In Just Three Years: Will Ukraine Fulfill its Energy Strategy?

Publications about reform09 2018

Over the last 10 years, the global power sector has made a huge leap: American entrepreneur Elon Musk launches and implements an idea to switch cars to electricity and solves issues related to supplying entire islands with power with the use of a new technology, the construction of accumulator stations, while Europe increases the share of electricity production from renewable sources to 34%. The majority of these innovations are still not achievable for Ukraine. However, we have our own plan for the development of the Ukrainian power sector: the Energy Strategy through 2035, which is called "Safety, Energy Efficiency, and Competitiveness." The implementation of this document is meant to reform the power sector, which is part of the legacy of the former USSR. The Energy Strategy through 2035 will correct the relevant shortcomings. The implementation of the strategy will be divided into three stages, the first of which will last until 2020. This means that the first results should be visible in three years.

In Just Three Years: Will Ukraine Fulfill its Energy Strategy?

Experts and industry insiders talk about how feasible the first stage of the plan is, what Ukraine's advantages are, and what the main obstacles are.

We identified five main goals and asked experts to assess on a scale from 1 to 10 the probability that they will be accomplished (1: the chances are critically low, 10: the goal will definitely be achieved). The mean value of experts' assessments shows how likely they think it is that the goals will be accomplished.
Experts also named the three most important prerequisites or favorable conditions that would enable the goals to be achieved, as well as the three biggest obstacles. Here are the most interesting answers we got.

GOAL 1: TO CREATE A NEW MODEL OF THE ELECTRICITY MARKET

ASSESSMENT — 6.2
The electricity market reform will enable the establishment of competitive wholesale and retail electricity markets and provide consumers the right to choose suppliers and access to new services. In practical terms, this means that industrial enterprises will get the right to buy electricity under direct agreements with producers. Domestic consumers, i.e. common citizens, will also get the right to choose the company that offers the most favorable supply conditions or the best tariff. Essentially, the monopoly of current regional energy companies, which today are the only electricity suppliers in their respective areas, will be dismantled. Additionally, consumers will get access to new services.

Prerequisites
1
Vladimir Omelchenko
Director for Energy Programs, Razumkov Center
The adoption of a law on a new electricity market model containing clear goals and mechanisms for accomplishing the goals that have been set
2
Ruslan Bogdanov
independent expert
The insistence of our Western partners, who request and demand from the Ukrainian authorities the implementation of power market reforms, and pressure from the power community, international financial organizations, and institutions of the European Union
3
Andrey Perevertaev
power industry expert of the project coordination group of the Ministry of Energy and Coal Mining
High motivation of Ukrenergo, especially in terms of the integration of the Unified Grid of Ukraine and Europe

Obstacles
1
Ruslan Bogdanov
Lack of political will or political instability in the country
2
Yuliya Nosulko
head of DTEK's Department for Regulatory Policy
Unstable work of state structures responsible for the implementation of the reform The NEURC's paralysis in November-December 2017 showed the high risk that the reform will fail due to political reasons
3
Vasily Kotko
President of the Energy Association of Ukraine
The vast amount of subsidiary legislation that will need to be elaborated for the full-fledged launch of the new market model

It took us approximately 10 years to develop this market model, and the work continues. That's why I'm sure it will be implemented. I see no global or fundamental risks that it won't get done within the established timeframe, but there are certain risks, to be sure. For example, one risk is that for the timely implementation of the new energy market model, dozens of pieces of subsidiary legislation need to be elaborated. And although work is proceeding intensively, our tendency to postpone everything also needs to be taken into account. In my opinion, this is one of the main risks.

Another obstacle to the implementation of the new market model could be political unrest, which always distracts people from work. The final thing that's hindering our work today is the fact that the regulator (the NEURC) is powerless — the president needs to issue an order and appoint temporary members of the NEURC.
Vasily Kotko

"There's a Coordination Center for supporting the implementation of the new electricity market model, whose main tasks include coordinating work and overseeing all necessary organizational measures aimed at the timely implementation of the new market model in Ukraine. Meetings of the Center are held regularly and taskforces and special supgroups are being established, in which both representatives of state authorities and market players are actively participating. It is planned to adopt draft Rules and Codes required for the operation of the new market model at a NEURC meeting in the very near future, after which suggestions and comments about them will be accepted. The work is moving forward, and we don't see any factors that could significantly affect the timeframe for the implementation of the new market in Ukraine."
Alexei Slugin, Head of Donbasenergo's Department for Analysis and Forecasting

GOAL 2: ACHIEVING UKRAINIAN ENERGY INDEPENDENCE

ASSESSMENT — 7.1
The Ukrainian government has declared reduced dependency on imported power resources to be one of the key tasks for the near future. Ukraine has managed to eliminate its dependency on gas supplies from Russia's Gazprom, but the dependency on blue fuel imports remains. At present, Ukraine imports almost half of the gas it consumes (11.7 bln cubic meters in the first 10 months of 2017). The coal import situation in Ukraine is also complicated, as the economic blockade of the so-called DNR and LNR have resulted in the termination of supplies of anthracite, which is used by half of the thermal power stations in the country, from the non-controlled territories.

The Strategy provides for a significant increase in gas and gas coal production and the attainment of a production level that would enable Ukraine to provide its own resources and stop importing them by the end of 2020.

Prerequisites
1
Roman Opimakh
Executive Director of the Association of Gas Producers of Ukraine
Change in tax legislation pertaining to gas production — on January 1, 2018, an incentive charge of 6 and 12% for new gas wells is being introduced, as well as a stabilizing norm for such projects — a 5-year moratorium on rate increases
2
Alexander Selischev
DTEK's Strategy and Business Development Director
A transparent procedure for coal, gas, and oil-product pricing, liberalization of trade on coal, gas, and electricity markets
3
Yuriy Sakva
First Deputy Chairman
of the All-Ukrainian Energy Assembly
Starting to switch anthracite-based TPP generation units to gas coal consumption

Obstacles
1
Igor Shchurov
General Director of DTEK Oil & Gas
Further deregulation is required in the licensing system, improvement in the subsoil use system (including the development of a brand-new Subsoil Code and settlement of the issue of "sleeping licenses"), settlement of the issue of new special permits
2
Gennadii Kobal
Director of ExPro Consulting
The process may slow down the decrease in gas prices, the devaluation of the hryvnia, as well as other factors that are outside of Ukraine's control. After all, it's one business when the price of gas is $450 for 1,000 cubic meters, and a totally different one when the price is $150
3
Volodymyr Omelchenko
High commercial and political risks

"I would say the obsolete rules governing subsoil use are one of the main obstacles to an increase in gas production. We've been discussing a comprehensive upgrade of the basic law, the Natural Resources Code, for quite a while now. The document should legally formalize all procedures pertaining to subsoil use, including sales of special permits, the procedure for issuing licenses with the use of electronic bids and free electronic access to secondary state geological information.

Access to geological information is another problem. Since there isn't free access to geological information, potential investors are unable to independently assess land plots and transparently nominate them for auction. I would also say that the aggressive program of the state aimed at providing new plots is a problem. The policy of the State Service for Geology and Mineral Resources fails to meet investors' expectations, and they don't understand it. The regulator didn't hold a single auction over the past year. And 75% of special permits issued in the last three years were issued without bids, which testifies to the domination of double standards."
Roman Opimakh

GOAL 3: INCREASING THE SHARE OF RENEWABLE ENERGY IN THE ENERGY BALANCE

ASSESSMENT — 6.0
The Energy Strategy provides for the construction and commissioning of approximately 5 GW of renewable energy sources (RES). The share of RES in the energy balance should increase from 4 to 8%. The Strategy is based on an expected decrease in the cost of wind and solar energy, as well as on its active development at sites of what's called "distributed generation."

Prerequisites
1
DTEK RES
The activation of the RES market is driven by a set of factors: improved technology performance, stabilization of country risks, the general state orientation on renewable energy sources, which will be reflected both in a guaranteed green tariff and in documented intentions to develop this sector
2
Volodymyr Omelchenko
Support from international donors and political support within the country
3
Oleksandr Kharchenko
Director of the Energy Industry Research Center
Plans for the construction of major RES facilities announced by large companies for the near future, financing of projects by Ukrainian and foreign businesses and the EBRD

Obstacles
1
Yuriy Sakva
Obtaining approvals, land allocation and connection to electric grids are a problem that will take a very long time to solve
2
Andrey Perevertaev
Political instability in decision-making (switching over to bidding procedures is possible), lobbying of major market players in the area of heat supply and manual regulation by the regulator, as well as the lack of competition, can become an obstacle
3
Vasily Kotko
The lack of regulating facilities is a problem for the development of green energy in Ukraine

"With the large HPPs taken into account, the share of RES in the overall electricity production balance is already approximately 11%. The main increase in RES is possible in the heat supply sector. Positive factors for Ukraine's further RES development will be lobbying companies operating in this area, maintaining the green tariff and the absence of commercial risks for RES on the electricity market."
Andrey Perevertaev

"Given the high level of interest among foreign investors, as well as the highest 'green tariff' for alternative energy in Europe, the increase in the share of RES to 8% in 2020 is one of the Strategy's most feasible key indices.
Alexei Slugin

GOAL 4: UPGRADING POWER GENERATION FACILITIES

ASSESSMENT — 5.0
In Ukraine, electricity is produced mostly by nuclear and thermal power plants. In the first 10 months of this year, NPPs' share was 56% of the total generation in the country, and TPPs' share was almost 29%. Almost all of the units of nuclear and thermal power plants were built in the Soviet era, and now Ukraine urgently needs to replace the equipment, which is thoroughly obsolete. Some of the facilities may still be of use, since their service life can be extended through modernization. Under the Energy Strategy, by 2020, it is planned to extend the service life of 6-GW NPP facilities and 9-GW TPP facilities. It is also planned to replace 2-6 GW TPP facilities with new, highly maneuverable facilities, and to switch some TPP units from anthracite to gas coal.

Prerequisites
1
Andrey Perevertaev
Adoption of the Law on the Electricity Market
2
Gennadii Kobal
The approved program for extending the service life of nuclear power plant units
and Energoatom's possession of means sufficient
for implementing it
3
Volodymyr Omelchenko
The improvement of the investment climate that will take place after the reform and the stabilization of the political situation

Obstacles
1
Volodymyr Omelchenko
Poor performance of the tariff policy for investment promotion
2
Vasily Kotko
Improving the ecological figures of thermal generation will require significant funds
3
Ruslan Bogdanov
Extremely tight deadlines for launching new facilities

"It is highly probable that only some of the TPP units will be modernized and the service life of NPP units extended by 2020. With regard to switching the most in-demand anthracite units that are not being supplied with their own coal to gas coal, the full achievement of this task is realistic. This is already being done: by the end of the year, two DTEK Pridneprovskaya TPP anthracite units switched to Ukrainian gas coal had been launched, and another two units will be switched next year. Further, this year, Centrenergo also launched two units of the Zmeyevskaya TPP with new coal.

Switching TPP units to gas coal can be restricted by several factors, including investment: the cost of switching certain blocks can be significant. There can also be technical restrictions (final confirmation of the technical possibility of switching is not available for every unit). Besides, some anthracite units are only used for part of the year, and it would be economically unfeasible to switch them (there is an excess of generating capacity in Ukraine).
Alexander Selischev

"I think that the service life of nuclear plant units will most likely be extended, as the NEURC will include funds for financing relevant work in the nuclear plant tariff, and the nuclear sector will complete the 6 GW task"

Yuriy Sakva

"At present, there are no approved projects for the construction of new thermal generation facilities. The lack of such projects and the extreme level of physical and moral obsoletion of TPP equipment makes extending the service life of TPP and NPP generation units by means of partial upgrading and reconstruction the only solution for the near future."
Alexei Slugin, Head of Donbasenergo's Department for Analysis and Forecasting

GOAL 5: IMPROVED ENERGY EFFICIENCY

ASSESSMENT — 5.7
The Energy Strategy provides for a reduction in energy intensity from 0.28 tonnes of oil equivalent/$1,000 to 0.2 tonnes of oil equivalent/$1,000. Full and transparent accounting of all types of energy sources is envisaged, as well as 100% commercial accounting of domestic thermal energy consumption, implementation of energy service agreements, classifying residential buildings by energy consumption, etc.

Prerequisites
1
Vasily Kotko
High prices for energy products
2
Volodymyr Omelchenko
Profitability of energy efficiency improvement projects
3
Evgeniy Bushma
Director of DTEK ESCO
At present, successful cases are being created at certain industrial enterprises and budgetary institutions, illustrating the necessity and the benefits of introducing energy-efficient technology. Significant interest among foreign investors in financing energy-efficient projects with a high level of energy saving

Obstacles
1
Ruslan Bogdanov
It is hardly possible to ensure 100% accounting of thermal energy consumption or dramatically decrease the energy intensity of the economy within such short time
2
Volodymyr Omelchenko
Poor performance of the policy aimed at providing subsidies to the population
3
Evgeniy Bushma
It is necessary to increase the level of awareness regarding the benefits of energy efficiency and energy saving among the population. The formation and implementation of a policy in the area of energy efficiency at the level of the central authorities would be useful in overcoming this obstacle

"My expectations are the most positive with regard to this goal. Higher prices for consumers promote reduced consumption of energy, it really happens. It should also be mentioned that the government has a proper understanding of the issue. Certain aspects can be discussed with them, but they know what they're doing."
Oleksandr Kharchenko

Source: DS