What Should Ukraine’s Postwar Energy Policy Be Like?

Ukraine’s energy sector is among those that have suffered the most because of the war. The energy infrastructure is commonly the target of Russian air attacks, and as such strikes continue, the damage mounts daily and will not magically disappear with the war’s end. On the other hand, Ukrainian energy assets were deeply depreciated and obsolete even before the full-scale invasion, and the Ukrainian economy was among the most energy-hungry globally.

The lack of market approaches to energy sector management, half-hearted reforms, the drag of populism, a nontransparent and unpredictable energy policy, and an unattractive business environment created barriers to investment in the sector and, accordingly, its modernization. Today, a window of opportunity is opening for Ukraine: a chance to build a modern, efficient, low-carbon energy sector integrated into European energy markets. Such an energy sector could form the basis for the country's economic development. But seizing this opportunity effectively will require a U-turn in the energy policy and avoiding mistakes made in the past.

During the war, while the infrastructure remains under attack on a daily or weekly basis, it is impossible to forecast accurate scenarios of the development of the energy sector of Ukraine or to settle on specific projects to renovate the energy sector. We do not know what the magnitude and character of the damage to the energy sector will be at the war’s end, or the size of the postwar economy and population, both key determinants of energy consumption. It is also unclear how Ukraine will be integrated into the global economy and the European energy system.

Nevertheless, it is possible to sketch out some of the options for the Ukrainian economy and energy sector in the future. The underlying goal of this visioning exercise is to figure out the lineaments of an energy policy central to rebuilding Ukraine’s economy and developing its energy sector along new lines.

Requirements for a Postwar Energy Policy

The basic requirements for a successful postwar energy policy are relatively clear.  

First is the necessity of European integration. Ukraine is located between the Western world and Russia, which soon will become China’s energy appendage, with the latter’s policy of expansionism (in the search for new markets and cheap resources) and a desire for dominance controlling its economic behavior. For obvious reasons, a tighter energy linkage with Russia or China is unsuitable for Ukraine—hence the need for a Western orientation.

Second is a renewed focus on renewable energy sources. The transition to nonfossil fuels is already underway in major economies. Ukraine’s embrace of renewable sources would be expected to become a powerful lever geopolitically and in international competition.

Third is transparent market pricing. An effective and modern energy sector cannot be constructed in the absence of market prices and transparent policies Their absence was always the Achilles' heel in Ukraine’s energy policy.

Fourth is an environment conducive to foreign investment in Ukraine. Ukraine cannot integrate into the EU without in-depth reforms that are not simply cosmetic and the introduction of European energy regulation. These reforms must stipulate transparency and predictability of state policy (rather than manual control and overregulation), which are among the factors foundational to creating an attractive environment for investing in the energy sector. Without such investment, recovery and modernization of the energy sector will be impossible.

Avoiding the Problems of the Past

The development of a postwar plan to rebuild and modernize the energy sector should face squarely the key problems that afflicted the sector in the past and led to its stagnation during Ukraine’s years of independence. Only by acknowledging them and their persistent influence can similar problems be avoided in the future.

1. Paternalism and populism. Both factors have significantly impeded energy sector development in Ukraine. Both created barriers to introducing market energy prices, significantly limiting the state’s ability to attract investment and thwarting the modernization of energy assets. There was a sort of unfortunate consensus in the past whereby citizens demanded low tariffs from the government (always considering household energy supplies overpriced and therefore never trusting the government) and the government used the tariff problem as a bargaining chip in political contests.

Subsidized low prices, however, did not contribute to energy efficiency and energy saving. And hidden subsidies only opened up opportunities for corrupt behaviors, including corruption at an international level, which ultimately increased dependence on Russian energy supplies.

2. Nontransparent rent-seeking by narrow groups. Opaque schemes and corruption, on the part of the oligarchy in particular, became possible owing to the lack of transparency against the favorable background created by the populist energy policy.

3. The hypertrophied role of the state. On the one hand, the hypertrophied role of the state was a Soviet legacy; on the other, it was fertilized by populist slogans about the need for low energy prices for households. This factor ultimately resulted in a critically high state ownership of energy assets and excessive overregulation of the energy markets. The state's role as an energy assets owner was extremely high in Ukraine. Efficiency seldom was the result.

4. Lack of primacy of the country’s energy security over the interests of individual actors. Despite the many opportunities available in the past to improve energy self-sufficiency and strengthen energy security, the interests of individual players or the country's poorly conceived energy policy led to increased import dependence or threats to national security from the agreements of individual players. Such agreements outside state control meant that Ukraine found itself deeply dependent on petrol supplies from Russia and Belarus just before the invasion, for example.

5. Problems of strategic planning. Energy sector development targets as defined in strategic documents were mostly not fulfilled or were fulfilled only with significant deviations. Sometimes the goals set out in different strategic documents were at odds with one another.

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The Ukrainian government expects energy to become one of the drivers of future economic development. That is possible, but only if the state’s energy policy is not riddled with the same sort of mistakes as were made in the past. It will also be challenging to persuade people that new approaches, such as appropriate pricing, are among the necessary conditions for the economy to survive.

The opinions expressed in this article are those solely of the author and do not reflect the views of the Kennan Institute.