Monitoring of the reforms progress based on the analysis of the implementation
of the recommendations of sectoral analytical brief for URC 2021
Section 1. Monitoring of the implementation of recommendations on reform priorities for 2020–2021
1. Providing consumers with energy resources at affordable prices, following the principles of protecting vulnerable consumers, energy efficiency and minimizing the negative impact on the environment.
In 2020–2021, administrative price regulation remained to be the main mechanism of protecting vulnerable consumers from price fluctuations in energy markets. This approach cannot be considered fair and effective, as it applies to all household consumers, regardless of their solvency. In particular, in the gas sector until August 2020 there was a regime of special responsibilities (hereinafter - SR), from January to March 2021 the maximum gas price for household consumers was set, and from May 2021 to the end of April 2022 a mandatory annual product is enacted on the retail market has. In the retail electricity market, the SR mode with a fixed final price of UAH 1.68 per 1 kWh is maintained.
The availability of energy for vulnerable consumers in 2020–2021 was ensured by the payment of subsidies, for which the 2021 budget provides UAH 36.6 billion - slightly less than in 2020 (UAH 37.2 billion). The number of households that received subsidies for housing and communal services (hereinafter - HCS) in 2020–2021 was 2.7–3.4 million, or 18–23% of all households in the country. Additional criteria for ensuring the targeting of subsidies, introduced by the resolution of the Cabinet of Ministers of Ukraine (hereinafter - the CMU) of April 14, 2021№ 420, still contain risks of receiving subsidies by those consumers who are able to pay for HCS independently. At the same time, some of the restrictions imposed by the Government may lead to the deprivation of subsidies to those who really need them.
At the same time, funding for measures aimed at combating the root cause of subsidies - low energy efficiency of households - has decreased. The state program of "warm loans" was extended in 2021, but the amount of its funding decreased to UAH 150 million (in 2020 - UAH 400 million). The State Budget of Ukraine for 2021 also does not provide funds to expand the funding of the Energy Efficiency Fund. The budget declaration for 2022-2024 contains almost no allocations for energy efficiency.
Deepening the problem of chronic underfunding of the industry and the debt crisis in the markets of natural gas and electricity (in case of continued administrative regulation of energy prices for household consumers).
Restrictions on competition in retail markets (due to price restrictions, suppliers are not able to compete with each other).
There are fewer incentives for consumers to take energy efficiency measures (both due to continued regulation of energy prices and due to insufficient financial support for energy efficiency measures by the state and local authorities).
Paralysis of the Energy Efficiency Fund and discrediting the idea of energy efficiency in case of the absence of funding for these purposes in the budget.
2. Implementation of the Law on Commercial Accounting as a major step towards the implementation of energy-efficient measures in the housing sector.
In December 2020, the Law of Ukraine "On Commercial Accounting for Heat and Water Supply" was amended, according to which the deadline for providing 100% of commercial heat accounting was postponed from August 1, 2020 to August 1, 2022. As of April 2021, 83% of residential buildings in Ukraine are equipped with heat meters. Note that the majority of Ukrainians pay for household meters, although the greatest incentive to save heat is possible only in the case of individual metering and payments for it.
Similar changes have been made to the Law of Ukraine "On Ensuring Commercial Accounting for Natural Gas" - 100% accounting for natural gas has been postponed from January 2021 to January 2023. As of January 2021, the total percentage of commercial accounting of natural gas used by the population in Ukraine is 92%, and in some regions and cities - less than 80% (Donetsk region, Kyiv, Kharkiv). The most problematic category of consumers is those who live in apartment buildings and use natural gas only for cooking.
It should be noted that the bylaws required for the implementation of both laws (which determine the mechanisms for ensuring commercial accounting) have not been developed to date. Therefore, it is likely that the deadlines will be postponed again.
3. The adoption of the Law on Energy Efficiency, which will ensure significant progress in closing gaps in the implementation of Directive 2012/27/EU.
Appropriate bill № 4507 "On energy efficiency" was adopted in the first reading and prepared for the second reading. It partly takes into account the main principles enshrined in Directive 2012/27/EU.
At the time of our monitoring, preparations for the second reading of the mentioned bill in the profile committee were underway. There is a risk of losing many important provisions due to misunderstandings of committee members and editorial changes.
There is a risk of non-compliance with the law after its adoption due to lack of resources for its implementation. The explanatory note to the bill states that the implementation of the law does not require expenditures from the central and local budgets. This does not correspond to practice, as large-scale implementation of energy efficiency measures requires large capital investments and government support. Thus, there may be a situation when a key law is adopted, but resources for its the implementation are not provided.
4. Ensuring proper governmental support of the energy efficiency measures for the population (the “warm credit” program, the Energy Efficiency Fund and others).
State support for the implementation of energy efficiency measures has fallen to a minimum - 150 million UAH in the 2021 state budget for the program "warm loans". For a country's housing stock of millions of homes, it's a drop in the ocean. According to estimates by the Ministry of Communities and Territories Development, capital investments in large-scale renovation of residential buildings should amount to UAH 40-100 billion annually. The availability of sufficient funding from the Energy Efficiency Fund for the coming years remains questionable.
5. Proper communication of reforms and available support programs to the population.
Apart from general policy declarations on the importance of energy efficiency, no significant steps have been taken over the past year to confirm the readiness to implement energy efficiency measures in buildings as well as in other sectors of the economy. Among the main reasons: low institutional capacity and lack of understanding of the importance of the issue, lack of political will to make systemic steps in the industry.
In general, information on reforms is fragmented and unsystematic. The State Agency for Energy Efficiency and Energy Saving of Ukraine (hereinafter - the State Agency for Energy Efficiency), in particular, practically does not communicate reforms and support programs in the field of energy efficiency.
The information campaign on reforming the electricity market and the related increase in the price of electricity for the population also failed. The increase in prices, which is gradually being introduced from January 2021, is also taking place without proper justification and social advertising, which should facilitate the perception of household consumers of the relevant pricing decisions.
Resistance to reforms among the population and, as a consequence, an increase in the number of defaults on housing and communal services and other negative phenomena that will only exacerbate the crisis in energy markets. Ministry of Energy, National Commission that performs state regulation of energy and utilities (hereinafter - Regulator), the State Agency for Energy Efficiency do not cooperate for proper communication of reforms. Attempts to explain certain decisions to the population are isolated and do not become part of a nationwide campaign. Also, the media focuses more on discussing issues than explaining the logic or content of reforms.
6. Completion of the electricity market reform: a complete transition from the sole proprietor pool of SE “Energy market” to the free market and electricity trading.
Although formally the electricity market is considered open and reformed, in reality it remains segmented, only partially open, with many problems continuing to accumulate. According to the data of the Regulator, the level of competition in the market for the volume of electricity sales in the network was 3389 (according to the Herfindahl-Hirschman index, HHI). This indicator indicates a high level of concentration, low competition, the threat of monopolization and deterioration compared to the same period in 2020 (HHI = 2075).
Despite the efforts of the Government and the National Commission for Regulation of Economic Competition during the year to "extinguish fires" and implement certain regulatory changes, no fundamental steps have been taken to stabilize and improve the situation. At the initiative of the Ministry of Energy of Ukraine, the Government extended the imperfect SR mechanism in the electricity market until August 1, 2021. In early July 2021, there was a record collapse in market prices, which, according to the Antimonopoly Committee of Ukraine, had signs of anticompetitive concerted actions. After that, the Ministry of Energy initiated the introduction of temporary restrictions on the activities of dishonest buyers - the so-called “blacklist”. Such actions of the Government are an example not just of imperfect regulation, but of violation of European directives in terms of free access to markets.
Further distortion of the market model and imperfect regulation will not solve the problems of the previous market model and will also lead to new negative consequences. Despite the introduction of the wholesale electricity market in 2019, manual control is preferred, numerous regulatory restrictions on prices and rules of trade in various market segments are established and put in force, there is still a possibility to import electricity from countries that are not members of the Energy Community, SR model remains imperfect. As a result of such processes, the current model of the electricity market shows disparities in all its segments, financial instability of generating companies, debt crisis, unfavorable investment climate, unregulated functioning of the renewable energy sector.
7. Completion of the gas market reform: full liberalization of the gas market for domestic consumers.
Replacing direct price regulation in the retail market with quasi-SR, which eliminates the possibility of fair competition, and thus deprives the consumer of incentives to change suppliers, and suppliers - to "fight" for the consumer.
The draft law № 3508-d adopted by the Parliament contains significant risks, including corruption, offering to cover the commercial debts of gas distribution network operators at the expense of the state budget.
Terms of gas supply for the needs of communal heating enterprises by Naftogaz provide for advance payment and a very strict regime of gas selection with significant penalties for non-selection or overuse of ordered volumes. Such conditions create a great risk for communal heating enterprises, which has significant debts for previous periods, cannot guarantee advance payments and risks receiving serious fines and gas at the price of the “last hope” supplier, which in turn will lead to an avalanche of tariffs for heat and social protests by consumers.
The transfer of the Regulator's authority to set the heat tariff to local governments runs the risk of potential abuse by communal heating enterprises and local governments in both fuel purchases and tariff calculations, leaving consumers without access to inflated tariffs.
8. Ensure open-market competition with access for new players.
In June 2021, the Parliament adopted bill № 4578-1 in the second reading, which should simplify the procedures for connection to the gas transmission and distribution systems. Connections and access to networks should be simplified, and the number of grounds for denial of connection should be reduced.
9. Integration with the European markets.
In the gas sector, procedures for providing gas storage services are improving, they are becoming increasingly popular among foreign traders; Ukraine's rating as a gas hub is rising.
In the electricity sector, the Government together with Ukrenergo has intensified efforts to join Ukraine to ENTSO-E by 2023. However, Annex XXVII has not been implemented to the extent that it has been ratified.
Political instability, which can be an obstacle to legislation and government decisions for further integration into the gas and electricity markets; opacity in the implementation of Annex XXVII of the Association Agreement.
10. Ensure effective independent regulation for natural monopolies.
During 2020, the Regulator revised the methodology for calculating natural gas for technological needs for gas distribution network operators, and updated distribution tariffs in accordance with the new methodology. In the field of electricity in 2020, the Regulator approved a methodology for incentive tariffs for distribution network operators. At the same time, the issue of legislative support for the independence of the Regulator has not been resolved yet. In December 2019, in pursuance of the decision of the Constitutional Court of Ukraine (hereinafter - CCU), the Parliament amended the Law of Ukraine "On the National Commission for State Regulation of Energy and Utilities", changing the status of the body from independent state collegial body to "central executive body with special status". In addition, the guarantees of independence provided for in paragraph 1 of Article 5 of this law have been abolished. The Energy Community Secretariat in its annual Reports on the implementation of the acquis by the member states noted that the current version of the law is a temporary solution, because to consolidate the independence of the Regulator it is necessary to amend the Constitution of Ukraine. The Energy Community also noted that the current situation with the status of the National Commission for Regulation of Economic Competition violates Ukraine's obligations to implement European legislation.
The mentioned status of the Regulator does not allow to increase its capacity and improve both the monitoring of energy markets and their regulation.
11. Control over the quality of energy resources and services.
In 2020, the Regulator conducted 695 inspections of licensees in the field of energy and housing and communal services. It should be noted that the number of refusals to conduct inspections has decreased from 96 in 2019 to 20 in 2020, which is related to solving the problem of unified forms of acts of the National Commission for Regulation of Economic Competition. At the same time, in 2020 the control functions of the Regulator were limited in accordance with the requirements of the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Aimed at Preventing the Occurrence and Spread of Coronavirus Disease (COVID-19)", as a result of which scheduled inspections have not been conducted since March 2020. As a result, the amount of fines imposed on licensees decreased to UAH 56 million (in 2019 - UAH 129 million). The adjustment of tariff revenue to UAH 561 million (in 2019 - UAH 4,085 million). 9% of all violations identified in 2020 concerned provision network connection services and non-compliance with guaranteed quality standards.
Control over the quality of heat supply services for most licensees in the field of heat supply is entrusted to local governments. Their ability to perform control functions is questionable (see 1.2.2)
Weakening of the functions of supervision and control by the relevant licensing authorities (Regulator, local governments in the case of heat supply) pose a threat of non-detection of violations of licensees and reduce the quality of services they provide.
12. Ensure the formation of prices in the energy markets based on the balance of supply and demand, the rejection of state subsidies to the sector.
In the wholesale natural gas market, market pricing continued to operate, which, however, was not based on the balance of supply and demand in the Ukrainian market, but on import parity (pegging to prices at European hubs, taking into account transportation costs to the Ukrainian border). On the one hand, there are objective grounds for this, as Ukraine imports a third of its gas resources from Europe. At the same time, it is necessary to develop the Ukrainian Energy Exchange, sufficient liquidity of which would allow it to form a transparent and comprehensive price indicator that would show the actual balance of supply and demand in the Ukrainian natural gas market. In the retail market, free pricing, which would reproduce the situation with the balance of supply and demand in the wholesale market, was limited, in particular due to the introduction of annual tariffs, which, on the one hand, protected household consumers from price fluctuations, on the other - limited competition in the retail market.
In the wholesale electricity market, the SR regime continues to operate, which obliges the state-owned Energoatom and Ukrhydroenergo to sell electricity to the State Enterprise “Guaranteed Buyer” at preferential prices. The Regulator also accuses individual players of manipulating the wholesale electricity market, which leads to anomalous rises and falls in prices that are not related to the actual balance of supply and demand. The consequence of price regulation and distortion of the market structure is the accumulation of significant debts and losses by market participants: the debt of the State Enterprise "Guaranteed Buyer" to electricity producers in November 2020 reached UAH 30 billion, while the debt of "Ukrenergo" to it at the end of 2020 amounted to UAH 23.9 billion. Energoatom suffered losses of UAH 4.8 billion in 2020 (UAH 3.8 billion in profit in 2019) due to the need to sell electricity to the population at reduced prices.
Also, the deregulation of electricity prices and market development are generally constrained by historical debts formed under the previous market model: as of May 1, 2021, receivables of Energorynok are more than UAH 29 billion, and accounts payable - UAH 27 billion.
The increase in the final price of electricity for household consumers has been postponed again. In addition, some categories of household consumers have been promised a reduction in the electricity tariff, although it is still unprofitable today.
Financial instability of state-owned companies, which have special responsibilities in the electricity market (Energoatom, Ukrhydroenergo) due to the continued operation of the SR mechanism in its current configuration.
Continuation of manipulations on the wholesale electricity market, in particular due to the inaction of the authorities in terms of transposing the provisions of Regulation (EU) 1227/2011 (on the integrity and transparency of energy markets) into Ukrainian legislation.
Restriction of competition in the retail market of natural gas due to the introduction of annual tariffs.
Low liquidity of the Ukrainian Energy Exchange, which cannot yet be a transparent market price indicator.
Postponing the increase in electricity prices for household consumers worsens the overall financial condition of the industry.
13. Full monetization of subsidies and benefits for the population.
From the beginning of 2019 until May 2021, the process of monetization of subsidies continued. In the spring of 2019, Ukrainians were able to receive subsidies in cash, and from 2020 - to switch from non-cash to cash payments without any restrictions. During the heating season 2020–2021, 95% of subsidies for housing and communal services were received in cash and only 5% - in non-cash. From May 1, 2021, the process of monetization of subsidies was completed, the transition was made exclusively to the monetary form of receiving subsidies.
Privileges for housing and communal services began to be provided in cash from October 2019. From January 2020, beneficiaries also have the opportunity to switch from non-cash to cash benefits at any time. In 2021, there are still two models of cash benefits: non-cash and cash. As of 2020, there were about 2.6 million people in Ukraine eligible for housing benefits, and more than 90% of them continued to receive benefits in non-cash form. The process of monetization of benefits continues.
14. Ensure the political and financial independence of the Regulator.
The financial independence of the Regulator is ensured by regulatory fees paid by licensees from their own net income. The contribution rate is gradually increasing - from 0.088% in 2021 to 0.099% in 2022 (planned rate).
Following the decision of the CCU to declare certain provisions of the law on the Regulator as unconstitutional, the latter was amended accordingly, in particular to the articles containing guarantees of its independence (Article 5). As a result, the status of the Regulator changed from a “permanent independent collegial body” to a “central executive body with a special status”. Ensuring guarantees of the Regulator's independence at the regulatory level now requires amendments to the Constitution of Ukraine.
Greater possibility of political influence on the Regulator, in particular by the Cabinet of Ministers, as a result - the threat of creating obstacles to fair and impartial regulation of energy markets.
15. Ensuring the transparent functioning of the energy sector, including the proper management of natural resources, as well as the proper and comprehensive openness of the data.
Transparency in the functioning of energy markets in Ukraine has improved in 2020 compared to 2019. This is confirmed by the energy transparency index of Ukraine. The greatest progress has been made in the categories of "Consumption", "Natural Monopolies" and "Supply". In general, sectoral transparency is determined by the degree of readiness of the regulatory framework. Following the introduction of new rules in the electricity market in 2020, the transparency of the sector began to grow rapidly, even compared to the gas sector. The transparency of the oil and liquid fuel sector, which receives less attention by the state, remains unsatisfactory.
16. Implementation of the Law on Provision of Transparency in Extractive Industries
In order to implement this law, secondary legislation was adopted in 2020, and a multilateral stakeholder group was relaunched. The reports of the Extractive Industries Transparency Initiative for 2019 and 2018 were prepared and published, which "caught up" with the non-compliance with the law during the previous two years. Part of the signed production sharing agreements has been published, however incompletely, so implementation is still partial. The Ministry of Energy has received the EITI Platform on its balance sheet, but its full launch with online company reporting is expected in autumn 2021. Bill № 3790, which provides for full disclosure of contracts in the extractive sector, registered in the Parliament.
17. Ensuring consistency between strategic documents and key industry institutions.
The National Economic Council approved strategy for the period up to 2030, which lays down a long-term vision of economic development - climate neutrality until 2060. The document should become an important basis for the development of action plans, draft program and strategic documents by central executive bodies. As a result of consultations with other ministries, the Ministry of Environmental Protection and Natural Resources of Ukraine has prepared a rather ambitious project of The second nationally defined contribution of Ukraine to the Paris Agreement, which contains key sectoral goals and measures, including in the energy sector, buildings, etc. At the same time, the Energy Efficiency Action Plan until 2030 has not yet been approved, and other medium- and long-term documents are under development and drafts. As of June 2021, the CMU has not approved Ukraine's Second nationally defined contribution to the Paris Agreement, although the deadline for its submission to the Secretariat of the UN Framework Convention on Climate Change has long expired.
Powers to formulate energy efficiency policies, which are shared between several ministries, remains uncertain. In addition, the head of the State Agency for Energy Efficiency has not been appointed for more than 20 months, which does not contribute to the certainty and ability to implement policy in this area.
18. Establishing effective synergies and promoting good governance between all public institutions responsible for developing and implementing public sector policies.
Central executive bodies and other state institutions interact with each other, but are not sufficiently coordinated. For example, the country's energy efficiency policy is assigned not to one, as before, but to two ministries - the Ministry of Energy and the Ministry of Communities and Territories Development of Ukraine. The former has been mandated to formulate energy efficiency policies in industry and oversees the State Agency for Energy Efficiency, while the latter has the authority and competencies for energy efficiency in buildings. However, in some areas the distribution of functions is unclear. For example, utility companies are under the jurisdiction of Ministry of Communities and Territories Development, although they should be approached as an industry. This leads to the fact that the utility sector is out of the attention of any ministry.
19. Integration of energy and environmental strategies, stimulation of emission reductions by energy producers.
The strategies are to some extent integrated in the drafting of the Second national defined contribution of Ukraine to the Paris Agreement and in the National Economic Strategy for the period up to 2030. At the same time, no progress has been made in implementing the National plan for reducing emissions from large combustion plants (TPPs and CHPs).
Given that the Energy Efficiency Action Plan for the period 2020-2030 has not been approved (see paragraph 1.5.1), it is difficult to talk about full policy integration. The Budget Declaration for 2022–2024, developed by the Ministry of Finance of Ukraine and approved by the Government, contains virtually no plans for expenditures to support energy efficiency, in particular the Energy Efficiency Fund and the “warm loans” program. It is worth noting that a strong government policy aimed at improving energy efficiency could contribute to the use of the enormous potential to reduce greenhouse gas emissions at the national level. In practice, this area is not a priority of the Government at all.
20. Sustainable implementation of the developed state policies.
The declared policy course for the decarbonisation of Ukraine's energy and economy is still "used" to subsidize the coal industry: UAH 3 billion in the State Budget of Ukraine for 2021 is provided for expenditures of "Restructuring of coal industries" (which are mainly used to cover wage arrears). At the same time, the Concept of Reforming the Coal Industry for 2020–2024 still exists only as a project. Moreover, it provides for the privatization of all state-owned mines (except those subject to liquidation) in April 2022. The concept of transformation of coal regions of Ukraine also exists at the project level, while the first two pilot projects on transformation of coal regions in Chervonohrad and Myrnohrad are only planned to be launched.
Transition to market pricing in the retail market of natural gas announced by the CMU took place in August 2020. However, in early 2021, during the seasonal increase in gas prices, the maximum price for natural gas was set, and subsequently annual tariffs in the retail market were introduced, which essentially meant quasi-SR, i.e. indirect regulation of gas prices for the population. Thus, retail market reform has also been limited.
The dates for the transition to full commercial accounting of natural gas and heat have not been met and have been postponed until 2023 and 2022, respectively.
Distribution system operators, as planned, have been transferred to incentive tariffs, while the effectiveness of RAB tariffs still needs to be proven through the effective modernization of infrastructure by distribution system operators.
Possible social tensions in the coal regions in the event of slowing down industry reforms; continuation of subsidies to the coal industry; restriction of competition in the retail market of natural gas, lack of full commercial energy accounting - the threat of potential manipulation of consumption.
21. Ensuring the proper implementation of European legislation in all energy sectors.
As of May 2021, in order to implement the Association Agreement between Ukraine and the EU in the fields of energy, energy efficiency and the environment, Ukraine has yet to implement twenty acts of the European Union into its legislation. To this end, it is necessary to adopt bills on the prevention of abuse in the wholesale energy markets, on payment for electricity transmission services in export operations, on energy infrastructure, as well as on the research, exploration and production of hydrocarbons. In the field of environmental protection, according to the report of the EU-UNDP project on parliamentary reform, Ukraine must also implement almost two dozen acts of European Union law in order to approximate its legislation in this area to the European one.
Among the important "European integration" bills of 2021 are: the framework bill "On energy efficiency" (adopted in the first reading), the draft of updated Subsoil Code developed by the Ministry of Environmental Protection and Natural Resources of Ukraine. Their adoption will significantly advance Ukraine in bringing national energy legislation closer to European requirements.
At the same time, the draft law (with several alternatives) has not yet been adopted to implement Regulation (EU) № 1227/2011 on the integrity and transparency of the wholesale energy market (REMIT), which has already become the basis for the Energy Community to open a case against Ukraine (REMIT transposition to Ukrainian legislation was to take place by November 29, 2019, and implementation - by May 29, 2020).
In 2020–2021, Ukraine did not move towards the implementation of Directive 2009/119/EU on the establishment of minimum reserves of crude oil and petroleum products. The model for creating minimum stocks has not been approved yet, although the stocks themselves should be formed by the end of 2022.
Continuation of manipulations on the wholesale electricity market (non-approval of REMIT), preservation of the problem of "dormant licenses" (the decision is provided by the Subsoil Code due to the constant fee for subsoil use); the absence of an "airbag" (minimum stocks of petroleum products) in terms of import dependence in the supply of petroleum products.
22. Increase of energy production from own energy resources, with priority for development of renewable sources.
The main threat is the curtailment of foreign and domestic investment. During the year the Government continued to resort mainly to manual solutions to problems in the energy sector. The "uncontrolled growth of renewable energy sources" and the fact that the state's obligations under the "green tariff" are becoming a burden on the economy have been repeatedly discussed. The greatest contraction in the development of renewable energy will affect investment and trust in the state. As of July 2021, Ukrainian banks do not lend to renewable energy projects in the country due to the situation that has arisen with settlements with renewable energy producers based on the "green" tariff. In June 2021, NEFCO (Nordic Environment Finance Corporation) stated that it refused to invest in new renewable energy projects in Ukraine: “... waiting, "... waiting for the Government to start adhering to its commitments and for a stable and predictable investment environment to be established in the country."
23. Maintain an ongoing dialogue with coal-mining communities, promote social development through the adoption of socio-economic support programs for the regions with closing mines, and setting up a special Commission on Structural Change, which will include representatives of state and local government, business, science, trade unions and non-governmental organizations.
In May 2020, the Coordination center for the transformation of coal regions (hereinafter - CC) was established under the Cabinet of Ministers of Ukraine. It’s first meeting took place in October 2020. It included relevant government officials, heads of regional state administrations, MPs, representatives of coal mining companies, trade unions, and associations of local governments. In particular, members of the CC are expected to analyze the real state of the economy and social security in mining towns and suggest options for new areas of local economic development and job creation.
Initially, the leaders of the mining towns were not included in the list of members of the CC, but the representatives of three coal communities of Donetsk region (Vugledar, Myrnograd, Toretsk) were added afterwards. It is necessary to state that the CC still lacks other important stakeholders (NGOs, scientists, etc.).
Recently, the concepts of state programs for the reform of the coal industry (Ministry of Energy) and the transformation of coal regions until 2030 (Ministry of Communities and Territories Development of Ukraine) have been developed. As of July 2021, the concepts have not been approved by the Government.
A dialogue with representatives of mining communities has started, but more attention is now focused on the two pilot cities within the Ukrainian-German energy partnership.
24. Ensuring a sustainable and efficient use of energy infrastructure, in particular the gas transportation system.
The first step towards sustainable and efficient use of energy infrastructure in the field of electricity distribution has been taken through the introduction of incentive tariffs (RAB-regulation), which in the future should be accompanied by effective control over the use of funds for infrastructure upgrades and modernization.
Tariff formation for natural gas distribution services is still based on the “cost +” model, so operators continue to complain about permanent losses, in particular because the material costs provided by the tariff do not cover the costs of regional gas companies to purchase gas to cover production and technological costs/losses of the natural gas (hereinafter - PTC). As a result, gas distribution system operators are not yet able to effectively modernize gas distribution networks and reduce PTC. The issue of possible cost optimization for the "release" of tariff funds for investments in the network should also be of interest to the Regulator.
Heat networks are used the least efficiently among all transport infrastructure in the energy sector. According to the National Commission for Regulation of Economic Competition, in 2020 the losses in the heat networks of its licensees as a percentage of the total heat supply to the network amounted to as much as 22.8%. The reason is the tariff policy, which did not allow heat supply companies to modernize their infrastructure. Tariffs did not even cover material costs, as a result of which heat supply companies accumulated multibillion-dollar debts to Naftogaz for used gas. Such arrears significantly limit communal heating enterprises’ ability to raise funds to upgrade networks.
Effective use of the gas transmission system after 2024 is in question. Completion of Nord Stream-2 threatens the continuation of the Russian gas transit. At the same time, the ten-year plan for the development of the gas transmission system, developed by the gas transmission system operator, takes into account the scenario of "zero" transit after 2024. It envisages reorientation of the gas transmission system to the needs of domestic consumers, but the possibility of financing this is questionable, given the accumulation of debts to the gas transmission system operator for negative imbalances - UAH 9.8 billion as of May 2021.
Deterioration of the quality of energy services due to underfunding of measures to modernize energy infrastructure. Thus, SAIDI indicators (duration of power outages) due to the fault of companies in 2020 increased by 20% compared to the same period in 2019.
25. Comprehensive preparation for the integration of Ukrainian energy system into the European ENTSO-E, modernization of mainstream networks and substations.
The progress of the last year includes the implementation of a number of technical measures for the integration of the Ukrainian power system into ENTSO-E, as well as the preliminary certification of the Ukrenergo. However, Annex XXVII to the Association Agreement has not been implemented to the extent that it has been ratified.
26. Balanced development of renewable energy sources as a priority for the development of generating capacities in the electric power industry.
The situation in the renewable energy sector remains critical and chaotic. The holding of "green" auctions has been postponed to 2022, before which it is planned to finally regulate this process at the regulatory level. There are intentions to issue "green" Eurobonds in the fall of 2021 to repay past debts for the payment of debts to renewable electricity producers.
On July 17, 2020, 47 MPs appealed to the CCU with a petition to declare the legislative provisions of the Law of Ukraine "On Alternative Energy Sources" and the Law of Ukraine "On the Electricity Market" as unconstitutional. According to the MPs, by adopting the Law of Ukraine "On Alternative Energy Sources", the Parliament went beyond its powers and interfered in the constitutional powers of the executive branch, without any alternatives establishing coefficients and mechanisms for calculating the "green" tariff, thus depriving the executive branch of discretion and power to change it. Hence, there is a threat of declaring the "green" tariff in Ukraine as unconstitutional and its complete abolition.
The threat of another retrospective change in legislation is the introduction of an excise tax on electricity produced from renewable sources (draft law № 5600). The adoption of such a law contradicts the signed Memorandum of Understanding between the Government and associations of renewable energy producers and creates an additional illegal burden on investors in "green" energy. This could result in a further deterioration of the investment climate, increased arbitration claims and an increase in the market price of energy from renewable sources.
27. roviding protection against inflation for the Reserve Decommissioning Fund (RDF) for the nuclear power plants and revising the Concept of Decommissioning in the direction of increasing allocations to the RDF.
In 2020, there is no protection against inflation of RDF funds. The Ministry of Energy and Environmental Protection of Ukraine has developed a bill to amend the Budget Code of Ukraine to protect the financial reserve intended for the decommissioning of nuclear facilities from inflation. However, the Ministry of Economy of Ukraine did not approve it, and the Ministry of Finance of Ukraine does not support it and considers it inexpedient to withdraw funds from the state budget, which in turn contradicts the position of Energoatom. The Decommissioning Concept has also not been revised, but the Ministry of Energy has promised to prepare an updated document in the third quarter of 2021.
28. Ensuring preparation for the full integration of regional electricity markets, increasing interstate trade, deepening scientific and technical cooperation with the European Union in the field of electricity digitization.
One of the aspects of unification of regional markets is infrastructure, i.e. the integration of the Ukrainian Unified Energy System with ENTSO-E. To this end, Ukraine implements the technical measures provided for in the relevant action plan approved by the Cabinet of Ministers. In the commercial aspect of the unification of electricity markets, 2020 was less successful than the previous year. Electricity exports in 2020 amounted to 5.1 million MWh (in 2019 - 6.3 million MWh), imports increased slightly (due to supplies from Belarus) - from 2.2 million MWh in 2019 to 2 .7 million MWh in 2020).
In the regulatory aspect, transposition of REMIT to Ukrainian legislation is important for the integration of regional electricity markets in order to prevent manipulation of the wholesale electricity market, which would increase the confidence of regional players in the Ukrainian market. Several alternative bills aimed at transposing REMIT have been registered in the Parliament but have not yet been adopted.
The unstable price situation on the spot electricity market (and the inability of regulators - the Antimonopoly Committee of Ukraine, Regulator - to promptly resolve it) indicates the immaturity and unwillingness of the Ukrainian electricity market to integrate with European regional markets. Further delays in the adoption of REMIT also jeopardize such integration.
Section 2. The current major challenges in implementing the reform (at the time of monitoring)
Gas market reform: significant debt of all gas market participants, which is estimated to reach over UAH 110 billion; constant growth of debts in the sector of heat supply and gas payments; low liquidity of the market in general. The sharp rise in the price of gas in the European market poses huge challenges to advancing the liberalization of the gas market in Ukraine. Due to the price being the highest in the last 13 years, there are significant risks of social protests during the heating season of 2021–2022, which may motivate the Government to slow down the reform.
Electricity market reform: elimination of disparities in the segments of the electricity market and cross-subsidization; establishment of the optimal tariff for electricity for household consumers; repayment of debts to producers of renewable energy.
Reform in the sector of buildings’ energy efficiency: political will and leadership in the implementation of a large-scale campaign of thermal modernization (as opposed to populism and the slogan of low tariffs); availability of sufficient and permanent state support for the implementation of energy efficiency measures in the housing sector; formation of large-scale tools to reduce the need for thermal energy not only in the sector of apartment buildings, where condominiums are created, but also without them, and in the sector of individual houses.
Section 3. Recommendations on reform priorities for 2021–2022 (next annual period, until URC 2022)
The monitoring revealed that no significant progress was made in reforms of the energy sector during 2020–2021. The recommendations provided for priority actions for 2020-2021 remain relevant in the future.
The priority steps in the reform of the energy sector in the near future should be:
Combating manipulation and dishonest behavior in the market (implementation of the REMIT regulation on the integrity and transparency of the wholesale energy market) and support for the integrity and institutional capacity of the Regulator, which has repeatedly signalled attempts of commercial and political pressure.
Solving the debt problems both in the old gas and electricity markets and in the new ones, which continue to accumulate. So far, certain "traditional" instruments are being considered (internal borrowing or loss of income by state-owned companies or some manual adjustment of settlements by market participants themselves).
Fighting populism. Lower tariffs for a number of energy services remain a source of chronic problems and losses for the sector, taking away significant resources from local governments to cover the deficit of utilities and discouraging consumers to take action. Energy prices should not be an instrument of social policy. In order to make the right decisions, consumers must receive correct, not distorted, price signals and projected and continuous government assistance. Effective protection of vulnerable consumers includes large-scale thermal modernization of buildings, more structured and targeted social assistance, as well as ensuring transparency and control over those suppliers that are historically linked to natural monopolies in the gas and electricity sectors.
Supporting the liquidity of energy marketsand curbing the "market power" of individual companies. It is necessary to continue to develop exchange trade in the presence of short and long standardized products, to improve rules and codes. State-owned companies operating in the energy markets need to come out with larger volumes of gas and electricity and become real market-makers, i.e. to balance dominant private players, set certain price indicators and maintain liquidity.
Not declarative, but real implementation of the goals of the European Green Course. Renewable energy policy should be meaningful and systematic, in line with the country's declared strategic goals. Investments in the decarbonisation of the economy are becoming vital along with such an important area for Ukraine as energy efficiency. It is necessary to start clearly planning the replacement of the obsolete fund of energy capacities with new ones on the basis of clean technologies, and at the same time not to ignore the issue of fair transformation of coal regions.
Sufficient funding for energy efficiency projects. State support for the implementation of energy efficiency measures should be systematic: not only in words but also in practice. Large-scale modernization of Ukraine's housing sector requires annual capital investments of at least UAH 40 billion. In order to ensure the necessary pace of such modernization, the existing state support mechanisms (Energy Efficiency Fund) should function in a sustainable and well-planned manner, and if necessary, new ones should be created in compliance with the principles of transparency, sustainability and mandatory monitoring of the implemented measures in view of increasing energy efficiency of buildings.