Experts about energy and environmental reforms: results of the year

09 December 2019

Speaking at the presentation of an annual report on the status of implementing reforms in Ukraine’s energy and environment sectors under the Ukraine-EU Association Agreement, held at Ukraine Crisis Media Center, experts said that positive shifts were observed in most energy and environmental reforms in 2019. In particular, the electricity market was launched, the unbundling in the gas sector was almost completed, and subsidies were monetized for 95% of subsidy recipients. Among the biggest challenges are what to expect in the gas sector after 1 January 2020 and the situation in the oil sector, even though the latter receives much less attention.

Gas

Among the positive changes in the gas market was the launch of daily balancing. Separation of the gas transmission system operator is nearing an end, even if in the “overdrive” mode. The government introduced new approaches to the setting of prices for households and teplokomunenergo companies, approximating them to market prices: the formula for calculation of regulated gas price for households and heat producers now includes market benchmarks, i.e. indicators showing real prices in the competitive market segment. The regulator worked on implementing European Network Codes. At the same time, discriminatory supply regime does not allow household consumers to easily change the supplier.

The issue of gas transit after 1 January 2020, after expiration of transit contract with Russia, remains the biggest risk factor. Technically, Ukraine has prepared for the “zero transit” scenario and the stocks of gas in storage reservoirs permit that, DiXi Group Research Director Roman Nitsovych says. However, zero transit would also drive prices in the competitive market segment up, and preparation for such a scenario must be made as well.

“It is quite probable that this matter will be raised today (during the meeting in Paris – editor’s note) as well, even though we strongly advised the political leadership against including the gas issue to the Normandy Format talks. The Russians are very comfortable with “inserting” the transit issue into a package agreement, together with the resumption of direct deliveries. I cannot rule out that today, they will propose to discuss it together with the Donbas question. The most important thing is not to buy it and not to give up our gains, including arbitration awards. These are uneasy talks, but there should be a clear stance that we are adopting European rules and will make contracts according to European rules, regardless of the processes occurring simultaneously: peaceful settlement, gas delivery litigations and the like,” Roman Nitsovych said.

This situation should have prompted Ukraine to find the own ways of ensuring its energy security, but the steps taken so far in this regard are not enough. “There is a lot of talk about domestic gas production, but for the time being, the changes taking place in this area aren’t fast enough to allow for large investments. There is a lot of talk about construction of interconnectors, but the investments aren’t that large,” the expert said.

Electricity

Ukraine has implemented almost all requirements concerning operation of the electricity market according to European rules, both for cross-border trade and for network access. Not a single Energy Community member state has ever launched the electricity market at such a tempo and under such political tension and uncertainty, Energy Reforms coalition expert Svitlana Golikova says. Despite numerous deficiencies that still exist and the fact that many things need to be fixed in overdrive or manual mode, it did happen anyway, and that’s an achievement.

The matter concerning energy regulator has not been completely resolved yet, but at least, starting from the last year, it began to work according to law, not presidential decrees. “We again need to make the regulator a body of executive power with a special status, and I think that this draft law will be passed by the year’s end. The next year, we should probably expect amendments to the Constitution, whereby the president will again have the powers to appoint and establish a regulatory commission,” Svitlana Golikova said.

At the same time, Ukraine’s reporting on its real achievements, both to European partners and to its own citizens, is not good enough. Most of the people do not know and do not understand how market participants must behave and how the electricity market changes the country’s life.

“We need to send the right signals to the society, authorities and our foreign partners about economically right things occurring in this sector. What’s happening today is not always right; it is rather politically expedient. But I think that common sense and economics will prevail, and in the next five years, more positive news will come from this sector,” Svitlana Golikova summed up.

Oil

The most urgent matter is creation of oil stocks: the choice of a model and adoption of bylaws regulating the mechanisms of creating these stocks and their storage, unblocking/use and replenishment conditions. Overall, the oil sector receives insufficient attention, even though it is very strategically important, Energy Reforms coalition expert Hennadii Riabtsev says.

“Everybody’s talking about serious dependence of Ukraine on Russian gas coming from reverse deliveries, while 80% of petroleum products consumed in Ukraine are produced from Russian oil. … Petroleum products are infrastructural commodities, and their quality bears upon the cost of all goods and services sold in Ukraine, so if these products will suddenly become in short supply, it will stop faster than from our default on other international commitments,” the expert stressed.

Energy efficiency

The start of monetization of housing subsidies and benefits was the most important event in the energy efficiency sector. Today, 95% of subsidy recipients receive subsidies in monetary form. But the problem is that cash and “cashless” monetization still exist simultaneously. “Until these two models will continue to exist, there will be confusion for consumers themselves and there won’t be grounds for the full-fledged emergence of retail electricity and gas markets,” Tetiana Boiko, Energy Programs Coordinator at OPORA Civil Network, said.

The situation with monetization of benefits is worse: most benefit recipients were unaware that they could apply for monetization of their benefits by 15 October. “Since no information campaign took place, most people were unaware of that. Therefore, we insist that people are enabled to apply now and switch to cash monetization. And the strategic objective for 2020 is the transition to full monetization,” Tetiana Boiko said.

The Energy Efficiency Fund began receiving applications from Associations of Apartment Building Co-owners (AABCs); 13 applications have been submitted to date. The challenge is that the Energy Efficiency Fund is presently working only with apartment buildings which created an AABC. 55% of Ukrainians live not in apartment buildings. Only 17% of these buildings have an AABC, and for the majority of AABCs this service is still unaffordable due to large sums involved. “In order for this product to become widely available, we need to think, first of all, about what to do with single-apartment buildings. The easiest thing is to leave “warm loans” for them. And as far as AABCs are concerned, we have to either leave both “warm loans” and the Energy Efficiency Fund or simplify, as much as possible, at least the “package A” from the Energy Efficiency Fund to make it widely available,” Tetiana Boiko added.

Environmental protection

Certain steps were taken to monitor the quality of ambient air, industrial pollution and environmental protection, but the implementation of directives haven’t been completed yet, Natalia Andrusevych, Chair of the Board of “Society and Environment” Resource Analytical Center, says. The National Emission Reduction Plan for large combustion plants does not have sufficient financial instruments for its practical implementation.

“We lack an enacted law on integrated permits. There are no proper financial instruments to make the National Emission Reduction Plan for large combustion plants work. In order to establish wildlife and nature conservation areas in accordance with the Birds Directive, special bilateral agreements between Ukraine and the EU are needed… The latest signals from the government give hope that certain positive shifts could be expected with regard to the access to environmental information,” Natalia Andrusevych said.

Speaking about practical application, examples of applying in practice the environmental impact assessment law and the strategic environmental assessment law are already available, although certain difficulties remain.

The ideas which appeared after the change of political leadership, advocating revision of strategic documents which took a long time to develop together with the expert community, are causing concern. “I think that we need to focus on the good things done by the previous government and parliament and continue to move in that direction; we need to adapt these things to today’s realities, not just brush them aside and start everything anew,” Natalia Andrusevych said.

Business climate

Among the achievements of the year 2019 are liberalization of foreign exchange, which is a favorable step for investors, and introduction of an auction system in the renewable energy sector. This system allows to increase competition, lower renewable energy prices and improve project implementation quality, Oleksandra Humeniuk, Director of European-Ukrainian Energy Agency, says.

Financial stability of Guaranteed Buyer, effectiveness of the PSO mechanism, launch of the additional services market, launch of auctions supporting renewable energy sources and construction of new power generating capacities remain the “homework” for the next year. The issues concerning the amount of “green tariffs” and the difference between electricity tariffs for industrial and household consumers need to be addressed, too.
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