Ukraine’s energy efficiency fund

November 2016  |  SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

November 2016 Issue

Ukraine, similar to other post Soviet countries, still suffers from a high level of energy consumption in its economy and very low energy efficiency. The Ukrainian government has attempted to tackle this issue for decades without substantial success, and given that the price for Russian gas was always low for the pro-Russian government of Ukraine, Ukrainian state officials were reluctant to take active measures to address this issue.

The activation of energy efficient measures in Ukraine became vital and inevitable after the start of the hybrid war initiated by the Russian Federation in 2014. In particular, Ukraine’s northern neighbour tried to force the new government of Ukraine and the state-owned company PJSC Naftogaz Ukrayyny to buy natural gas at exorbitant prices. Soon after, the Ukrainian government answered this problem with a number of sporadic energy efficiency initiatives, such as partial reimbursement of loans provided to households to replace gas boilers, special ESCO legislation in the public sector, special tariffs for heat producers from alternative fuel, etc. Although these measures had some effect, they were not sufficient, and both public officials and civil society realised that a more systematic approach, in particular with financing energy efficiency measures in the district heating sector, is required.

As a result, at the end of 2015 and the beginning of 2016, the Ukrainian government came up with an idea of establishing an Energy Efficient Fund to create sustainable financing of energy efficiency activities in Ukraine in district heating and related areas. The concept of this fund was discussed for more than half a year, and the discussions resulted in the passing of a ‘Concept for the Implementation of Mechanisms for Sustainable Financing of Energy Efficient Measures’ (that is, the establishment of the Energy Efficiency Fund) as adopted by Resolution of Cabinet of Ministers of Ukraine of 13 July 2016 No. 489-p.

According to the Concept, the inefficient use of fuel and energy in district heating costs Ukraine and its citizens US$3bn annually (60 percent of energy resources is wasted). The volume of households’ energy consumption amounts to 20,384m or almost 33 percent of total final consumption in Ukraine, and 58 percent of such consumed energy is natural gas.

The average volume of gas necessary for district heating equals 18.6 bcm. If Ukraine reaches EU levels of gas consumption, it can save up to 11.4 bcm annually (60 percent of the Ukrainian import). This can be achieved due to the following measures aimed at the respective reduction in annual gas consumption: (i) thermal modernisation of buildings (up to 7.3 bcm); (ii) replacement of individual boilers (up to 1.7 bcm); (iii) modernisation of boilers (up to 1.1 bcm); and (iv) modernisation of pipelines (up to 1.3 bcm).

The indicator of specific energy consumption in Ukraine is two to three times higher than in developed EU countries. As a result, the need for investment in thermal modernisation amounts to UAH 830bn (the current UAH/USD exchange rate is approximately 26). However, so far only UAH 893m was allocated for these purposes in the state budget for 2016-2017. Given the scant resources in state and local budgets, sustainable financing of energy efficient projects in residential buildings is possible only with additional financing from international financial and donor organisations.

The Ukrainian government believes that establishing the Energy Efficiency Fund on the basis of a transparent and efficient use of financial resources and on the basis of European approaches toward partnership between state and international financial organisations will help to solve these issues. The government plans that at the first stage the Fund will use existing mechanisms of support from state and local budgets.

The Fund should start operation in 2016-2017 and optimal results are expected to be achieved in 15 years. Among these include: (i) a reduction in the consumption of natural gas forecast at 1.5 bcm annually, which will save UAH 9.1bn annually and improve stability of the local currency and energy efficiency; (ii) reduction in financing subsidies (UAH 5bn annually) and other breaks for the population with respect to utilities payments; (iii) creation of a new market of energy efficient measures; (iv) new employment with up to 75,000 jobs; (v)  increased tax payments of up to UAH 10bn; and (iv) a reduction in household bills, and an increased investment by households in their own energy efficiency.

According to official statements, UAH 800m has already been allocated for the Fund and up to €100m is expected from international partners for 2016-2017.

In accordance with the Draft Law of Ukraine On Law on Energy Efficiency of Buildings No. 4941 of 11 July 2016, registered by the Ukrainian government in the parliament (and which is planned to be voted on in October 2016), the Cabinet of Ministers of Ukraine will itself found the Fund in the form of a state establishment which will act on the basis of its charter approved by the Ukrainian government.

The Fund will, in particular: (i) reimburse part of interest under loans (or part of loans) obtained by individuals, associations of co-owners of condominiums, ESCO companies for energy efficient measures related to residential households, public establishments and organisations; (ii) provide technical support (energy audit, technical and economic substantiation, etc.) for projects aimed at enhancing energy efficient measures of residential households, public establishments and organisations, and heating supply objects; (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 is currently working on the structure of the Fund, and it is expected that the Ukrainian government will approve its internal structure (financing, staff, etc.) after consultations with all interested parties in October 2016.

 

Maksym Sysoiev is an associate at Dentons. He can be contacted on +380 44 494 4774 or by email: maksym.sysoiev@dentons.com.

© Financier Worldwide

BY

Maksym Sysoiev

Dentons

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