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Amid rancor over Nord Stream 2, Ukraine could gain from clean energy funding

30 July 2021 William Fleeson

Ukraine has made no secret of its opposition to the advancing Russia's Nord Stream 2 pipeline project. Yet the country's clean energy sector could gain from the recent international compromise, which includes funding of more than a billion dollars.

On 21 July, Germany and the US announced they had reached a deal that would allow Nord Stream 2, a natural gas pipeline running from Russia to Germany, to finish construction. The project stands nearly complete, but has been suspended amid a major diplomatic row involving numerous countries and the EU.

Germany and the US highlighted a new element of the negotiations: a 'Green Fund for Ukraine.' The fund commits "at least $1 billion" in support to Ukraine's clean energy sector. Germany will administer the program and seek to attract private support to add to public funding.

Heiko Maas, Germany's foreign minister, welcomed the compromise in a tweet the day the deal was announced. "I am relieved that we found a constructive solution with the US on Nord Stream 2," Maas said. "We will support Ukraine in building a green energy sector."

Germany will supply an initial $175 million for the fund, which will support the development of an array of clean energy projects, including renewables, energy efficiency, coal use abatement—and emerging technologies like hydrogen. The US, for its part, pledged "technical assistance and policy support" in line with the fund's goals.

The pipeline is estimated to start shipping gas in the fourth quarter of this year.

At the heart of the Nord Stream 2 issue is the idea that a new, fully operating pipeline will allow Russia to sell gas to European customers at Ukraine's expense. Ukraine hosts existing overland gas pipeline infrastructure between Russia and Europe and funds its state budget in part from the billions of dollars it collects in gas transit fees.

Maas promised that Germany would work to further Russian gas shipments through Ukraine beyond 2024, when the current contract between Russia and Ukraine expires. In a bilateral statement with the US, Germany promised to deploy "all available leverage" to extend gas transit arrangements by up to 10 years, which could require naming a special envoy and starting a negotiations process. That process would begin by 1 September, according to the statement.

Opponents of Nord Stream 2 say it will put Ukraine at a disadvantage vis-à-vis Europe and Russia alike. Russia has cut off gas flows through Ukraine before, wreaking havoc on European markets and politics. Moreover, the long-burning conflict in Ukraine's east, against a set of forces widely believed to be either Russian or Russian-supported, has rankled Ukrainian, European, and global diplomacy since the conflict began in 2014.

Ukraine and Poland, an EU member with policy alignment to many countries in eastern Europe, released their own joint response, which criticized the Nord Stream 2 compromise as a danger to Ukraine and other countries under Russian influence.

"This decision has created political, military, and energy threat[s] for Ukraine and Central Europe, while increasing Russia's potential to destabilize the security situation" on the European continent, the countries argued. Each country said it would continue to oppose Nord Stream 2 "until solutions are developed to address the security crisis" the new pipeline creates.

In their joint statement, Germany's Federal Foreign Office, and the US State Department highlighted certain safeguards again Russian future aggression.

"Should Russia attempt to use energy as a weapon or commit further aggressive acts against Ukraine, Germany will take action at the national level and press for effective measures at the European level… to limit Russian export capabilities to Europe in the energy sector, including gas," the government departments said.

Restoring Ukraine's clean energy credibility

Laurent Ruseckas, an executive director with IHS Markit's global gas practice, said the green fund is significant.

"This [the Green Fund] is obviously an idea in an early stage of development, one which came out of Nord Stream 2 diplomacy, but on its face is clearly a good idea," Ruseckas said. "It could have a significant positive impact."

The clean-energy orientation of the fund is important, Ruseckas said, given Ukraine's recent experience of a "collapse in renewables investment" after the failure of the national green tariff policy. Under that plan, a renewables boom ran from 2017-2019.

But Ukraine's green tariff became a victim of its own success. The policy proved much more costly than expected, and Ukrenergo, Ukraine's energy transmission operator, effectively stopped paying renewable generators last year, Ruseckas explained.

Renewables investment prospects in Ukraine were "completely ruined," Ruseckas said. That situation remains largely the same today.

With Ukraine's green-policy credibility in tatters, a foreign creditor could help restore related investment attractiveness.

"The Green Fund could play a hugely important role as a guarantor of new renewables investments," Ruseckas said. "If these risks [of the green tariff bust] are backstopped by a creditworthy international entity, that should do the trick" in restoring the Ukrainian renewables market.

Ruseckas reasoned that an international credit source may be the only way to re-establish investment in renewables, as well as other clean technologies for the future.

"Without rebooting renewables investment in Ukraine, any discussion of more elaborate things like hydrogen goes out the window," he said.

Alex Kokcharov, a principal research analyst and eastern Europe specialist in IHS Markit's country risk service, saw the green fund as positive but not substantial in the near term. "The impact [of the fund] is likely to not be immediate," Kokcharov said.

Controversy over project continues

Yet, allowing Nord Stream 2 to be completed is still controversial in Germany and the US. Leaders from distant points on the political spectrum in the countries expressed criticism. Robert Habeck, a co-leader of Germany's left-leaning Green party, called the compromise and the pipeline itself "objectively wrong" and "not in the interest of climate protection."

The Greens' opposition to Nord Stream 2 may assume a higher importance if the party wins Germany's elections for the chancellorship on 26 September. The party is polling in second place in current electoral polls.

In the US, Ted Cruz, a Republican from Texas and a member of the US Senate Foreign Relations Committee, called the move to proceed on Nord Stream 2 a "generational geopolitical mistake."

"This decision is… a multibillion-dollar gift that will keep on giving in perpetuity at the expense of the United States and our allies," Cruz said.

Posted 30 July 2021 by William Fleeson, Senior research analyst for Executive Briefings, IHS Markit


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