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Ukraine’s Energy Efficiency Fund

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Efficiency dilemma

In common with other post Soviet countries, Ukraine suffers from very low energy efficiency and a high level of energy consumption in its economy. Key primary sources of energy are coal and natural gas (about 36 percent of the energy mix each), with nuclear power accounting for roughly 18 percent.[1]

The Ukrainian government has been aware of the efficiency issue for decades but has failed to make substantial progress. State officials felt no great incentive to take any meaningful active measures, as Russia always sold natural gas to Ukraine at low prices.

The mood changed dramatically in 2014 when the need for a long-term energy efficiency drive was made painfully obvious by the flare up of tensions between Ukraine and the Russian Federation. In particular, Ukraine’s northern neighbor tried to pressurize the new administration and the state-owned company PJSC “Naftogaz of Ukraine” into buying natural gas at much higher prices than previously. This kick-started the Ukrainian government into taking a number of sporadic energy efficiency initiatives, such as partial reimbursement of loans to households to replace gas boilers, special ESCO legislation in the public sector, and special tariffs for producers of heat from alternative fuel.

While these measures had some effect, they were soon deemed insufficient, and both public officials and civil society realized that a more systematic approach was required, in particular in terms of providing financing for energy efficiency measures in the district heating sector.

This culminated in late 2015 / early 2016 with the government proposing that an Energy Efficiency Fund be set up to create sustainable financing for energy efficiency activities in district heating and related areas. Discussions ensued, resulting in the Cabinet of Ministers of Ukraine adopting a formal ‘Concept for the Implementation of Mechanisms for Sustainable Financing of Energy Efficient Measures’ by Resolution No. 489-p of 13 July 2016. The Resolution paves the way for the regulatory framework needed to establish the Energy Efficiency Fund, as discussed below.

Savings opportunity

The Concept estimates that the country loses out to the tune of US$3 billion annually through the inefficient use of fuel and energy in district heating costs, meaning that some 60 percent of energy resources are wasted. Household energy consumption is running at 20,384 Mtoe, which is almost 33 percent of total consumption in Ukraine ‒ 58 percent of which is natural gas.

Ukraine burns on average 18.6 bcm of gas per annum to meet its district heating requirements. If Ukraine enjoyed EU levels of gas consumption efficiency, it would save up to 11.4 bcm annually (equivalent to 60 percent of Ukrainian imports). This could be achieved through the following measures: (i) thermal upgrade of buildings (up to 7.3 bcm); (ii) replacement of residential boilers (up to 1.7 bcm); (iii) boiler upgrades (up to 1.1 bcm); and (iv) pipeline upgrades (up to 1.3 bcm).

The intensity of individual energy consumption in Ukraine is two to three times higher than in western EU member states. To achieve a comparable level of energy efficiency, an estimated UAH 830 billion (approx. US$32 billion) would need to be invested in thermal upgrades of buildings. Disappointingly, only UAH 893 million (approx. US$34 million) was allocated for these purposes in the state budget for 2016–2017. Given scant resources in state and local budgets, sustainable financing of energy efficiency projects in residential buildings is possible only with additional funding from international financial and donor organizations.

Creating the Energy Efficiency Fund

The Ukrainian government believes the Energy Efficiency Fund will successfully attract external financial resources. It will be based on the principles of transparent and efficient use of available resources and on the model European approach towards cooperation between state and international financial organizations.

The Fund should start operations in 2017 (most likely full scope operation will start in April 2017, according to recent statements by government officials) and optimal results are expected to be achieved in a 15 year horizon. Key goals include: (i) a reduction in the consumption of natural gas forecast at 1.5 bcm annually, saving UAH 9.1 billion (US$350 million) annually and improving stability of the local currency and energy efficiency; (ii) reduction in direct subsidies (UAH 5 billion annually) and other breaks for consumers with respect to utilities payments; (iii) creation of a new market for energy efficiency measures; (iv) creation of up to 75,000 new jobs; (v) increased tax payments of up to UAH 10 billion; and (vi) a reduction in household bills, and increased investment by households in their own energy efficiency.

The government plans that, initially, the Fund will use existing mechanisms of support available under state and local budgets. According to official statements, UAH 800 million (US$31 million) has been allocated for the Fund, and up to US$110 million is expected from international partners for 2016-2017.

The Cabinet of Ministers of Ukraine expects to create the Fund directly as a state establishment, as proposed under the Bill: Law on Energy Efficiency of Buildings No. 4941 of 11 July 2016, planned to be voted on in November 2016. The Fund will act on the basis of a charter approved by the government.

It is expected that the Fund will, in particular: (i) reimburse part of the interest payable on loans (or part of loans) obtained by individuals, associations of co-owners of condominiums and ESCO companies for energy efficient measures related to residential households, public establishments and organizations; (ii) provide technical support (energy audit, technical and economic feasibility, etc.) for projects aimed at enhancing energy efficient measures of residential households, public establishments and organizations and heating supply buildings; (iii) provide proposals for state policy in the sphere of energy efficiency and related instruments; and (iv) perform other functions in accordance with its charter.

The Ministry of Regional Development and Municipal Economies of Ukraine is currently working on the structure of the Fund, and the government is expected to approve its internal structure (financing, staff, etc.) after consultations with all interested parties in October–November 2016.

[1] https://www.eia.gov/beta/international/analysis.cfm?iso=UKR