Energy Vulnerability: The Kremlin’s Goal is to devastate Ukraine’s power grid and trigger a severe social and economic crisis

While Russia’s offensive success in Ukraine appears quite limited for now, Putin has come closest to achieving another objective – inflicting critical damage on Ukraine's energy infrastructure, potentially leading to its collapse during the winter season. This is where Russian strikes on Ukraine are currently focused.

The upcoming winter – the third since the Russian invasion – may be the most difficult, warns the International Energy Agency in a recent special report. Residents must prepare for extended blackouts. Even in the most favourable scenario, the electricity shortage could reach a third of the expected peak demand.

However, despite the challenges, Ukraine’s current resources may allow the country to navigate the winter, as long as there is no further significant damage in the coming months, particularly if operational nuclear power facilities are not disabled. This issue is critical and is one of the main arguments in favour of allowing Ukraine to use Western missiles to strike targets within Russia.

At present, the energy sector is the most vulnerable part of Ukraine’s economy, which has otherwise shown remarkable resilience in adapting to wartime conditions, largely thanks to Western aid and the expansion of military production. The National Bank of Ukraine predicts a 3.7% GDP growth and inflation below 9% for 2024. Businesses, too, are cautiously optimistic. Like government officials, they have factored in the risks of damage to the energy infrastructure in their forecasts and plans.

Over the past two and a half years, Ukrainian businesses have adjusted to working in an environment where electricity is both scarce and prohibitively expensive. However, this fragile balance, which they are struggling to maintain, could be disrupted if Russian attacks intensify. The energy challenge will not dissipate with the passing of this winter; Ukraine’s economy will require not just reconstruction, but a structural overhaul of its energy sector to function normally.

The primary goal of Russian missile and drone attacks on Ukrainian territory in recent months has been to destroy its energy infrastructure. From 22 March to 31 August1, the UN Human Rights Monitoring Mission recorded nine coordinated attacks across 20 regions, seeing signs of violations of international humanitarian law. Russia’s primary targets are facilities connected to Ukraine’s three nuclear power plants, which currently provide 55% of the nation’s electricity. According to Politico, citing a report by Ukrainian energy expert Mykhailo Honchar for NATO, on 26 August, during one of the most destructive attacks in two and a half years of war, Russia deliberately aimed to disable substations supplying power to nuclear plants. The attack involved 109 drones and 127 missiles of various types. According to Politico sources in Kyiv, the need to protect nuclear plants is the main argument Ukrainian officials use to convince the US to allow strikes on Russian territory with long-range Western missiles. One official told the publication that this argument ‘got everyone [in the US] to focus’.

Experts from the International Energy Agency (IEA) estimate peak electricity demand in Ukraine this winter may reach 18.5 GW. Before the war, Ukraine was capable of producing over 50 GW, allowing it to be a major energy exporter. However, approximately 18 GW of this capacity came from the Zaporizhzhia Nuclear Power Plant, the largest in Europe, and other facilities now located in Russian-occupied territories. By the start of last heating season, Russian missile and drone attacks had disabled half of the remaining capacity, and by this season's start, another quarter was lost. According to Ukraine’s Ministry of Energy, cited by Forbes, Ukraine’s energy system has suffered over 1000 attacks since the war began.

As Ukraine braces for a potentially catastrophic winter, the IEA estimates that the country will be able to generate just over 10 GW of electricity this winter – compared to about 18 GW last year. A more optimistic forecast of 14-15 GW starting in December comes from Sviatoslav Pavliuk, director of the Association of Energy-Efficient Cities of Ukraine. Current production stands at 10 GW. According to existing agreements, the EU could supply up to 1.7 GW to Ukraine.

The IEA warns that the third winter since the Russian invasion may be Ukraine's hardest yet. Even in a favourable scenario, the electricity shortage could reach up to a third of the expected peak demand. In practice, this means that when temperatures drop below -10°C, Ukrainians could face daily blackouts lasting 10-12 hours, explains Oleksandr Kharchenko, director of Ukraine’s Energy Industry Research Centre, in an article for the Wilson Centre. And this is not the worst-case scenario. The IEA's forecast assumes that Russia does not cause further significant damage to Ukraine's energy system.

The IEA also emphasises the importance of protecting nuclear power plants. It calls on Ukraine's allies to help strengthen air defence around these facilities and to bolster cybersecurity measures against potential Russian hacker attacks. Additionally, the IEA stresses the need to expedite deliveries of equipment and spare parts required to repair the part of Ukraine’s infrastructure that can still be restored. Another suggestion is to increase the electricity import limit from the EU (Ukrainian authorities are requesting a raise from 1.7 to 2.2 GW). At a presentation of the IEA report, European Commission President Ursula von der Leyen announced €160 million in aid for Ukraine: €100 million for repair work and equipment, and €60 million for shelter construction and other humanitarian needs. According to the latest estimate by the Kyiv School of Economics, rebuilding the damaged infrastructure will cost $16 billion.

The destruction of energy infrastructure serves a dual purpose: causing a social crisis during the winter and triggering a snowball effect of industrial collapse in Ukraine. Despite the anticipated energy deficit, Ukraine’s economy may still show relatively decent results. The National Bank of Ukraine forecasts a 3.7% GDP growth for 2024, up from an earlier projection of 3.6%. In September, the inflation forecast was even slightly lowered to 8.5% (which is below the current inflation rate in Russia). The risks associated with strikes on energy infrastructure were factored into these forecasts from the beginning.

Ukrainian businesses, too, have shown cautious optimism in recent months. The business activity index, calculated by the National Bank, rose from 44.4 points to 48.4 in August. One reason for this improvement is that businesses are adapting to energy problems by creating their own power generation or purchasing electricity from abroad. According to a survey by the American Chamber of Commerce in Ukraine and Deloitte, 88% of Ukrainian companies are prepared for periodic power outages, and nearly all (94%) have a contingency plan in case of prolonged blackouts (Forbes reports). However, only a third of companies can independently sustain themselves with electricity for 24 hours or more during a power outage.

Consulting firm GMK Center uses the example of Metinvest, Ukraine's largest metallurgical producer and exporter, to explain the strategies industrial enterprises are adopting. During the summer, to avoid power supply disruptions, Metinvest began purchasing electricity from abroad. The state guarantees uninterrupted supplies only to companies that import at least 80% of their consumed electricity. For emergencies, Metinvest purchased gas turbine stations for $36 million, capable of generating 30 MW, in addition to the 50 MW the company already had. Metinvest's total electricity consumption exceeds 550 MW, and investments to create its own generation capacity of this scale are estimated at $500 million. However, given the war, the company is unwilling to invest such a sum.

Ukraine’s economy has one of the world’s highest dependencies on electricity prices due to the high energy intensity of its industry, notes GMK Centre's chief analyst Andrii Tarasenko. In 2022, Ukraine consumed 2.1 kWh of electricity per dollar of GDP, compared to neighbouring Poland, Slovakia, and Hungary, which consumed 0.96, 1.2, and 0.94 kWh per dollar, respectively. This is another challenge the Ukrainian economy will need to address once the war ends. Currently, electricity costs for industrial consumers in Ukraine have become the highest in Europe due to the need to import or self-generate power. As damaged infrastructure is restored, prices will decrease, but Ukraine is unlikely to return to an era of cheap electricity, warns Tarasenko.