CMS Ukraine: Overview of the hydrogen power industry’s prospects in Ukraine

Authors: Sergiy Datsiv, Associate at CMS Ukraine, and Maria Orlyk, Partner at CMS Ukraine

It’s not the first time hydrogen has become a topic of heated discussion among energy experts, investors, and other stakeholders. Until recently, the development of the hydrogen power industry was hampered by the high cost of renewable energy and the insufficient advances in technology. Today the situation is different. Developing greener means of power production has become a priority to reduce greenhouse emissions. Green hydrogen is now set to become one of the key solutions.

Ukraine may find itself at the center of the hydrogen energy industry. In its Hydrogen Strategy, the EU considers Ukraine to be a country with a high potential for producing low-carbon hydrogen. Ukraine has been encouraged by the EU to join the Clean Hydrogen Alliance; its accession is expected soon.

Furthermore, Ukraine has the potential to produce substantial amounts of hydrogen. According to estimates, approximately 505,133 million cubic meters of green hydrogen could be produced in Ukraine annually. However, there is no demand for such volumes of hydrogen in Ukraine; therefore, production is mainly being considered for export to the EU. For example, Hydrogen Europe envisages exporting 8 GW of green hydrogen from Ukraine by 2030.

The rapid growth of green hydrogen production in the coming years in Ukraine is jeopardized by its high cost. Experts suggest that green hydrogen could be produced for $0.8 to $1.6 per kg in most parts of the world before 2050. This compares to gas, priced at $6-12/MMBtu, which makes hydrogen power production competitive with current natural gas prices in Brazil, China, India, Germany, and Scandinavia on an energy-equivalent basis. When including the cost of storage and pipeline infrastructure, the delivered cost of renewable hydrogen in China, India and Western Europe could fall to around $2/kg ($15/MMBtu) in 2030 and $1/kg ($7.4/MMBtu) in 2050.

The high cost of green hydrogen production is an independent factor that stands in the way of its production taking off significantly. But the high cost of green hydrogen provides Ukraine with extremely valuable time to prepare for hydrogen production – development of the respective legislation, suitable investment climate and functioning incentives.

In addition to production potential, Ukraine has sound prospects for developing a hydrogen transmission system based on the operative gas transmission system (“GTS”), which is 37,000km long and connects Ukraine with the EU and Moldova. The Ukrainian government is already considering the advantages of using the Ukrainian GTS for transmitting hydrogen. There are several obstacles that need to be removed before GTS can be exploited for hydrogen transmission.

First, neither the GTS Code nor Gas Distribution System Code in Ukraine contains provisions allowing hydrogen to be transmitted through the systems. The Codes, therefore, would need to be amended.

Second, the Ukrainian GTS does not appear to be suitable for hydrogen transmission because hydrogen molecules are smaller than natural gas molecules and they can escape where the GTS sections connect. Another problem is the general depreciation of the Ukrainian GTS and its parts. The research conducted by a Ukrainian gas company jointly with Ukrainian scientists has revealed certain weaknesses of the Ukrainian GTS. The research, which will continue until 2022, is designed to explore whether Ukrainian GTS could be used to transmit hydrogen. The research is conducted by introducing hydrogen into five models of the Ukrainian GTS field that has been especially constructed for the research. During the first stage of the research, the models were pumped with 99% hydrogen. The overall decrease in the pressure in the models reached 46% in the first 14 days. Further stages of the research foresee that models would be pumped with a mix of natural gas and hydrogen in the proportion of 50:50, 70:30, 80:20, and 90:10, respectively.

Although the study will not be complete until 2022, it is already apparent that the Ukrainian GTS could be used for hydrogen transmission only after modernization, which would require significant investment. It is very likely that Ukraine would have difficulty procuring such funding through its internal financial resources.

Both the development of hydrogen electrolysis capacities and investment in Ukrainian GTS require a significant legal stimulus to attract internal and especially foreign investments in the area. Sadly, there are no developments in this direction yet. Therefore, designing incentives to boost the hydrogen power industry should become a priority for the Ukrainian government.

Ukraine already has relevant experience in applying a legal stimulus to encourage the development of renewable energy capacities. These stimuli, however, turned out to be less efficient than expected because, after approximately 5 years of their application, the total energy production from renewable sources reached only 4%.

This 4% was reached for a disproportionally high price. For example, in the first half of 2020 the Guaranteed Buyer, a state enterprise responsible for off-taking renewable energy from producers was purchasing green energy at EUR 0.16 per kilowatt while nuclear power was purchased at EUR 0.012 per kilowatt. Moreover, the Guaranteed Buyer has difficulties paying for green energy; and renewable energy producers’ current indebtedness amounts to UAH 23 billion (c. EUR 693 million). Besides, the Ukrainian power system suffers from imbalances that will be regulated by the wider usage of heat power (which produces power by burning coal).

This experience should be taken as a starting point when designing the incentives for the development of hydrogen power generation and the infrastructure for its transmission in the country.

Overall, Ukraine has every chance to develop a strong and highly profitable hydrogen power industry given its capacity to develop green hydrogen power production and transmission. There appears to be enough time to develop incentives for modernization of the Ukrainian GTS, develop generating facilities to satisfy the national demand for hydrogen power, and sell hydrogen to neighboring countries.