Publication

Ukraine`s perspective on hydrogen is not yet defined but optimistic

09/09/2021

Tetiana Revutska

Senior Associate, Attorney-at-Law

Energy and Natural Resources,
PPP and Procurement,
Real Estate and Construction,
Construction and Development,
Renewables

World's rising interest in hydrogen has touched Ukraine as well. Ukraine's government reports on its plans to attract investment into production, transportation, use and storage of hydrogen. 

Ukraine has potential to become a lucrative destination for hydrogen producers due to its resources that allow to produce different types of hydrogen, and geographical position granting access to European markets. Public statements of the EU and in particular, Germany, to support development of the industry in Ukraine both with policy and funding, also add room for optimism. Becoming an important hydrogen node may help Ukraine to mitigate its energy security dangers and to deliver on its duty to reduce greenhouse gas emissions as well.   

Yet Ukraine still lacks regulation regarding production and transportation of hydrogen, including transportation to foreign markets. This article looks into what are Ukraine's policy perspectives when it comes to hydrogen production and transportation, and what further developments are to be expected in the framework.

In the EU Hydrogen strategy, Ukraine was named one of the EU priority partners in the development of hydrogen due to its natural resources and physical interconnections points. This has invigorated the stakeholders' discussions on how Ukraine can befit this partnership, especially as a home for producers of green hydrogen using renewable energy.

Resources

In 2020, Ukraine's electric energy mix was 51.2% nuclear, 35.2% fossil fuels, 7.3% renewable energy, 5.1% of energy was produced by large hydro stations and 1.2% – by prosumers. 

Although the renewables' share is not large, back in 2019 it was half the size – 3.6%. The growth was achieved due to the feed-in tariff system, which offered lucrative price for the green energy sold to the guaranteed buyer.

The feed-in tariff system was replaced with the auctions system in 2020, and most feed-in tariff rates were reduced in mid-2020 due to retroactive decrease. 

These not quite consistent policy stimuli create a sort of double-edged sword situation when it comes to further investing in renewables. On one hand, in its Energy Strategy Ukraine has announced its goal to reach 25% of renewable and hydro energy in its electricity pie through 2035. The feed-in tariff, even after its retroactive decrease, is still reported as profitable, and the green auctions may start any time soon and offer a market price as well. On the other hand, the auctions were expected to start in 2019, which still did not happen. The guaranteed buyer is steadily late on its feed-in tariff payments for current year and have not paid for the renewable energy produced in May, June, and July 2020. Thus, while counting on state support, the green producers also look for alternative markets to sell their green energy.

Creating new markets for renewable energy, including for producing green hydrogen, will be beneficial to the electricity transmission system. The wind and solar plants were stopped 20 times in 2020, while only 3 times in 2019, which happens due to extra amounts of solar energy being produced during less demand-intensive day hours. There were a few stops this year as well. Ukraine's energy system does not have many effective ways to balance renewables' excessive production. Some pilot energy storage facilities are now being developed, though they are not enough and still lack necessary regulatory framework to function properly.

Thus, supplying the renewable energy to green hydrogen producers, or upgrading the renewable energy plants so that they produce hydrogen may be a viable alternative to relying on the state renewable energy support programmes.

Transportation

When it comes to transportation of hydrogen, the Ukraine's gas transmission system is in limelight. It's exit capacity is 146 billion cubic meters per year, and it has exit interconnection points with Poland, Slovakia, Hungary, Romania, and Moldova.

The gas transmission system is purposed for natural gas only and will require retrofitting to be able to transport a gas-hydrogen blend, let alone pure hydrogen. Although undesirable per the transmission system operator's management, the need to do that may arise due to the risk of Nord Stream 2 being finished and starting to function. In this case, the Ukraine's transmission system operator will lose a chunk of its revenue necessary for the upkeep and maintenance of the system and may have to retire parts of its infrastructure.

And also, the repurposing approach seems viable only if there is significant production of hydrogen in Ukraine to be transported to its western neighbouring countries. 

Ukraine's policy on hydrogen

Ukraine has not yet introduced any specific laws or regulations on hydrogen production, transportation, or use. However, some of the necessary changes were announced or presented for the public discussion; and we may also predict some of the prospective changes based on effective legal framework or lack of it.

The first expected change is letting the renewable energy producers sell their green energy on the open market. Currently, the renewable energy producers who receive feed-in tariff sell the produced energy to the guaranteed buyer. They may exit the guaranteed buyer's balancing group and sell the energy on the open market, yet the prices there are substantially lower than the feed-in tariff rates. 

In late August this year, Ukraine's Ministry of Energy has finally presented its view on the feed-in premium scheme in a draft law. It will allow the renewable energy producers to sell the energy on the open market and to receive a premium on top of the market price based on a contract for difference with the guaranteed buyer. The premium will be sliding and will be calculated as a difference between the feed-in tariff set for that producer and the day-ahead price or the bilateral agreement auction price for the energy. 

This will allow the renewable energy producers to sell their energy to hydrogen producers and to still enjoy the financial benefits of the feed-in tariff and will relieve some of the financial pressure off of the guaranteed buyer, that currently cannot keep up with the feed-in tariff payments. 

The second expected change is allowing the hydrogen to be introduced into and transported using the gas transmission system. It is yet unclear what will be the regulatory change, and whether the laws will only allow to repurpose the system to create the dedicated hydrogen infrastructure or will allow the existing system to transport natural gas enriched with hydrogen as well. It is expected that the planned approaches will be listed in the Ukrainian hydrogen strategy, which is now being developed with the support of the World Bank.

The third expected change is creation of the market conditions for trading hydrogen and creating policy incentives for higher hydrogen demand. Apart from exporting hydrogen to its neighbours, Ukraine may also simulate its domestic use in production of ammonia, steel, which is one of Ukraine's top exporting goods, and in transportation industry. The need to adapt to Europe's CBAM initiatives may also influence use of hydrogen whenever appropriate, although the Ukrainian government did not yet signal how it intends to adapt its greenhouse gas emissions policies to the European ones.

Anticipated developments

There are initiatives that hint further development of hydrogen projects in Ukraine.

For example, in Joint Statement of the United States and Germany on Support for Ukraine published on 21 July 2021, Germany committed to establish and administer an at least $175 million Green Fund for Ukraine to support Ukraine's energy transition, energy efficiency, and energy security. The fund, among other things, shall promote the use of renewable energy and facilitate the development of hydrogen.

We may expect that the feed-in premium scheme will be adopted regardless of the development of the hydrogen industry in Ukraine, since it will benefit all renewable energy produces as well as the guaranteed buyer. 

Changes regarding modernizing the infrastructure may be expected to happen later on after the Ukrainian hydrogen strategy is developed and adopted. This also applies to any new framework regulating the hydrogen markets. It is quite possible that the Ukrainian legislators will closely monitor the hydrogen regulatory changes and market developments in Europe to then transpose them into Ukrainian framework, like it happened when the natural gas framework was developed. 

Currently, absence of legal framework does not preclude the investors from doing pilot projects involving production of hydrogen. The investors should investors first asses the exact project they are contemplating and opt for instruments that offer more investment protection, given that the Ukrainian policy here will be new and lacks predictability. Ukraine has recently introduced special investment agreements for projects with large amounts of investment, that may be tailored for the hydrogen project as well. A special investment agreement may provide for laws stabilization, option to choose a foreign governing law for the agreement and to resolve disputes in international arbitration instead of national courts. 

To conclude, we may expect some growth in interest in hydrogen projects in Ukraine. The interest may be driven more by the prospects of exporting hydrogen to the EU, although this may change in course of future policy decisions boosting domestic consumption. The hydrogen legal framework is not in place at this point yet will be developed in the future starting with facilitation of the use of renewable energy, and proceeding with the repurposing of natural gas transmission system and creating additional market incentives. 
 

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