The Fourth Russia – Green Ukraine

The Fourth Russia – Green Ukraine
Ukraine has become a green energy powerhouse after it funnelled substantial reconstruction investment into the renewables and hydrogen sectors following the war with Russia. / wiki
By Ben Aris in Berlin June 10, 2022

ED: This article is one of a series called The Fourth Russia that imagines what the world will be like five years in the future. It is pure speculation based on best-guess assumptions and designed to be a jumping off point for thinking about what the longer-term consequences of the war in Ukraine will be for Russia, Europe and the world.

The energy crisis that has wracked Europe since the EU began to cut itself from Russian energy five years ago has had a silver lining. It has driven the transfer to renewables much faster than anyone could have hoped. And the biggest winner of this transformation has been Green Ukraine.

The war was a blessing in disguise for Ukraine as post war, all the conditions appeared to rapidly transform the country into a green energy powerhouse.

Ukraine was already home to heavy investment into renewable energy after former President Petro Poroshenko introduced extremely attractive green tariffs to attract investment into the sector and reduce Ukraine’s reliance on Russian gas. Domestic and foreign investors had poured over $5bn into building solar and wind farms that already accounted for 15% of the country’s generation capacity at the time the war started.

Russia targeted much of Ukraine’s power infrastructure during its six-month campaign, most of which had to be rebuilt from scratch. Part of the $150bn Marshall Plan, partly funded by seized Russian reserves under the so-called Bucha Mechanism, was targeted at developing renewable power capacity to bring the share of green power in the mix up to 50% within three years. But it was the investments into hydrogen that have proved to be a game-changer.

Today Europe still imports nearly 100bn cubic metres of gas per year from Russia, although this is now only 15% of Europe total energy needs, down from 35% before the war, and can be entirely covered by the expanded LNG supplied by the US and Qatar among others.

Pressure to cut off all Russia’s gas deliveries has fallen after LNG production expanded to the point where it can supply all of Europe’s needs should another war start, which has dramatically depressed prices and hence Russia’s revenues.

But increasingly gas is being replaced by hydrogen currently still mixed in with gas. Russia’s rising hydrogen production is still being pumped via the Ukrainian pipeline system that has largely replaced the 40 bcm of methane Russia has been sending to Europe since 2019. The transit deal was renewed in 2024, but with new strict restrictions and a requirement that half the gas in the pipelines be hydrogen.

Reservations about buying Russian hydrogen remain, as the country mostly produces blue hydrogen, from chemical processes that create a lot of captured carbon waste, whereas Ukraine’s hydrogen is almost all green, produced by electrolysis using solar power. And Ukraine’s blossoming green hydrogen production is set to replace much of the Russian blue hydrogen supply in the coming years.

The decision to stop the flows through Nord Stream 1 in the middle of 2023 forced more gas transit via Ukraine, leaving Russia with little option other than to deal with Kyiv. Responsible for 55 bcm of gas per year – a third of all Russian gas exports to Europe – the decision to remove Nord Stream 1 exemptions from EU energy laws, and so in effect close the pipeline down, was a body blow to the Russian European gas business it is unlikely to recover from. Russia renewed its gas transit deal, with Ukraine paying $2bn in transit fees in the process.

The compromise was welcomed in much of Central Europe, which maintained Russian gas supplies without having to find alternative sources, and the extra cash Ukraine earned took considerable pressure off the budget in the first years of reconstruction after the war.

Ukraine has taken advantage of the changes to massively invest into hydrogen production. It has been buying Russian gas to use as feedstock for its own hydrogen production and as its own renewable generation capacity grows it is decreasing the amount of Russian gas used as feedstock and re-tasking its own 20 bcm of gas production as feedstock for its own hydrogen production, which is gradually displacing the Russian methane-hydrogen mix that was part of the 2024 transit deal.

The economy has been growing by at least 8% every year since 2024, and renewable energy investors rapidly returned as Ukraine began to recover from the war. In the last three years, foreign direct investment (FDI), which has doubled in the last two years, is driving growth.

Ukraine is expected to shed its dependence on gas by 2030, although it will probably continue to buy Russian gas to produce hydrogen. However, Europe has learnt its lesson and is keeping Russia’s contribution to EU hydrogen supplies to 15% low enough that it can easily be sourced elsewhere if tensions flare again.

Kyiv became home to the headquarters of the European Green Hydrogen Corporation (EGHC) last December and talks with Russia to expand gas supplies to Ukraine’s solar-powered hydrogen production facilities are currently ongoing, but remain difficult.

Support for doing the proposed supply deal between Naftogaz and Gazprom has grown, as some argue that Russia needs to be brought back into the global emissions reduction campaign as temperatures continue to rise. The Paris Climate accord targets have been missed and no one is suffering more from climate change than Russia. Temperatures there are rising three times faster than elsewhere on the planet, and two thirds of Russia’s permafrost is now deemed to be in danger of melting. If the ground in Russia’s tundra reaches zero, which is now expected to happen in the next few years, then gigatonnes of primordial CO2 that have been locked in the ice for millennia will be rapidly released with unpredictable consequences. The Kremlin has been leveraging this danger to try to have some sanctions dropped and to repair commercial ties with Europe.

Moreover, with Norway’s gas production in decline and the Netherland’s Groningen gas field having closed down four years ago due to earthquakes, those in favour of the deal say that Europe has little choice but to use expanded LNG deliveries from the US, which now dominates the business, as hydrogen feedstock is not economically viable if the gas is to compete as a fuel source with far cheaper green energy, even if some hydrogen fuel will always be needed to cover the baseload demand for power when renewable energy is not available.

Ukraine is also establishing itself as a major centre for battery production, based on its extensive lithium deposits, the largest in Europe.

The Lithium Metallurgical Kombinat of Ukraine (LMKU) celebrated the production of its first kilo of the metal last month at a ceremony attended by Elon Musk, who is negotiating for a long-term supply deal to support his growing Tesla empire.

The development of the LMKU plant has been fraught with problems, requiring the government to totally rewrite the concessions legislation, but investors are excited, as the plant’s construction is expected to clear the way for the development of an EV production complex in Ukraine.

Musk is also negotiating a deal to take over Ukraine’s small automotive producer Eurocar in the west of the country, which is anticipated to become the basis of a massive Tesla factor to match his $1bn plant in Berlin that is now five years old and struggling to keep up with demand.

Musk said in a recent interview that he is willing to build another plant at least as large as the Berlin facility, provided Kyiv gets Brussels to sign off on its compliance to Chapters 2, 3, 5 and 7 of Ukraine’s EU accession deal that covers reforms to the labour code, free access to energy, property rights and set the duties for the import of parts from the EU into Ukraine.

Ukraine is rapidly emerging as a technology centre in Europe thanks to cross-fertilisation of these industries and Ukrainian President Volodymyr Zelenskiy’s sweeping Investment Protection Act signed in 2023 that slashed corporate taxes and gives iron-clad property rights protection that are all modelled on EU best practices. “We are more European than Europe!” has become the president’s rally slogan.

Ironically, part of Ukraine’s tech success has been due to the flood of high-quality Russian technicians and software engineers that migrated to Lviv for work once they had obtained their “Persil proposk” certifying they were in opposition to Putin’s war. The certificate allows them to apply for Ukrainian work permits. Since merely having a Russian exit stamp in the first months of the war was made enough to qualify a tech engineer for a Persil proposk, the whole process became much easier, as Russian and Belarusian engineers remain in high demand.