June has been an eventful month for reforms in the energy sector in Ukraine. The Ukrainian government approved laws on the Energy Efficiency Fund, commercial accounting of utilities, and energy efficiency of buildings, and a law on the electricity market has been signed. Ukraine also celebrated a sustainable energy week, and a number of Ukrainian cities have joined the Covenant of Mayors: an EU initiative aimed at counteracting climate change.
Given these developments, it seemed natural to talk about the current energy issues facing Ukraine with Johannes Baur, the head of the third section of the EU Delegation to Ukraine’s “Energy, transport, and environment” assistance program.
When do you expect the launch of the Energy Efficiency Fund?
We hope that the fund will start operating by the end of this year and that the first projects can be launched next year, before the 2018-19 heating season.
Why is the fund so essential for Ukraine? Are similar funds used in EU countries?
Energy efficiency, the cause for which this fund was created, is very important for Ukraine for three reasons.
The first is energy security. Ukraine is currently using energy very inefficiently. At the same time, the country is highly dependent on anthracite coal and, in the past, has relied on Russian gas, which poses a political and security problem. It is therefore very important for Ukraine to reduce its energy consumption, and the best way to do that is through systemic measures on energy efficiency.
Secondly, with rising prices for gas and electricity, energy payments have become very burdensome for individual citizens as well as for the country’s budget. The total amount of government energy subsidies paid out reached 60 billion UAH in 2017. This figure should go down next year, partly as a result of reducing energy consumption. We always say that the cheapest energy is the energy that is not used.
The third reason Ukraine needs to focus on energy efficiency is also economic. In the EU, we know from experience how local energy-efficiency projects can support the local economy. And, in the end, energy efficiency helps to reduce the emission of harmful gases and thus contributes to a cleaner environment.
Ukraine has great potential to improve its energy efficiency. For example, a significant part of the population lives in apartment buildings that were built in the 1960s and 1970s and need to be modernised. Thus, there is a lot of potential to reduce the amount citizens pay for energy.
In the EU, there are many such funds that work similarly to that planned in Ukraine. Examples exist in Poland, the Baltic states, and other countries.
Are you satisfied with the recent laws created on the energy efficiency of buildings and commercial accounting of utility services?
We are pleased that these laws have been passed. This is a very important step for establishing a regulatory framework for energy efficiency measures.
The laws are not perfect, and we are now analysing some of the approved amendments.
In particular, the law on the energy efficiency of buildings does not fully comply with related EU legislation, and will need to be improved in the future. That said, we still support it because it is a critical first step in the right direction.
The EU promises to allocate €100 million to the Energy Efficiency Fund, but this is conditional on the adoption of another law on housing and communal services. What is your assessment of that bill, which is now prepared for its last reading?
This law is important because it establishes rules for relations between communal services and citizens, including residents of multi-storey houses.
Part of this future law does not apply to EU common law. An example is water supply; we cannot evaluate this issue in terms of adherence to common European standards.
Regarding our decision to support the Fund, since three out of four of the necessary laws have been approved, we will start a program activity worth approximately €50 million. This will help to launch the Fund. As the remaining conditions are fulfilled, including the adoption of the law on public utilities, we will allocate larger amounts of money in separate tranches. This will happen next year.
The media has stated that the level of energy efficiency in the EU is three times higher than in Ukraine. Is that true?
We do not have recent statistics on this. However, we can speak to some recent improvements in Ukraine, based on a reduction in the volume of gas consumption in the country from 50 billion cubic metres to 32 billion cubic metres per year.
Work on energy efficiency should be systematised. Buildings should be consistently upgraded. This requires energy audits and trained auditors. Without these system-level prerequisites, it is very difficult to implement energy efficiency projects, especially for large buildings. Therefore, this is a very important part of the EU energy efficiency and support program.
You mentioned Ukraine’s energy insecurity as one reason for the importance of energy efficiency. But are we any more secure buying the same Russian gas from the EU rather than from Russia directly?
There are two dimensions to this issue: political and economic.
Considering the very difficult political relations between Russia and Ukraine, it is easier to buy gas in the EU, especially given that it is cheaper than buying it directly from Russia.
In general, countries should always strive to purchase energy at the lowest possible cost while avoiding becoming dependent on its supplier, as Ukraine has been in the past. By avoiding dependence, an energy source can be replaced when necessary.
You mentioned the problem of energy subsidies to citizens. Among other problems, subsidies are seen as interfering with energy saving and energy efficiency by lessening incentives for the population to reduce consumption.
From a social point of view, considering the significant increase in utility costs, the system of subsidies is needed. The state needs to support vulnerable and poorer segments of the population.
That said, the system needs to be modernised; it should become monetised and reformed in such a way as to really motivate people to find bigger energy savings. This is particularly important for those people who receive subsidies for the full cost of their utilities.
Now there is no such motivation for citizens to change their practices. It is clear that the current system is not sustainable.
In March, the European Commissioner for Energy, Maros Sevchovich, wrote a letter to the president and prime minister in which he criticised Ukraine’s methodology for electricity tariff calculation. Is this really a problem?
Tariffs are an important and sensitive issue. The initial problem is that over the last 25 years almost no investments were made in Ukraine’s energy infrastructure. At the same time, energy prices were massively subsidised. Eventually this contributed to the deep financial crisis of 2014.
The situation needs to be changed, but it will take some time. Increasing tariffs would be a big challenge without some economic growth in Ukraine, including growth in wages and personal incomes. There is no other way forward but to move towards transparent and market-based energy prices; we don’t want Ukraine to go back to the former corrupt system.
The state can still support the poorest part of the population with subsidies, but it is necessary to at least reduce the number of people who require state support to pay their utility bills.
Speaking of tariff costs, the National Commission is responsible for state regulation in the areas of electricity and utilities. There has been a lot of talk about its lack of independence in decision-making. How do you see the situation?
We are well aware of the criticism of some of the Commission’s decisions.
The EU had earlier encouraged Ukraine to adopt a new law on the regulator, which would ensure the National Energy and Utilities Regulatory Commission would be politically and financially independent in accordance with EU standards. The law was passed in fall 2016 but has not been fully implemented. This needed to be done so that the regulator would be politically and financially independent and have public and market players’ confidence to make decisions in the interests of the whole country.
This is a difficult process and it will take some time for Ukraine, but I am hopeful we are moving in this direction. The transformation of the current NKREKP structure may be an opportunity to establish new relationships between the regulator, market players, and the public.
Ukraine has been a member of the EU Energy Community since 2011. Is it able to fulfill its obligations?
Since 2014, Ukraine has taken a number of important steps aimed at fulfilling its commitments as part of the EU Energy Community, which are also commitments under the Association Agreement.
In particular, the adoption of laws on the gas and electricity markets and on the national regulator are very important steps forward.
There has also been some progress in the gas sector. The law on the electricity market was only recently signed, so a lot of work is still ahead. We work closely with the EU Energy Community Secretariat to help Ukraine meet its commitments.
Now that the formal commitments are fulfilled, the most important thing is to focus on the implementation of the approved energy legislation.