The policy of “cheap gas” that were in place in 1990–2004, slightly relaxed both the Ukrainian authorities and consumers of blue fuel. Despite the appropriate priority of state policy, enshrined in legislation at various levels, including the 1994 Law of Ukraine On Energy Saving, in practice no measures have been taken to reduce consumption, to introduce energy-efficient technologies and to develop domestic production. The situation remained unchanged even in 2009 after the signing of a leonine contract for the supply of Russian gas to Ukraine, under which the price of “blue fuel” for Ukraine exceeded its price for European consumers.
It should be noted that for the last 15 years the price of gas was an element of Russia’s geopolitical pressure to promote its own interests in Ukraine. Persistently blaming Ukraine for stealing gas, Russia has carefully formed a negative image of Ukraine in the eyes of Western countries.
Starting energy reform in 2015, Ukraine has stopped buying gas directly from Russia; accordingly, this pressure tool was leveled. However, cooperation with Russian fuel suppliers can be resumed by Ukraine on an as-needed basis.
The real implementation of energy independence measures began only after increased tension between Ukraine and Russia due to the events that took place in Crimea and the Donbas. At the same time, all external conditions were extremely unfavorable: economic decline and loss of opportunities to invest in its own production, the loss of the productive capacity of Chornomornaftogaz (up to 2 billion cubic meters of gas per year), the closure of shale gas projects, etc. On the other hand, the volume of gas consumption decreased significantly due to the loss of
Crimea and part of the Donbas, as well as the declining output of large enterprises which were consumers of natural gas.
Until recently, Ukraine has not been dependent on other countries, except for coal mining and electricity (not including the import and disposal of nuclear fuel). But here there were many problems too: loss-making state mines required constant billion-hryvnia subsidies which were distributed and spent in a non-transparent manner. It was accompanied by a low level of security, remarkable illicit production and a devastating impact on the environment. Due to the conflict in the Donbas and blockade on coal deliveries from the temporarily occupied territories, it turned out that “mainland” Ukraine became dependent again. This led to the introduction of a state of emergency in the energy sector under a decision adopted by the National Security and Defence Council, which is regularly extended, and energy operators are forced to import thermal coal from Russia as well.
The energy sector is equally problematic: cross-subsidization through cheap nuclear energy, high capital intensity amid a lack of investment opportunities, dependence on foreign fuel suppliers, low percentage of alternative energy sources (in 2016 — 1.26%), etc. However, the last figure should increase exponentially now. In 2016, Ukraine ratified the Paris Agreement, committing itself to reduce its greenhouse gas emissions by 40% from 2012 till 2030 to the level seen in 1990. Energy will play a decisive role in this process, and replacement of traditional generation with renewable sources should reach 25% by 2035 (according to the draft of the new Energy Strategy of Ukraine).
A major factor in achieving energy independence is energy efficiency. At present, the average index of energy intensity in Ukraine is 2–3 times higher than the average index in the world, and 5–6 times higher than that in EU countries. Achieving European indicators means energy savings, including gas. Reduction of energy consumption in the residential sector will lead to a decrease in benefits and subsidies, for which the state budget has already allocated UAH 47.1 billion in 2017, and by the end of the year, this figure is likely to increase by at least a third.
The main problem of the energy market was and remains political speculation and populism, applying primarily to domestically produced gas. It has always been a guarantee for maintaining low utility tariffs (it is said to be cheap and goes to satisfy the needs of the population). But within the framework of the liberalization of the sector and the introduction of competitive markets, and under IMF arrangements, the difference in gas prices for various categories of consumers has practically been abolished recently. Such a decision has led to the fact that utility tariffs will no longer be constant but would change according to the dynamics of prices for imported gas. This is payback for ignoring energy reforms over the past decades. After all, non-market gas prices for the population cost the state too much: USD 53.6 billion was spent on subsidized gas in 2005–2015.
From May 1, 2017, gas prices for the population were as close as possible to market prices (regulated gas prices for the population amounted to 84–96% of the market in April–July 2017), that is, industrial consumers receive it almost for the same money. This will help to avoid long-term corruption and abuses in the future, when cheap domestically produced was sold to industrial consumers at a higher price, and the difference found its way into the pockets of those who were involved in the organization of such schemes. Also, fair pricing will prevent cross-subsidization, contributing to the financial stabilization of state enterprises of the fuel and energy complex, moving this market out of shadowing sector, the availability of funds for capital investments and increase in revenues to the state budget.
However, the current situation is difficult and continues to deteriorate. Almost half of the population faces difficulties paying for services. Thus, in March 2017, subsidies were received by 43.6% of households. The total debt of the population of Ukraine for housing and utility services comes to more than UAH 18.8 billion (according to the State Statistics Service in the first quarter of 2017). In the first quarter of the current year, the number of subsidies for housing and utility services increased by 14.6% to UAH 2 billion compared to the same period in 2016.
The energy independence of Ukraine is a factor of national security.
According to various estimates, our country is about 50–60% energy-dependent. However, the effective implementation of the planned measures, adoption of the relevant legislation and opening up of theenergy market for investments will help to offset the negative effects of such dependence.
The Ministry of Energy and Coal Industry of Ukraine was established in December 2010 through the reorganization of the Ministry of Fuel and Energy of Ukraine and the Ministry of Coal Industry of Ukraine.
The State Agency on Energy Efficiency and Energy Saving of Ukraine was created in April 2011 by reorganizing the National Agency of Ukraine for Efficient Use of Energy Resources (established in December 2005) and the State Inspectorate for Energy Saving (established in May 1996).
National Commission for State Regulation of Energy and Public Utilities (NKREKP) was established in August 2014 by merging the functions of the National Energy Regulatory Commission (NERC, established in December 1994) and the National Commission for State Regulation of Public Utilities (Natskomposluh, founded in 2011).
The current situation
The energy independence of Ukraine has many aspects: stimulation of domestic gas production, more effective introduction of alternative energy sources, energy efficiency improvements, etc. So, in April of this year, the Government approved the Medium-Term Plan of Priority Actions until 2020, its section entitled “Energy and Housing and Communal Services” defines the following areas of reform:
1. Implementation of the Third Energy Package of the EU.
2. Development of housing and communal services.
3. Reform of the coal industry.
4. Development of renewable energy.
5. Energy efficiency and energy saving.
In any case, the implementation of the principles of energy independence is one of the most significant reforms (62 in total), which is described in the Strategy for Sustainable Development Ukraine 2020. It is chosen as one of the ten priority areas. The main task of energy reform is the provision of energy security and the transition to energyefficient use and consumption of energy resources through practical implementation of innovative technologies.
The main goals of state policy in this area are as follows:
• Reducing the energy intensity of GDP (by 20% by the end of 2020) through provision of full energy consumption accounting, transition to energy efficient technologies and equipment, including the implementation of development projects for alternative energy sources;
• Diversification of ways and sources of energy supply (oil, gas, nuclear fuel, increase in domestic energy production, introduction of transparent rules for the development and use of energy resources);
• Liberalization of the electric and thermal power markets, coal and gas, transition to a new model of their functioning;
• Reorganization of NJSC Naftogaz according to the Third Energy Package of the EU;
• The reform of the pricing and tariff system for energy and fuel (revision of the mechanism for the balance of energy resources, renunciation of cross-subsidization and state subsidies);
• Reform of the coal industry, privatization of perspective and liquidation of unprofitable mines (Arseniy Yatsenyuk’s Government action plan, approved in 2014, provides for the liquidation of 32 loss-making mines, the preservation of 24 mines, the privatization of 37 mines), etc.
Also, an important area of energy reform is reorganization of energy markets and the implementation of European energy legislation by the Energy Community Treaty, improving the legislation and regulatory environment to attract private investment into the energy sector.
The policy of increasing energy independence is gradually taking the form of strategic documents and concrete actions. Thus, in May 2017, the Cabinet of Ministers presented a draft of the new Energy Strategy of Ukraine until 2035. Priorities: to minimize import dependence by optimizing domestic consumption and energy efficiency, to maximize domestic production of various types of fuel, to establish strategic reserves, to diversify sources and ways of energy supply, etc. Developers suggest stimulating the energy efficiency improvement through monetization of subsidies with a gradual renunciation of subsidies. In general, this strategy repeats other documents on reform of the energy sector.
There are plans to create an Energy Efficiency Fund soon (the relevant law has already been adopted), which will enable a systematic approach to the thermo-modernization of multi-apartment houses. The problem is as follows: about 90% of high-rise buildings in Ukraine need to be thermo-modernized, which, according to rough estimates, could cost more than UAH 300 billion, but the actual lending level (insulation of a house or apartment and the replacement of gas boilers with solid fuel boilers) by state-owned banks remains insufficient (more than 120,000loans for insulation amounting to more than USD 2 billion). The fund is aimed at complex measures on improving energy saving and energy efficiency in the housing stock, unlike selective “warm loans”, and is expected to save 1.5 billion cubic meters of gas annually. This project will involve not only public funds but also funds of the European Union and the German Government.
At the same time, the introduction of energy-saving technologies at state enterprises continues. In 2016 Naftogaz and companies subordinated to it saved 240 million cubic meters of gas, 25.6 million kW of electricity and 105.960 thousand Gcal of thermal energy. The total value of saved fuel and energy resources over the past year amounts to UAH 1.6 billion.
One of the main factors in achieving energy independence is raising the level of gas production. From overall production of 20.1 billion cubic meters in 2016, 14.6 billion cubic meters accrue to the state producer Ukrhazvydobuvannya. According to estimates made by officials, domestic production should grow up to 27–28 billion cubic meters by 2020 (“Ukrhazvydobuvannya” — 20 billion cubic meters) and provide
Ukraine with its own gas almost entirely. For this purpose, within the framework of the Ukraine–2020 strategy, six key areas of reform of PJSC Ukrhazvydobuvannya were identified, aimed at increasing the company’s economic efficiency: increasing production and stockpiles, improving operational and investment efficiency, etc.
The Law On the Electricity Market of Ukraine, which was adopted by the Verkhovna Rada on April 13, 2017, implementing the norms of the Third Energy Package of the EU, including the division of companies according to the areas of distribution and transmission of electricity, was an important element for further development of the Ukrainian energy market. The law creates the necessary basis for the transition to a new model of the market: moving away from a single buyer practice and the introduction of a market pricing mechanism, which provides for the elimination of cross-subsidization.
This law will liberalize the electricity market for thermal power plants starting from the second half of 2019, and for nuclear power plants and hydroelectric power plants from the second half of 2020. Electricity production companies will decide on the price for most of the electric power produced. Also, it will be possible to switch to direct contracts between electricity producers and suppliers to the final consumer.
The law eliminates the current structure of the energy market (State Enterprise Energorynok) and allows for increasing competition and optimizing the mechanism of money flow from consumers to producers.
Due to the elimination of cross-subsidies, the price of electricity for the population will become equal to the tariffs for industrial users. This means that it will be increased 1.5–2 times compared to the current level.
On the other hand, the industry will overcome the burden of subsidizing the population and will be able to win in terms of the competitiveness of Ukrainian production. An important element of strengthening the institutional capacity and independence of the National Commission, which regulates energy and utility services, was the adoption of a relevant law which came into force at the end of 2016. The document reduced the President’s influence on the NKREKP and ensured the rotation of the Commission’s members for the renewal of its composition.
It should be noted that it is still a long way off the legislative and regulatory finalizing procedures and reforms in energy and energy independence. It is necessary to implement many elements of European legislation soon, to approve the draft of the updated Energy Strategy of Ukraine until 2035 and the new edition of the Code of Ukraine on mineral resources, to implement the Concept of reforming and developing the coal industry for the period until 2020, to implement in practice the recently adopted laws On Energy Efficiency of Buildings, On Commercial Accounting of Utilities, etc.
International Monetary Fund. At this point, the key motivation for energy reform in Ukraine is its commitments to the IMF for receiving another tranche from the fund. The memorandum of March 2, 2017, indicates the following:
1. Increasing level of social assistance targeting, encouraging households to save and spend within budget limits.
From May 1 of this year, the norms of gas and electricity consumption for individual and centralized heating have already been reduced. By the end of July 2017, other parameters of the system of utility subsidies for households will be revised to improve targeting. Revision of social norms will be introduced in off-peak months during the heating season; gas and heating distribution tariff based on capacity will be applied, enabling the transfer of part of the cost to the summer months.
Thus, this will give an opportunity to limit expenditures on subsidies for utility costs to UAH 47 billion in 2017.
2. Improvement of the gas sector.
Ukraine undertakes the commitment to adjust the prices for domestically produced gas every six months so that its price would be on a par with the price of imported gas. This price revision is carried out in case of changes in the price of imported gas by more than 10%. The interim adjustment mechanism will be in effect until the tariffs are fully liberalized.
Moreover, by the end of August this year, a resolution of the Cabinet of Ministers on monetization of assistance within the framework of subsidies for housing and communal services at the level of utility companies will be adopted. Thus, private gas traders will be able to compete with Naftogaz in gas deliveries. Furthermore, the scheme, which allows non-subsidized households to receive a payment delay of 12 months, will be abolished.
Independent experts from various organizations closely monitor the implementation of the energy independence program and energy reform, including the following:
• DiXi Group Analytical Center — dixigroup.org
• Better Regulation Delivery Office — brdo.com.ua
• Independent analytical platform VoxUkraine — voxukraine.org
• Non-profit organization EasyBusiness — easybusiness.in.ua
• Center for Economic Strategy — ces.org.ua
• Energy Research Center — eircenter.com
• Association on Energy Efficiency and Energy Saving — energy-efficiency.in.ua
• Civic Network OPORA — oporaua.org
• National Ecological Center of Ukraine — necu.org.ua
On September 7, 2016, the Ministry of Economic Development and Trade changed the statute of the Naftogaz Ukrayiny energy company, taking Ukrtransgas away from its management and transferred the company to its own control. Naftogaz stated that this decision had not been agreed. The EBRD also spoke out against the decision.
Within less than two weeks, Prime Minister Volodymyr Groysman revoked the decision of the Ministry of Economic Development and Trade.According to Prime Minister Volodymyr Groysman, Ukraine will become energy independent in 3–4 years time. However, the importance of statements by politicians should not be exaggerated.
Providing there is economic growth, gas consumption by industrial users will also increase. Therefore, a gradual increase in domestic production may fail to meet rising demand. Moreover, the importance of reduction of gas consumption is somewhat exaggerated in Ukraine. In 2014–2016, gas consumption in Ukraine fell by 16% to 42.6 billion cubic meters, by 21% to 33.7 billion cubic meters, and by 2% to 33.2 billion cubic meters, respectively. The largest reduction was in industry — by 22% to 15 billion cubic meters, by 19.2% to 11.4 billion cubic meters, and by 12% to 9.9 billion cubic meters of gas (for the same period). Consequently, the decline in gas consumption was not due to the introduction of energy efficient technologies, but due to the loss of industrial capacities in Crimea and Donbas, as well as due to the decrease in production caused by the deterioration of the economic situation in 2014–2016.
The Law On the Electricity Market of Ukraine approved in the first reading in September 2016 and the adoption of the Law On the National Commission for State Regulation of Energy and Public Utilities was the price for receiving the next tranche of EUR 600 million of macro-financial assistance from the EU.
September 2009 – The EU’s Third Energy Package came into force.
September 2010 – Ukraine signed the Protocol on Accession to the Energy Community Treaty (was enacted in February 2011)
January 2015 – Sustainable Development Strategy “Ukraine-2020” was adopted
March 2015 – The Gas Sector Reform Action Plan was approved.
April 2015 – The Law “On the Natural Gas Market,” which implements the EU’s Third Energy Package, was adopted.
July 2016 – The Law on Ratification of the Paris Climate Agreement, which was signed by Ukraine in April 2016, was adopted.
September 2016 – the Law “On the National Commission for State Regulation of Energy and Utilities” (entered into force in November 2016), which implements the EU’s Third Energy Package in the part of the functioning of the national regulator, was adopted.
December 2016 – the Concept for the development of Ukraine’s gas industry was approved.
December 2016 – The Draft Energy Strategy of Ukraine until 2035 was presented for discussion.
March 2017 – Ukraine signed a memorandum with the IMF, where energy sector reform is one of Ukraine’s obligations.
April 2017 – The Government approved the Medium-term Action Plan until 2020.
April 2017 – The Law “On the Electricity Market of Ukraine”, which implements the EU’s Third Energy Package, was adopted.
May 2017 – The Concept of the Coal Industry Reform and Development for the Period until 2020 was approved
June 2017 – the laws “On the Energy Efficiency Fund”, “On the Energy Efficiency of Buildings”, “On Commercial Accounting of Utility Services” were adopted.