More than 3 years of war in Ukraine have left their mark on the energy sector. In the power sector, nearly 80% of the thermal generation and about two-thirds of the hydropower capacity have been damaged or destroyed, leading to a power deficit equal to about one-third of peak demand. Hydrogen demand was nearly 1 Mtpa before the war, predominantly for ammonia production, with only about 40 ktpa from refining. However, assets have since been damaged or occupied and demand has plunged by almost 80%. Steel output, which represents a potential new application for hydrogen, has dropped by almost two-thirds.

Massive capital mobilisation is needed for reconstruction, but there is also a lot of bilateral support flowing to Ukraine. The cost of reconstruction was estimated to have reached USD 524 billion by December 2024. Transport infrastructure is estimated to require nearly USD 78 billion, industry and commerce another USD 64 billion, and core energy assets USD 68 billion. At the same time, by December 2024, nearly USD 430 billion of bilateral support had been committed for Ukraine, two-thirds of which has already been allocated. About half is for purposes other than humanitarian or military. The European Union and its member states have been the largest donors.

Hydrogen could create jobs and revenue, but would require massive investment. Every 2.5 Mtpa of hydrogen production could generate annual revenues of USD 18‑22 billion from exports and create up to 100 000 jobs, though nearly 70% of these jobs would be temporary. Deployment at this level would require an investment of USD 85-90 billion just for electrolysis and renewables. Tackling the cost of capital is key, since this investment would carry interest payments of USD 165‑175 billion with a cost of capital at 15%, which could fall to be USD 55‑60 billion at 5%.

The macroeconomic environment presents challenges. At a macro level, nearly 15% of the population has left the country or been internally displaced, impacting labour availability for hydrogen projects. Inflation has fluctuated between 12% and 26%, and central bank interest rates have been at 10 to 25% affecting the cost of capital for hydrogen projects. In 2024, fiscal deficit reached nearly a quarter of Ukraine’s GDP (USD 180 billion) and public debt was equal to nearly 100% of GDP.

Country risk and its impact on the cost of capital is the most important hurdle for hydrogen projects. Low-emissions hydrogen is a nascent sector, and scale-up faces barriers including the need to find off-takers to secure finance, the cost gap in comparison to production from unabated fossil fuels, and infrastructure availability in certain locations. In Ukraine, however, country risk determines the overall cost of capital. Even before Russia’s full-scale invasion, the cost of capital was already above 12% for renewables, and even higher for hydrogen projects given the sector-specific risks. The country has already defaulted on its international debt and its government bonds rating is the lowest.

Ukraine’s proximity to the European Union puts it at an advantage compared to other countries aiming to export to the region. Ukraine shares a border with the European Union and is already interconnected with multiple gas pipelines. This proximity would enable low-cost transport for hydrogen and its derivatives by pipeline, which is cheaper than transport by ship. The short distance also allows transport by rail for outputs such as steel products. This could make a difference when comparing the delivered cost of products from different regions.

Large growth in demand for hydrogen in the European Union and the Carbon Border Adjustment Mechanism (CBAM) could trigger deployment. Hydrogen demand in the European Union was nearly 8 Mtpa in 2023, which could increase to 15‑73 Mtpa by 2050 depending on the evolution of different technologies and applications for hydrogen. Legislation already in place will spur demand for low-emissions hydrogen, and the CBAM could help further close the cost gap with unabated routes. Hydrogen, fertilisers (ammonia) and steel are all covered by the CBAM. Before the war, one-third of Ukraine’s steel exports were to the European Union. Completion of the EU accession process would mean that the EU Emissions Trading System (ETS) would also provide an incentive for low-emissions domestic production.

Ukraine has vast gas infrastructure, but further efforts to assess its use for hydrogen are needed. Existing gas interconnection pipelines to the European Union have a technical capacity equivalent to nearly 33 Mtpa. Some of the capacity might be used for biomethane, but it is large enough to potentially accommodate hydrogen and biomethane. Ongoing efforts to develop hydrogen corridors through Slovakia to Germany and Austria currently need off-takers to move forward. In addition, Ukraine could store about 2.4 Mtpa of hydrogen in existing underground gas sites. Both pipelines and underground storage have strong potential, but more assessment of their suitability for hydrogen is needed.

Ukraine has a rich renewable potential; its wind and solar technical potential is 1 300-2 300 TWh/yr. If this potential was used for hydrogen production, this would be equivalent to 18-38 Mtpa. The average renewable resource quality in Ukraine is better than in Germany, which represents a large share of EU hydrogen demand and is expected to continue to do so in the future. This could translate into a cost advantage once the cost of capital comes down. However, nearly half of the renewable potential is in oblasts that are either currently occupied or contaminated with land mines. Water availability might pose difficulties in regions with the highest potential, given the combination of low water supply and competing uses.

Efforts in the short term should focus on renewables. This is first and foremost because of the need to restore energy supplies. But there would be positive spillover effects to hydrogen, as this would serve to de-risk renewable deployment, which is a key cost component for renewable hydrogen production. It would also enable a progressive de-risking approach for different parts of the supply chain, allowing investors to gain confidence with renewables instead of trying to finance integrated projects from the start.

Addressing the high country risk premium is critical in the short term. This could leverage the bilateral support announced to mobilise capital, but it could also build upon grants from development finance institutions. Coverage against war risk in Ukraine is already provided by the World Bank. There are also examples of national development finance institutions and Export Credit Agencies providing political risk insurance. Part of this capital with preferential terms for the debt could also be used to deploy smaller projects that serve as lighthouse projects to build experience for subsequent deployment. A limitation for hydrogen is that this capital source is usually targeted at critical areas.

Hydrogen development requires a gradual approach, starting with assessment. Once the war ends, while initial actions will rightly focus on restoring energy security, there will be an opportunity to lay the foundations for the hydrogen market. Preparatory work is needed, covering aspects from the legislative framework to technical standards, capacity building, techno-economic studies, and suitability of the gas infrastructure, among other topics. This first stage would serve to inform next steps, but also provide time for a more stable environment to emerge, with greater visibility on the post-war economy.

Development finance might be sufficient to support demonstration projects, but private capital will be needed for large-scale deployment. Support for demonstration projects can build domestic experience that would be useful for the private sector and provide input for the government on regulation and potential. However, given the high investment needed for renewable hydrogen projects, large projects will require private capital. For this, investors need a long track record of projects that provides confidence on project cash flow and returns. This not only requires lighthouse projects, but sustained performance over time.