Energy as a strategic variable: generation, storage, transit and interconnection

Ukraine's energy position in 2010 and its position now are almost unrecognisable as the same country. Setting out the change is the clearest way to understand what energy means strategically here.

Where it started

In 2010 Ukraine imported the large majority of its gas from a single supplier, at a price set by negotiation rather than by a market, under contracts that were periodically renegotiated under pressure. It transited a very large volume of that supplier's gas to Europe, which was described as leverage and functioned more as a liability. Its electricity grid was synchronised with the russian and Belarusian systems. Household energy was priced far below cost, and the gap was a permanent fiscal problem.

Every element of that description has changed.

Gas

Direct purchases from the previous supplier stopped in 2015. Gas is now bought on European hubs and delivered through reverse flow from Slovakia, Hungary and Poland — a market purchase at a market price.

Domestic production covers a substantial share of consumption, and consumption itself has fallen dramatically since 2013 through a combination of price signals, efficiency investment and the loss of industrial demand.

And Ukraine holds the largest underground gas storage capacity in Europe, a Soviet-era asset built to buffer transit flows. That storage is a genuinely strategic asset for the European market as a whole, and its commercial use by foreign traders — storing summer gas for winter delivery under customs warehouse arrangements — is one of the more interesting underused opportunities in the region.

Electricity

The Ukrainian grid disconnected from the russian and Belarusian systems in February 2022, on what had been planned as a test, and synchronised with the European ENTSO-E network in March.

That was a technically demanding operation compressed from a multi-year programme into weeks, and it is the single most consequential energy decision in the country's history. It made electricity imports from the EU possible during the attacks on generation, and it made Ukrainian export capacity available to a European market that needs it.

What the war changed

Sustained attacks on generation and transmission from late 2022 destroyed or damaged a large share of thermal capacity and much of the high-voltage substation network.

The response, discussed at length elsewhere in this archive, was a rapid shift to distributed generation, imports and storage. The system that emerges from this period will be structurally different from the one that entered it — more decentralised, more privately owned, more interconnected with Europe.

The strategic reading

Three points.

Transit revenue is a declining asset with a defined end. Any fiscal planning that treats it as permanent is wrong, and the transition away from it is largely complete.

Storage and interconnection are the durable strategic assets. A country with the largest storage capacity in Europe, synchronised with the European grid, sitting between EU markets and the Black Sea, has a structural position in European energy that has nothing to do with transit and everything to do with flexibility.

And the renewable and nuclear resource base is substantial. Ukraine has among the best wind and solar resource in Europe outside Iberia, significant nuclear generation capacity, and land available at a cost that makes utility-scale development viable. That combination, connected to the European grid, is the medium-term energy proposition — and it is what makes hydrogen and green industrial investment a serious rather than speculative conversation.

Related in this archive

• Ukraine's energy system is being rebuilt small: what that means for suppliers
• The 2019 transit deal: what European rules actually bought Ukraine
• Air links: how a country connects to its markets, and what closing them costs
• Ukraine Annual Review 2024: the constraint moves to people

When I arrived in 2004 to read mechanical engineering, Ukraine's energy argument turned on a single supplier. Today the same argument is about interconnection, storage and market rules. To understand where a country is going it is usually enough to notice which question it is asking: if the question has changed, the country has too.