Ukraine has one of the most energy inefficient economies among other members of the European Energy Community, and this is highly damaging for the economic competitiveness of the country, energy experts believe.
Ukraine’s energy sector has considerable potential for raising investment, but the decade-long lack of transparent and clear rules has made the market prone to monopolies and red tape.
This means there’s no way the Ukrainian energy market can improve without large-scale reforms, energy experts said during a July 28 webinar, Obstacles to Energy Reform, set up by the U.S.-Ukraine Foundation think tank.
Weak institutional capacity and oligarchic consensus are key obstacles to making much-needed changes, according to Sergiy Maslichenko, Ukraine’s former deputy energy minister.
“Several Ukrainian politicians promised to start reforming the sector,” he said. “But there is a lack of sustained political will to change the status quo that is beneficial for oligarchs. The anti-monopoly committee is also not doing its best job.”
On July 1, 2019, Ukraine launched its wholesale electricity market. In theory, the market now should be competitive.
Before this change, the power plants used to sell electricity they produced to state company Energorynok. The electricity’s value for the market and tariffs for consumers were thus determined by the National Commission for State Regulation of Energy and Utilities. Energorynok, in turn, sold electricity to distribution companies, and they sold it to businesses and private consumers.
To reform the industry, the government decided to remove the extra links in this chain and to liquidate the intermediary company after paying all the debts. But this hasn’t helped the energy industry just yet. According to experts, over the last year, the debts have risen again.
No clear vision
Paternalism and populism also hinder the reform, according Adrian Prokip, an energy expert at the Ukrainian Institute for the Future.
Prokip referred to a survey by the Kyiv International Institute of Sociology that was conducted shortly before the presidential election in 2019. It showed that almost 40% of Ukrainians — due to political promises of presidential candidates — expected the new president to decrease the price for gas for households in the first 100 days.
But, in Ukraine, it’s the government — not the president — who imposes special duties on suppliers and sets the price.
The candidates knew well that this was not their responsibility, but some still made these promises their slogans on billboards in the runup to election day, according to the expert.
“For many years, we saw a lack of strategic thinking,” Prokip said.
An equally important cause of the reform stagnation is that there is no clear picture of the final result of this same reform, said Olena Pavlenko, president of the Ukrainian think tank DiXi Group.
“The European Union has its clear vision of what it wants to achieve by 2025. Ukraine doesn’t,” she said. “The country is going somewhere, but does not know what’s going to happen at the end of the reform.”
Pavlenko believes that many stakeholders benefit from this. As long as the status quo remains in place, oligarchs will be the big winners, because it allows them to use questionable schemes that are favorable to the energy companies they own.
Improving the system
In 2017, the Cabinet of Ministers of Ukraine introduced the so-called Energy Strategy of Ukraine until 2035. It includes modernization, construction of overhead power lines and substations and the implementation of market mechanisms to create greater competition.
According to Pavlenko, the EU must help Ukraine with the implementation of this strategy, providing financial support to modernize technology and train local professionals. Simply sending foreign specialists will give only short-term results, she said.
“Building internal capacity can yield long-term development,” she said. “Also, it is crucial to build trust between all stakeholders: the government, business and civil society. The government should be clear and explain to consumers if they raise prices, why they are doing it.”
Read more: Edward Chow: Ukraine must seize the moment on energy reform
Volodymyr Omelchenko, director of energy programs at the Razumkov Center pollster, calls the idea that Ukraine can reform the energy sector on its own utopian.
“In the conditions of comprehensive Russian aggression, the creation of an attractive investment climate is doubtful,” he said. “As long as Ukraine is in Russia’s sphere of influence, there can be no reforms.”
To advance reform, he went on, the West must set a more transparent agenda for Ukraine and push for deeper integration into the EU.
