable level, according to a study by Low Carbon Ukraine. However, electricity prices in neigh­bouring countries would also increase slightly at these times.

Third, the connection could also directly promote the reduction of greenhouse gas emissions – but only if Ukraine simulta­neously introduces a significant CO₂ tax. In that case, synchronisation could reduce CO₂ emissions from coal- and gas-fired power plants in Eastern Europe (Poland, Romania, Slovakia, Hungary and Ukraine) by nearly one-fifth annually. This corresponds to about 14 megatons of CO₂ or about 2 per­cent of Germany’s annual emissions. Among other things, the savings would come from countries being able to sell sur­plus electricity from renewables to their neighbours instead of shutting down renew­able energy sources.

Fourth, Ukraine generally wishes for closer ties with the EU. The synchronisation of electricity systems and the resulting pos­sible integration of electricity markets would entail additional economic, as well as institutional, interdependence between the EU and Ukraine, which would be dif­fi­cult to sever. This would accompany regu­latory integration into the Energy Community, which obliges Ukraine to implement energy-related EU directives.

The EU Commission’s ambition to make Europe the first climate-neutral continent by 2050 and the implementation of the Green Deal are also a strong argument from the EU’s perspective in favour of both syn­chronisation and extensive integration. Ukraine could become one of the key part­ners for the German economy as well, which is dependent on energy imports. Wind, solar, biomass, water and large areas of land are abundant, making Ukraine an attractive source of green electricity and hydrogen.

The theoretical potential is huge, but the Ukrainian electricity system is currently barely able to generate enough electricity for its own needs. The level of investment is low, and the electricity market is characterised by oligopolies and political influence. Consequently, the country can only be an electricity exporter and energy supplier for Germany if it rapidly expands its renewable capacity, and the Ukrainian market gains stability and competitiveness through Euro­pean regulation and demand. In the course of this, Ukraine could also develop new energy sources for itself.

Major Challenges

Scope and Consequences

In return for the US restraint in not im­posing sanctions on Nord Stream 2, Ger­many has expressed its willingness to Washington to support Ukraine. The US and Ukraine referred to Ukraine’s integration into the European network in their Charter on Strategic Partnership. The EU also considers it a priority.

While ENTSO-E will have to address the remaining technical operational challenges, because of their political implications they should not be left to a technical body alone. Synchronous electricity grids are “commu­ni­ties of solidarity and fate” in which all par­ties share benefits and risks. This requires a high degree of trust in both reliable tech­nical operation and largely stable and depend­able cooperation in the future. This is because electricity grids are managed at three levels: a) at the level of technical opera­tion and infrastructure, b) at the level of political regulation, and c) at the trading and market level.

Unlike the Baltic States, with which a synchronisation process is also underway, Ukraine and Moldova are not members of the EU, nor will they become so in the fore­seeable future. Owing to the EU’s strong and well-defined institutions, all EU mem­ber states have mostly equal control over the electricity system. As non-EU members, Ukraine and Moldova will be largely excluded from this.

However, in the case of synchronisation of the Ukrainian grid with the continental grid, the country would also need to be more involved at the non-technical gov­ern­ance levels. Electricity market integration means not only physical interconnectivity, but also interconnected trading. The regu­latory framework underlying synchronisation does take into account the interoper­ability of systems and cross-border lines, as well as their technical integrity and secu­rity. Beyond this technical operational level, however, there are clear gradations between the EU and its neighbours in terms of inter­connection and trade contacts, regulation and power projection. The Energy Community has been the instrument to advance physical and market integration. But the common body of law as well as network codes (i.e. the rules for network operation) have become increasingly sophisticated. As a result, the obstacles to integration are also getting higher. For the electricity system to be technically and operatively functional, the motto is “Rules before Joules”: first im­plement the rules, then put the power lines into operation. This also applies to the inte­gration of the markets.

Conclusions

With the joint German-US declaration, Berlin has assumed a key role in connecting Ukraine. Because of the scope of this project, however, the new German govern­ment will have to act in consultation with Brussels and the other member states, and work towards a consensus.

Theoretically, there are three options for action for Berlin, Brussels and Kyiv:

• Merely let the technical process run its course. If there is no clear political leadership, most likely the process will not be concluded, even if none of the parties openly opposes synchronisation. This would put Ukraine in a difficult position with regard to green energy investments. Not only would it contradict the German-American declaration, but it would also bring the EU no closer to its geopolitical goal of making the con­tinent climate neutral.

• Restrict the connection to a direct cur­rent close coupling (B2B). This would leave Ukraine in “quasi-island” mode and would probably also involve higher costs in the long term.

• Define a clear roadmap that encompasses support for the technical and political pro­cesses. It would specify which rules apply, which power lines should be built and which investments should be made. In this way, technical risks could be managed and political costs calculated. This would be a prerequisite for a sustainable solution.

The EU has to make political decisions about the reforms that Ukraine should implement, in terms of regulation as well as trading and markets. Berlin will have to moderate and prepare the decision-making process. Depending on how the process is implemented, Ukraine will either create confidence that it wants to join the EU in the long term or expectations of future upheavals and disintegration tendencies (e.g. in the event of a change of government in Ukraine). In any case, synchronisation cannot simply be reversed.

Two controversial issues need to be kept in mind here. The EU’s carbon border ad­just­ment mechanism will constrain free trade of electricity and increase the price of electricity imports. There is also the threat of tensions with Belarus and Russia. In the worst-case scenario, the competition over electricity integration could lead to a con­frontation between electricity blocs. This is why Germany should act as a mediator between Russia and Ukraine.

The following points will require a political decision:

First, whether the connection is to be realised only via B2B or whether the EU wants to implement real synchronisation via alternating current (AC) lines.

Second, when – in 2023, 2026 or later – coupling or synchronisation should take place. A gradual sequencing in different phases could also be considered.

Third, which grid connections specifically are to be put into operation. For example, Ukraine’s neighbours might agree in prin­ciple to synchronisation but might not want a direct/powerful electricity connec­tion to their national grids.

Fourth, the role of the existing and future electricity mix for cross-border trade with the EU. Currently, nuclear and coal-derived power dominate but Ukraine has great potential for renewable energy.

In each case, unequivocal decisions are needed to establish a transparent political process. A clear sequence would make it pos­sible to identify milestones in the pro­cess (in terms of time and quality), for check­ing whether conditions have been met.

If synchronisation is poorly prepared tech­nically, economically and politically, and if no-one takes political responsibility, this could lead to nasty surprises for both sides.