Economic Assessment of Low-Emission Development

Scenarios for Ukraine

Maksym CHEPELIEV, Ph.D. in Economics Oleksandr DIACHUK, Ph.D. in Engineering

Roman PODOLETS, Ph.D. in Economics Zürich, Switzerland, 11/12/2017 ETH Zürich Zentrum campus

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CO2 Emission and Climate Change in Ukraine Institute for Economics and Forecasting National Academy of Sciences of Ukraine

In 2015 Ukraine was the 23d (189.4 million tons of CO2 largest emitter of CO2 emissions from fuel combustion.

In 1990 Ukraine was ranked the 6th among the countries – largest emitters of energy-related CO2

* CO2 Emissions from Fuel Combustion only

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Structure of GHG Emissions in Ukraine Institute for Economics and Forecasting National Academy of Sciences of Ukraine

GHG emissions in “Energy” sector in 1990-2015 constituted 64.7-75.7% of total GHG emissions together with emissions related to “Industrial Processes” it constituted 82.0-90.0%. This determined general dynamics of GHG emission in Ukraine.

76%

12%

11%1%

65%

17%

14%

4%

Energy

Industrial processesand product use

Agriculture

Waste

1990 2015

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Renewables in Gross Final Energy Consumption Institute for Economics and Forecasting National Academy of Sciences of Ukraine

In terms of Renewables share in GFEC Ukraine lags behind not only developed countries (including the countries-members of Visegrad Group) but also globaly.

20.0%14.0%

19.5%

4.2%13.6% 15.7% 12.5% 15.1%

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World OECD EU-28 Ukraine Poland CzechRepublic

Hungary SlovakRepublic

2014

Other Biofuels and waste Geothermal, Solar, Wind etc. Hydro Share RES in GFEC

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Energy and Carbon Intensity Institute for Economics and Forecasting National Academy of Sciences of Ukraine

The carbon intensity of the country´s GDP, in 2014 was almost 2.8 times higher than in OECD- countries and 2.4 higher than in Visegrad Group-countries. And it was 3.8 times higher compared with the EU-28 countries.

The energy intensity of Ukraine's GDP (2014) was correspondingly 2.6 and 2.4 times higher than in OECD countries and in the countries- members of the Visegrad Group. And it was 3.4 times higher than in European Union.

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

toe

/ tho

usan

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10U

SD

Energy IntensityUkraine

OECD

The VisegradGroup

World

EU-28

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

t CO

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hous

and

2010

USD

Carbon IntensityUkraine

OECD

The VisegradGroup

World

EU-28

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Key Indicators of Ukraine Institute for Economics and Forecasting National Academy of Sciences of Ukraine

Dynamics of GHG emissions follows the curve of total primary energy supply. In 1990-2000, rates of GHG emission was comparable to the rates of GDP decrease, but in 2001-2008, as a result of changed structural proportions in economy, GDP increase was no longer accompanied by the relevant GHG emission increase (decoupling).

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95019

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LULUCF

Share of GHG's (total) compared to 1990 (right scale)

Share of GDP compared 1990 (right scale)

Share of TPES compared 1990 (right scale)

Share of GHG's (Energy + Industrial processes) compared to 1990 (right scale)

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Selected performance indicators of ESU2035 Institute for Economics and Forecasting National Academy of Sciences of Ukraine

In August 2017 Cabinet of Ministers adopts updated Energy Strategy of Ukraine till 2035 (ESU2035).

2015 2020 2025 2030 2035

Primary Energy Intercity, toe/thousand 2010 USD GDP PPP 0.29 0.20 0.18 0.15 0.13

Share of RES (including hydro and thermal energy in TPES, % 4% 8% 12% 17% 25%

Share of RES (including big Hydro PP) in Electricity production, % 5% 7% 10% >13% >25%

Share of Wind and Solar in Electricity production, % 1% 5.5% 6.7% >9.7% >12.8%

Share of Nuclear in Electricity production, % 54% 52% 51% 50% 48%

The share of Coal PP complies with Directive 2010/75/EC <1% <10% <40% 85% 100%

CO2 Emission compared 1990, % 31.8% <60% <60% <60% <50%

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Ukraine in International Climate Agreements Institute for Economics and Forecasting National Academy of Sciences of Ukraine

Ukraine is Annex I Party to United Nation Framework Convention on Climate Change since 1996

Ukraine is Annex B Party to the Kyoto Protocol since 2004 (Second Commitment Period of the Kyoto Protocol is under ratification process)

Ukraine is a Party to Paris Agreement starting from September 19, 2016 with Nationally Determined Contribution (NDC) that presents national goals on climate actions – both mitigation, reduction of GHG emissions and adaptation to impacts of climate change

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Ukrainian Nationally Determined Contribution (NDC) Institute for Economics and Forecasting National Academy of Sciences of Ukraine

• “Ukraine defines ambitious, but at the same time substantiated and fair target with regard to the level of GHG emissions. It will not exceed 60% of 1990 GHG emissions level in 2030”.

• Ukrainian NDC will be revised till 2020.

43.8%

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Climate Obligation of Ukraine

Total GHG's compared 1990

Kyoto Protocol 1st period

Kyoto Protocol 2nd period

National Determined Contribution (Paris Agreement)

- prewar level

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Low-Emission Development Scenarios for Ukraine Institute for Economics and Forecasting National Academy of Sciences of Ukraine

In accordance with Article 4, paragraph 19, of the Paris Agreement, all Parties should design long-term low GHG emission development strategies and communicate them by 2020. Low Emission Development (LED) Scenario is designed in the scope of Ukrainian LED Strategy development within the framework of USAID project. It is based on the policy measures compiled by the project’s working groups and quantified for the assessment by TIMES-Ukraine model. All energy policies are grouped into four streams: Energy Efficiency (EE) improvements, promotion of Renewable Energy (RE), Modernization and Innovation (MI) and Market Transformations (MT). Scenario of the “energy transition” in Ukraine from fossil (including nuclear) to renewable energy sources (RE Scenario), with further increase of energy efficiency, has been developed in collaboration with the Heinrich Böll Foundation’s Office in Ukraine, which supports Greenpeace initiative in performing conceptual studies on energy system transformations with RE domination, the so called “Energy [R]evolution”. Although most similar studies focus on a complete phase out of fossil fuels, in case of Ukraine, we take a 92% RE share as an economically feasible target. The main reason behind this decision is that according to our analysis further increase of the RE share in GFEC results in the exponential growth of additional investments and total system costs.

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TIMES-Ukraine and UGEM models linkage Institute for Economics and Forecasting National Academy of Sciences of Ukraine

To provide an assessment of LED policies in Ukraine we use a soft-linkage of TIMES-Ukraine and UGEM models.

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The energy system in TIMES-Ukraine model Institute for Economics and Forecasting National Academy of Sciences of Ukraine

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Circular flows in the UGEM model Institute for Economics and Forecasting National Academy of Sciences of Ukraine

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Scenarios GHG Emissions for LED Strategy Institute for Economics and Forecasting National Academy of Sciences of Ukraine

44% 42%36%

54%

70%

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53%

37%34%

31% 29% 31%

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2012* 2013* 2014* 2015* 2020 2025 2030 2035 2040 2045 2050

com

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90 (1

990=

100%

)

BAU EE EE+RE EE+RE+MI EE+RE+MI+MT

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Gross Final Energy Consumption in RE Scenario Institute for Economics and Forecasting National Academy of Sciences of Ukraine

3% 4%9%

19%

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2012 2015 2020 2025 2030 2035 2040 2045 2050

RE Scenario

Mto

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Imact of EE

Electricity from RE

Heat from RE

Solar

Biofuels and Biomass

Electricity

Heat

Oil Products

Gas

Coal

Share of RE

-28%-42%

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Electricity Production in RE Scenario Institute for Economics and Forecasting National Academy of Sciences of Ukraine

6% 5%

16%

39%

58%63%

70%75%

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2012 2015 2020 2025 2030 2035 2040 2045 2050

TWh CHP Bio

Geothermal

Solar Roof Panel

Solar Plant Size

Wind On-shore

Hydro Smal

Hydro Big

CHP Non-RE

TTP Gas New

TTP Coal New

TTP Coal Advanced.

TTP Coal Exist.

Nuclear New

Nuclear Exist.

Share of RE

-14%

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District heating in RE Scenario Institute for Economics and Forecasting National Academy of Sciences of Ukraine

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Cumulative 2012-2050 LED policy results Institute for Economics and Forecasting National Academy of Sciences of Ukraine

In general, both scenarios have negative total system costs, which means that additional capital expenditures are overstated by associated energy efficiency improvements and reduction in fuel consumption.

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Fluctuation of Wind and Solar Technologies Institute for Economics and Forecasting National Academy of Sciences of Ukraine

SPPs in Ukraine in 2013-2015

WPPs in Ukraine in 2013-2015

The real data shows that the ratio of battery capacities to the capacity of a SPP could vary from 63% to 91%. The average value of this ratio was 75-77% in 2013-2015.

For WPPs this parameters could fluctuate from 9% to 94%, and average value was 47-54%.

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Absolute and relative decoupling for LED scenarios Institute for Economics and Forecasting National Academy of Sciences of Ukraine

One of the significant benefits of the RE scenario is that this policy set up allows achieving absolute decoupling of GDP from GHG emissions and energy use.

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Macroeconomic effects of LEDS implementation Institute for Economics and Forecasting National Academy of Sciences of Ukraine

According to our results, both LED scenarios are associated with positive macroeconomic effects. While in the short run, additional GDP growth is relatively low (1-2%), in the mid- and long-term it can reach up to 12-16%.

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Impacts of LED Scenarios on households real income Institute for Economics and Forecasting National Academy of Sciences of Ukraine

With growing GDP, households also experience positive impacts of LED policies. In the short run, they are relatively insignificant, and even slightly negative for the RE scenario, but in the mid and long term, additional income growth can reach up to 12-14%.

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Changes in the sectoral output in 2050 Institute for Economics and Forecasting National Academy of Sciences of Ukraine

On average, estimates of the output changes show higher degree of uncertainty compared to aggregate macroeconomic effects. For some sectors, they even indicate the possibility of sign change, like in case of electricity industry under LEDS scenario.

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Long-term vision of Ukraine Institute for Economics and Forecasting National Academy of Sciences of Ukraine

In November 2017 Ministry of Ecology and Natural Resources of Ukraine released Draft Low Emission Development Strategy (LEDS) with target – no exceed 35% of 1990 GHG emissions level in 2050.

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Climate Obligation of Ukraine

Renewables Scenario

Total GHG's compared 1990

Draft LEDS Pathway

LED Strategy Target

Kyoto Protocol 1st period

Kyoto Protocol 2nd period

National Determined Contribution

- prewar level

RE Scenario Target

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Conclusions (1/2) Institute for Economics and Forecasting National Academy of Sciences of Ukraine

•With one of the highest levels of energy and emission intensities in the world, Ukraine has a high potential to exploit the “low hanging fruits” of the energy sector transformation by implementing LED policies, which can benefit both economy and environment.

•To explore such opportunities we use an integrated modelling approach, which includes energy system TIMES-Ukraine model and Ukrainian general equilibrium model. Using such methodology we provide an assessment of Ukrainian LEDS, as well as analyze more ambitious long-term environmental target, which includes transition towards 92% share of renewables in Gross Final Energy Consuming by 2050.

•While both policy options show an improvement relative to the BAU path, RE scenario provides ambition and sufficient national contribution in terms of limiting global warming below 2oC.

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Conclusions (2/2) Institute for Economics and Forecasting National Academy of Sciences of Ukraine

•With initially low level of energy efficiency in Ukraine, both LED policies result in positive macroeconomic and sectoral effects, with better perspectives in case of RE scenario, which at the same time requires significantly larger investments. Ukraine benefits from double dividends under both policy options, while RE scenario also provides an economically acceptable way of going from relative to absolute decoupling.

•At the same time, existing institutional environment and inefficient market framework can pose significant risks towards LED policies implementation. As a result, national energy markets transformation towards transparency and competitiveness becomes a necessary condition of LED policies success. In this context, Ukraine’s further engagement into European legal framework through the European Energy Community may provide an effective support on the way forward.

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Contacts Institute for Economics and Forecasting National Academy of Sciences of Ukraine

Oleksandr DIACHUK, Roman PODOLETS Department of Energy Sector Development and Forecasting, Institute for Economics and Forecasting National Academy of Sciences of Ukraine 26, Panasa Myrnoho St., Kyiv, 01011. Ukraine Office: +380 44 280 89 27 E-mail: diachuk@ief.org.ua podolets@ief.org.ua Maksym CHEPELIEV (corresponding author) Center for Global Trade Analysis, Purdue University, West Lafayette, USA E-mail: chepelev@gmail.com

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Renewables in Gross Final Energy Consumption Institute for Economics and Forecasting National Academy of Sciences of Ukraine

3.2%4.3% 4.2%

4.9%3.1%

4.0%4.9%

5.9%6.7%

7.4%8.3%

9.1%10.1%

11.0%

0%1%2%3%4%5%6%7%8%9%

10%11%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Share of RE in GFEC (real data)Ukrainian NREAP