The Russian invasion of Ukraine is set to enter into its fourth year in February 2025. Throughout the war, Russia has extensively targeted Ukraine’s energy infrastructure with frequent attacks that are aimed at crippling its electricity supply and thus damaging its war effort. Its attempts at disabling Ukraine’s power generation and transmission capabilities have left Ukraine with merely a third of its pre-war power generation capacity. As the war drags on, Ukraine and its allies are trying to rebuild its energy infrastructure with a focus on resilience and sustainability.
Impact of the Russian Invasion
Ukraine’s energy system is one of its sectors that has been most affected by Russian aggression. Much of its energy infrastructure has been damaged, and there has been a decrease in energy demand due to issues such as depopulation and reduced industrial output. Ukraine estimates that 40% of its electricity transmission infrastructure, 20% of its electricity distribution system, and up to 50% of its electricity generation capacity has either been occupied, destroyed or severely damaged. Ukraine’s energy demand before the war of 25 to 30 GW, equivalent to a large industrial nation, has declined by a third of its previous levels. The energy sector also played a key role in the Ukrainian economy, with its electricity sector constituting up to 8% of its GDP and payments for gas transit from Russia contributing about 0.3%. The restoration and reconstruction of Ukraine’s energy sector is crucial for its ongoing conflict with Russia and long-term integration with Europe. Several European entities have stepped in to help Ukraine repair its energy infrastructure and to build it back better.
Ukraine Facility
Europe has proven to be one of Ukraine’s most steadfast supporters throughout the ongoing conflict. European assistance has been coordinated and directed at multiple levels and through multiple partners, with a particular focus on restoring Ukraine’s battered energy infrastructure. The European Union’s dedicated support mechanism, the Ukraine facility, has offered up to €50 billion in financial support to help Ukraine address various challenges including within its energy sector. The facility covers a timeline from 2024 to 2027 and consists of three pillars, each designed to support Ukraine’s recovery through different pathways.
The first pillar, called the Ukraine Plan, was prepared by the Ukrainian government in consultation with other stakeholders and was adopted by the Council of the EU in May 2024. The plan aims to sustain financial assistance and support for Ukraine’s socio-economic reforms that would gradually bring out greater compliance with EU values and alignment with EU standards and regulations. The energy sector has been prioritised as a key sector within the plan with reforms focused on enhancing energy security and transitioning to renewable energy sources. Five of the 18 energy sector reforms planned have already been implemented, and two are currently in progress.
The second pillar, the Ukraine Investment Framework, is intended to drive investments and support the Ukrainian private sector through de-risking measures. It kicked off in June 2024 with €1.4 billion in guarantees and grants focused on the repair, rehabilitation, and development of energy infrastructure. The Ukrainian Investment Framework aims to unlock €40 billion in further investments in Ukraine. The third pillar entails assistance programs to further capacity building and provide technical assistance to the government.
Energy Community
The Energy Community, an international organisation with the goal of bringing together the EU and its neighbours in an integrated energy market, created the Ukraine Energy Support Fund. The fund allows governments, international financial institutions, and private donors to contribute to Ukraine’s immediate energy needs such as equipment, spare parts, fuel, etc. Of €1080 million pledged to the fund, €995 million have already been transferred. The fund has enabled Ukraine to undertake restorative efforts such as installing 220 MW of distributed gas capacity, repairing 1.6 GW damaged thermal power plants, and restoring vital renewable energy infrastructure. The Energy Community Secretariat estimates that the Ukraine Energy Support Fund financed the restoration of around 50% of the generation capacities needed for the winter of 2024/25.
European Bank for Reconstruction and Development
The European Bank for Reconstruction and Development (EBRD), Ukraine’s largest institutional investor, has been a vital supporter of Ukraine’s reconstruction efforts, having provided around €6.2 billion since the beginning of the conflict, with €2.4 billion in 2024 alone. With energy security being one of its five investment priorities, it has underwritten various endeavours that have bolstered the resilience and sustainability of Ukraine’s energy sector. In June 2024, it partnered with Goldbeck Solar Investment to finance the construction and operation of solar power plants. The solar facilities are planned to add 500 MWp of renewable energy production and serve as an impetus for further foreign direct investment in Ukraine’s energy sector.
The EBRD has launched the Energy Security Support Facility (ESSF), an endeavour intended to help various Ukrainian stakeholders invest in decentralised energy generation, energy efficiency, and renewable energy. The facility entails EBRD’s partnership with Ukrainian banks to partially cover the risk on loans for energy infrastructure. These loans are available to various actors such as small and medium enterprises, municipalities, private households, and medium-sized corporate clients. It is estimated that ESSF will enable over €700 million in loans for energy security investments.
Opportunities
Focusing on rebuilding Ukraine’s energy infrastructure and building it back better presents an opportunity for businesses to increase their investment in Ukraine under the aegis of various European mechanisms. In November 2024, the EU called for firms to invest in Ukraine’s recovery and reconstruction. The call urged EU businesses including joint ventures involving EU and Ukrainian corporations to submit proposals. The energy sector would be among the priority areas for the call, focusing on developing sustainable energy solutions such as renewable energy and modernising existing systems. The Ukraine Investment Framework’s instruments of loan guarantees of up to €7.8 billion and €1.51 billion in blended financing should serve to safeguard investments in rebuilding Ukraine. The EBRD has partnered with the professional services firm Aon to launch the €110 million Ukraine Recovery and Reconstruction Guarantee Facility to stimulate Ukraine’s war risk insurance market.
With several European programmes seeking to stimulate and de-risk investment in Ukraine, particularly in its energy sector, European energy companies are well-positioned to invest in Ukraine. This could be particularly advantageous considering Ukraine’s energy flows. While Ukraine is a net energy importer now, this was not always the case. Ukraine used to generate revenue by exporting energy to Europe even into the first few months of the Russian invasion. European companies could gain by rebuilding Ukraine’s energy production capacities and restoring its status as a net energy exporter.
Moreover, increased investment in Ukraine’s energy infrastructure has emphasized increasing resilience through decentralisation and sustainability measures. Renewable energy technologies are also witnessing a resurgence in Ukraine. Innovation is encouraged, and efforts are underway to combat systemic risks such as corruption. These trends, instruments, and measures could contribute to restoring Ukraine’s energy sector to a more robust, sustainable, and resilient form.
Challenges
The energy sector in Ukraine still faces considerable challenges in terms of recovery and restoration. With the hostilities still ongoing, energy infrastructure is consistently targeted. This increased risk profile could still deter investors regardless of the numerous instruments and measures applied to de-risk investments. The war risks insurance market has also suffered with the withdrawal of international insurers since the outbreak of hostilities. Corruption in the energy markets is an ongoing concern with the large flow of capital increasing the potential for further corruption.
Conclusion
The Ukrainian energy sector has been a consistent target for Russian aggression since the outbreak of full-fledged war in 2022. These attacks have targeted generation, transmission, and distribution facilities, leaving Ukraine with a supply deficit causing multiple blackouts, exacerbating grid instability, and losing a valuable stream of revenue as a net exporter of electricity. International assistance has been pivotal in helping Ukraine repair its energy infrastructure. Through financing energy projects, de-risking and underwriting investments, international aid has enabled Ukraine to restore its energy system albeit with a renewed focus on resilience and sustainability. With the recent suspension of USAID’s activities, European assistance programs are more significant than ever and indispensable for Ukraine and its energy security.