What is the state of Ukraine’s energy system after missile strikes

After numerous Russian missile attacks on the Ukrainian energy infrastructure, the situation with energy supply to the population and industry is extremely complicated. The situation requires quick and effective measures and extremely high coordination of efforts of the state, business and international partners. Before the start of the heating season, Ukraine is unlikely to restore at least half of the damaged generation and significantly reduce the deficit in the energy system, so businesses should take care of their own energy security, mainly by installing gas piston and gas turbine power plants.

Current situation

Since the end of March, Russia has launched seven large-scale missile and drone strikes on Ukrainian energy facilities. While last year the main targets were both 750 kV and 330 kV substations and individual thermal power plants, for the past three months the strikes have been carried out against virtually all generating shunting facilities (TPPs and HPPs).

These attacks have resulted in the loss of approximately 9 GW of generation and losses of more than $1 billion. The available generating capacity of the Ukrainian power system has been reduced to 11.5 GW, with current consumption at 12-13 GW. According to KSE, as of May, direct damage from the destruction of power generation facilities amounted to $8.5 bln, while damage to trunk lines totaled $2.1 bln.

These data are given in the explanatory note to the Resolution of the Cabinet of Ministers of Ukraine No. 632 dated 31.05.2024 «On Amendments to the Resolution of the Cabinet of Ministers of Ukraine No. 483 dated 05.06.2019».

The current situation in the energy system is more complicated than before due to the scale and nature of losses. To give an example: now about 85-90% of thermal generation and 45% of Ukrhydroenergo’s generation are damaged or destroyed. After shelling in the winter of 2022-2023, DTEK restored 10 TPP units, spending more than $120 mln. Now the restoration needs for thermal generation alone have already exceeded $350 mln.

Possible solutions

The situation in the energy sector requires quick and effective solutions from the government and business. There are options for solving the problem of ensuring stable power supply.

1. Introduction of distributed generation.

The main advantages of introducing distributed generation – gas piston and gas turbine power plants – are greater flexibility and a less convenient target compared to large stationary power facilities.

Ukrainian authorities offer such emergency solutions:

• Bills have been submitted to parliament about the abolition of VAT and import duty on imports of power equipment and components.
• Under the Affordable Loans 5-7-9% program, companies will be able to obtain soft loans of up to UAH 150 million for 10 years for distributed generation projects, as well as soft loans for installation of renewable energy sources for households and businesses.
  In addition, some banks have targeted lending programs for the purchase of energy equipment.
• Reduction of the terms for issuing and approving technical specifications for connection of distributed generation facilities to power grids, reduction of the number of required documents.

These solutions will partially allow businesses to provide themselves with alternative sources of energy supply in the perspective of 1-2 years. However, the implementation of distributed generation is hampered by the problem of timing and the need for own financing.

In general, the decision on large-scale implementation of distributed generation is very late. The military risks for the centralized energy system were clear from the very beginning of hostilities; in late 2022, the authorities spoke a lot about the need to decentralize the energy system, but no significant progress was made then.

2. Increased import capabilities.

Ukraine constantly imports electricity from Romania, Slovakia, Poland, Hungary and Moldova. In May, Ukraine imported a record volume of 448,000 MWh.

Electricity imports are probably the only guarantee of a stable energy supply for Ukrainian business, which is not related to critical infrastructure and defense industry. The planned restrictions do not apply to industrial consumers who buy imported electricity. According to D. Trading, in May, businesses imported under direct contracts 30-35% of its total volume or up to 300-500 MW at certain hours of all electricity supplied from Europe.

However, at the end of May, the Cabinet of Ministers revised the share of imported electricity consumption, which allows to work without blackouts – raising it to 80% from 30%. This decision was made without prior discussion with the business community, although it will have significant consequences for them. According to Anatoliy Kinakh, president of the USPP, the companies that will not be able to import electricity will not be protected from blackouts and will face a loss of competitiveness, as the European price of electricity is significantly higher than the domestic one. On the other hand, the decrease in competitiveness and financial stability due to the higher price of European electricity may also hit those who will be able to pay for imports.

«This may lead to an artificial, even speculative increase in demand for imported electricity, the price of which can rise to any level. But to avoid a shutdown, only those companies that have minimal electricity costs in the cost structure of their products will be able to pay for it,» noted Interpipe, where electricity takes up almost 25% of the cost of production of steel billets.

To increase the scale of imports, there is a limit of 1.7 GW set according to the ENTSO-E (European Network of Transmission System Operators for Electricity) regulation. The solution to the problem lies in increasing the limit to 2.2-2.3 GW and expanding the technical capacity of European suppliers. This is not quite easy to do technically, and a political decision is needed from the Ukrainian side to start with.

3. Implementation of renewable energy projects (RES).

The development of RES projects has its own peculiarities:

1. Construction timeframe. On average, it takes up to a year to build an industrial power plant, install it and put it into operation. Construction and installation time, as well as capital expenditures for wind turbines are even higher than in the case of SPP.
2. High capital intensity. In addition to the SPP or WPP directly, expensive energy storage systems are needed.
3. Insufficient capacity to fully meet the needs of production. For example, Ferrexpo’s first SPP covered only 1% of the company’s electricity needs.
4. Variability of generation. RES facilities generate energy only in sunny weather and in the presence of wind. In winter, SPPs produce a maximum of 10% of the amount of electricity they generate in summer.

Therefore, the installation of renewable energy sources is an additional source of energy supply for large-scale production, even taking into account the need to install an industrial energy storage system. For example, Ferrexpo plans to build a new solar power plant with a capacity of 10.8 MW in addition to the existing 5 MW plant.

4. Non-standard solutions.

Odessa authorities are negotiating with Turkey over the provision of floating power plants with a capacity of 250 MW. They want to use them to supply energy to the region by placing them in the ports of Odessa, Yuzhny and Izmail. Similar negotiations were already held in 2022 and 2023, when there were problems with power supply in the region. Then and now everything rests on the issue of security of these ships, which is objectively difficult to guarantee against the background of constant missile and drone attacks in the region. Odessa authorities believe that the very belonging of the ships to Turkey is a guarantee of safety. Besides, in order to realize this idea, it is necessary to build the necessary energy infrastructure in the ports, through which these ships could transfer the generated electricity to consumers.

Issue price

The authorities estimate the financial needs to restore the energy system for winter at $1-1.5bn. Funds for this purpose can be found in the Ukrainian Energy Support Fund. About €500m has already been collected, the EBRD is accumulating €300m to support Ukraine’s energy sector, and additional target contributions for energy recovery are made by Western countries (the USA, France, Germany, Great Britain, Norway).

An additional source of funds for the restoration of generation may come from the increase in tariffs.

• on May 31, the maximum price caps for industrial consumers in the day-ahead and intra-day markets were raised by 20-130%, and in the balancing market by 21-106%;
• from June 1, the electricity tariff for households was increased by 64% – up to UAH 4.32/kWh (including VAT).

The last decision was long overdue, as the price of electricity for households was much lower than the cost of production. Such a decision should increase the liquidity of the energy market and bring about UAH 50 bln of additional revenues on an annualized basis. Another question is how these funds will be spent – they will go to Energoatom (85%) and Ukrhydroenergo (15%).

Energoatom, whose facilities were not affected by Russian missile attacks, while the state company itself is constantly in the epicenter of corruption scandals, wants to allocate more than UAH 40 billion for the completion of nuclear power plant units, which at best will be commissioned in 5-10 years. The funds from the energy tariff increase want to “pour” into the concrete structures of future NPP units, while this money is needed «here and now» to restore damaged generation and develop distributed energy capacities.

In turn, the large-scale development of distributed generation depends largely on the efforts and financing of Ukrainian business. For the needs of industry, gas-piston (with an average capacity of up to 10 MW) and gas-turbine units (with an average capacity of 20 MW) are most suitable.

According to Oleksandr Kharchenko, Director of the Energy Research Center, the cost of purchase and installation of a gas piston plant is €1-1.1 mln/MW, while the cost of a gas turbine plant is €800 thousand/MW. The payback period for gas piston units is 3-6 years, for gas turbine units – 5-8 years.

Lack of time and solutions

It will be difficult to restore generating capacity now. Apart from the issue of financing, everything is hindered by the lack of time resources. Ukraine needs to work very quickly in two directions at the same time.

1. Restoration of damaged TPP and HPP units (where possible). According to some estimates, by winter Ukraine will be able to restore up to 2 GW of thermal generation and 1 GW of HPP capacity. This is approximately the same amount that Ukraine was able to restore last year.
2. Building up distributed generation capacity. Volodymyr Zelensky said that there is a plan to build up to 1 GW of distributed capacity as early as 2024 and 4 GW in the coming years. Ukrenergo estimates that Ukraine’s urgent need is 5-6 GW of new shunting capacity.

However, neither the state with the help of international partners, nor Ukrainian business will have time to launch either 1 GW or even 500 MW of new gas generating capacities by winter. By the beginning of the heating season it will be possible to launch only a part of gas piston plants, which are already at the final stages of design and installation. According to the estimates of Oleksiy Kucherenko, MP of Ukraine, former Minister of Housing and Utilities, it is realistic to launch 100 to 250 MW of capacities by the end of the year. However, this is not enough to quickly solve the problem of power shortages.

The main obstacle is “natural” technical procedures. Designing, ordering of equipment and installation of the already obtained equipment take up to half a year and longer on average, where the longest stage is its production. Gas piston units under the best of circumstances can be installed in a few months (small capacity) or half a year, they are quite simple to install and maintain – manufacturers sell ready-made units the size of a standard container. In turn, gas turbine power is much more complicated in design and installation, their start-up period takes from 12 to 18 months. There is practically no experience of their use in Ukraine.

«From idea to realization (project calculation, manufacturing or purchase of equipment, connection, commissioning) gas piston or gas turbine stations need at least 70 weeks, which is a year and a half. If we can unite the efforts of business and communities, as well as significantly simplify the regulation and permitting system, reduce the cost of capital, we will be able to get new generation by the beginning of the heating season 2025 – 2026», says Elena Zerkal, ex-advisor to the Minister of Energy.

In addition, Western producers do not have in their warehouses the amount of equipment that Ukraine needs. It means that they have to order it additionally and wait for production for about 6 months and/or look for second-hand units all over the world (they will cost on average half as much as new ones).

Given the critical situation, it is now necessary to create an emergency headquarters to plan and coordinate the efforts of central and local authorities, as well as private companies.

«The government should create a clear comprehensive plan to prepare the functioning of our economy and society under the current conditions. The plan should provide for coordination of the work of all parties, be targeted – covering every region and economically active enterprise, especially such energy-intensive industries as the steel sector, chemical industry, etc. Each region, each individual enterprise should be prepared for the negative scenario by an individual plan to the maximum extent possible», says Anatoliy Kinakh.

Before the beginning of the winter season Ukraine will not have time to restore all the damaged generation and introduce new distributed capacities to replace the destroyed ones. It is expected that due to the deficit in the energy system, restrictions for consumers will be applied for a long time. At present, this is due to the fact that HPPs traditionally reduce their output in summer, and several nuclear power plant units are under repair. Even if by winter all 9 NPP power units will be operating, the deficit in the energy system will remain significant due to the growth of power consumption in the cold period. According to various estimates, the deficit may amount to 3-5 GW.

Given the fact that the aggressor will not stop shelling, it is difficult to predict what the real situation in the energy system will be before the start of the heating season. In addition to the energy sector, one should also take into account the risks associated with the continued shelling of UGS infrastructure.