At the same time, as every challenge could be turned
into opportunity, the energy market reform could be used as a tool to boost
economic growth. Due to huge unrevealed potential of the energy market and its
undercapitalization, good reforms will open up enough room for big foreign
investments and numerous jobs. Ukraine’s energy market is attractive for investors
for several reasons: new market opens up in the center of Europe; Ukraine has
well-developed storage and transportation infrastructure; Ukraine has a rich
resource base, for instance unconventional gas; cheaper workforce (comparing
with an average European level) and undervalued assets.
Energy market has
the biggest potential for attraction of foreign investments
In order to make this happen, the sector has to
undergo a series of transformations. The reforms are stimulated by both inner
necessity as well as Ukraine’s international obligations. The new Ukrainian
Parliament together with the Cabinet has a difficult task to reform the whole
energy industry. Despite all the problems, there is a clear understanding of
the necessary steps to be made. As the Vice-President for the Energy Union,
Maros Sefcovic, said at the EU Energy Security Conference 2015: “I would like
to welcome the Ukrainian government’s efforts to move forward swiftly on deep
energy sector reforms …The short term effect will not be easy, and for this
the Ukrainian government deserves a lot of credit. Ukraine is definitely on a
new path since the aftermath of the Euromaidan Revolution, with the right
political conditions to bring about real change.”
Liberalization of the energy markets, elimination of
cross subsidizing, overcoming corruption, and increase in energy efficiency –
all these will lead to sustainability of energy sector.
European energy
integration
Apart from economic and security reasons, energy
reforms are in line with the Ukrainian European integration possess.
Association agreements and the Energy Community requirements are reflected in
the Parliamentary Coalition’s agreement and are in compliance with the Energy
Community Treaty (EnC). Ukraine as part to the Energy Community has committed
itself to implement the Third Energy Package as the rest of European Community
countries.
Energy markets
liberalization
The first step towards the implementation of reforms
has to do with combating corruption and curbing monopoly, non-transparency of
the markets, and liberalization of the oil & gas markets as well as
electricity markets.
Gas market reforms
The gas market reform in Ukraine is a complex issue,
in particular because the real market is yet to be established as currently
there is no genuine competition in place. Apparently, the situation will be
changed in the near future. Positive results of the current Parliament’s work
include adoption of the Law on Natural Gas Market, which the president has
already signed. The law is a fundamental step forward in combating corruption
and raising transparency. This step has laid the legal basis for Ukraine’s
natural gas market by grounding the principles of free competition, adequate
consumer protection and security of natural gas supply. It will contribute to
the future integration of the natural gas markets of other Energy Community
countries, including creation of regional natural gas markets.
On top of that the law provides a legislative basis
for the unbundling of “Naftogaz”, Ukraine’s gas monopolist, functions, i.e. gas
transmission and storage will be separated. The operators of gas distribution
networks (oblgases) will receive a new function of gas transmission to final
consumers. These will lead to establishing a competitive gas market and, what
is even more important to the competitive market of gas supply for the
population.
Transparency of
extraction industries
The proper gas market functioning will be impossible
without transparent rules for all the participants. For those dealing with the
energy sector a term EITI should be well-known and means that the countries,
which are parties to this initiative, have committed themselves to maintain
certain standards of transparency and accountability while extracting natural
resources. Ukraine will soon join the list of such countries due to the
recently adopted law “On strengthening the transparency of extractive industries
in Ukraine”. Implementation of this law will have positive results for
Ukrainian economy and will increase the country’s attractiveness for
investments. The EITI standard decreases or even abolishes the possibilities to
generate corruption. This fact will have a positive impact on Ukraine’s
sovereign credit ranking (B+/B2), and, consequently, will lead to lower
borrowing costs. Eventually, this will elevate investors’ confidence and
improve competitiveness, promote investment in extractive industries.
Energy efficiency
Being one of the most energy inefficient countries in
Europe, Ukraine has set quite ambitious targets to cope with the problem in
short term. The problem of efficiency of both energy consumption and production
is turning into a national idea and is the key focus of the energy reforms.
In this regard, a first step was made by adoption of
the Law on Energy Service (ESCO). For the first time the public agencies can
make contracts for energy service with ESCO companies. The energy service may
include such measures as thermal insulation of buildings and reconstruction of
heating. The mechanism of the ESCO contract means that an energy service
company finances all the works. After the service is provided, an ESCO Company
returns its investments due to the money that the customer saves as a result of
modernization.
With adoption of the law “On the aspects of
realization of property rights in a multi-story building” people will have an
opportunity to choose a contractor for delivering public utilities such as gas,
heat or waste collection if they live in multi-story buildings. In fact, this
law will destroy the monopoly of state/municipal housing offices and the
apartment owners will get more choice and bargaining power to choose a better
public utilities provider.
The other key-elements of the future developments will
include the draft law “On energy efficiency of buildings”. This law is aimed at
establishing mandatory targets for energy efficiency. Another important component
has to do with a draft law “On energy metering” as nearly 70% of consumers do
not have necessary metering appliances.
Renewables
In recent years Ukraine has made a significant
progress in planning the future of its energy system and developing a
renewable-energy policy. According to the National Renewable Energy Action
Plan, the share of renewable energy in the total final energy consumption
should be increased up to 11% by 2020, which means $15.2 billion of new
investments in RES deployment.
The comprehensive law “On the amendments to the law of
Ukraine, on electric power industry, considering a competitive environment of
RES-electricity production” was passed by the parliament a few weeks ago. This
law aims at providing investors and developers with wide range of options to
allocate funds for promotion of clean technologies and renewable energy sources
application.
Obviously, the biggest obstacle to achieve the targets
is the high costs of RES construction. Therefore, parliament created incentives
to invest into renewable energy. First of all, the new law abolished the
“local component” in the structure of the “green tariff’ and opened
up the market which had been artificially closed by an oligarch. Instead of the
“local component” clause, a concept of “premiums” for using the local
technology was introduced, which varies from 5 to 10%. Such a measure will
stimulate local production instead of punitive 50% local content requirement.
The formula for calculating the “green tariff” will be
replaced by a simple, clear, and unified for all kinds of energy. Tariffs have
been revised with the aim to establish transparent, clear and market prices for
all types of renewables. It was significantly increased the Feed-in-Tariff
(FiT) for the small hydro power plants (HPP). Then, it was introduced a FiT for
the solar panels set on the roofs of houses, the installed capacity of which
exceeds 30 KW. Therefore, private households can also benefit from producing
energy from renewable sources, such as solar panels or wind energy.
The bioenergy is seen as priority as the tariff for
biomass and biogas was also raised. The bioenergy fulfills two important tasks:
first, this is about electricity generation, which is vitally important due to
the fact that coal basins are temporarily not controlled by the Ukrainian
government; and, secondly, it can substitute gas.
The electricity
market liberalization
Although there is a law on the electricity market,
which envisages that the new model of energy market will start functioning in
2017, it does not include several important issues, such as elimination of
cross-subsidizing. The cost imbalance has been evolving throughout decades as
the population used to pay nearly 30% of the market price. The imbalance used
to be solved by adjusting wholesale prices, which lead to cross subsidizing.
The current law foresees a gradual transition to the new energy market model
and contains a provision about the fund for cost imbalance adjustment, which
limits the competitiveness of the market. According to the existent model, the
fund has to compensate for the financial imbalances, which will be filled by
the state enterprises “Energoatom”,”Ukrhydroenergo”, and “Ukrenergo”.
The fund will also provide a full payment for the electricity produced under
the “green tariff”. Naturally, such a model raises a lot of concerns among
the state companies and international experts. The aim of the new law is to
find an alternative solution to cope with the imbalances.
Integration into
the common European electricity system
Independent energy
regulator
The key obligation is to liberalize the energy market
and the key element of its successful implementation is to guarantee the independence
of the national energy regulator. The Cabinet is developing the respective
draft law. Effective regulation will, in turn, be achieved in case of fair and
transparent competition for the positions of Commissioners, ensuring
independence, transparency and impartiality of the national regulator.
Conclusions
The energy sector is a crucial industry for Ukrainian
economic development and wealth. It is also a key element of the national
security. The soviet heritage, which still is reflected in the infrastructure
as well stays in the heads of top executives of some state owned enterprises,
makes the implementation of reforms a complex process. At the same time, a lot
of efforts have been already made to shift the country from the old inefficient
post-Soviet path to a rational and sustainable future of Ukraine’s energy
industry. This process engages politicians, civic society as well as
international organizations, including the European Bank for Reconstruction and
Development, Energy Community and European institutions, the World Bank. The
laws adopted and those still in progress open the possibility of additional
international assistance that can be directed to investment projects, for
instance the ones on modernization of Ukraine’s gas transportation system and
other projects to further reform in the energy sector.
There are big prospects for turning Ukrainian energy
sector into a competitive, promising and equal for all the stakeholders market,
which inevitably will lead to economic growth.
Nataliya Katser-Buchkovska is a member of the
Ukrainian Parliament, head of the Subcommittee on Sustainable Development,
Strategy and Investments of Committee on Energy, Nuclear Policy and Security.
Katser-Buchovska can be reached at [email protected]
