Energy Reforms in Ukraine: On the Track to Climate Protection and Sustainability?

A commercial building in Zhytomyr, Ukraine, 2015Creator: Robert Sperfeld. Creative Commons License LogoThis image is licensed under Creative Commons License.

The energy sector in Ukraine is undergoing a fundamental transition. Yet, to overcome old structures and deep-rooted corruption, Ukraine needs a clear long-term strategy on the transition to green economy and sustainable energy. German and the EU technical support can play a key role in this process.

Two years after the Euromaidan protests in 2014, Ukraine has launched a range of promising reforms in the energy sector. Energy subsidies were significantly cut and gas consumption almost halved in the last two years. Yet, are these reforms paving way for climate protection and sustainability in Ukraine? Which challenges still need to be to overcome and how can the European Union and Germany help to foster the much-needed Ukrainian energy transition? These questions were discussed by experts from Ukraine, Germany and the EU at a conference, organized by the Heinrich Böll Foundation on June 27 in Berlin.

Johannes Baur from the European Commission’s support group for Ukraine starts with good news: Ukraine has overcome economic depression following the political conflict with Russia. Financial forecasts in the first quarter of 2016 have been for the first time positive since two years. Most importantly, the long-standing Ukrainian dependence on Russian gas imports is over. In 2015, gas imports from the EU have doubled from the previous year, reaching 10.3 bcm, and have for the first time exceeded imports from Russia. The latter decreased dramatically from 14.5 bcm in 2014 to 6.1 bcm last year.

Reducing the Burden of Energy Subsidies

Since Ukraine’s independence in 1991, the sale of natural gas was heavily subsidized in the country. Households were paying 10 times below the market gas price, which enriched oligarchs speculating on price differences, and cost Ukraine annually around 10 percent of its GDP.

“In practice, we were subsidizing Russian gas at the peak of the gas imports, paying 540 US dollar per 1.000 cubic meters and selling it to the population for 80 US dollars,” explains Svyatoslav Pavlyuk of the Reanimation Package of Reforms Initiative (RPR). As a result, in the last 10 years, total losses of the Ukrainian gas market reached 55 billion US dollars. “Instead of subsidizing the inefficient use of fossil fuel, we could have invested that money into measures increasing energy efficiency in the residential sector.”

In April 2016, the new government has introduced a unified gas tariff for consumers and utilities to meet demands by the International Monetary Fund to secure financial assistance. The prices for consumers, which were already increased several times, have doubled. As a result of tariff increases and tighter control on spending, the government deficit was reduced to 2 percent of GDP in 2015, according to the World Bank.

According to Pavlyuk of RPR, energy subsidies to two thirds of the population were reduced, whereas one third of the population, including economically the most vulnerable consumers, is supported through targeted social assistance. Aimed at reducing corruption in the gas sector, the reform has hit hard many consumers and stirred social protests. “Unfortunately, the government failed to explain correctly that the reform was not about increasing prices, but about abolishing energy subsidies,” Pavlyuk says.

The Reanimation Package of Reforms Initiative is in itself a symbol of the transformation across the country. The initiative unites some 70 non-governmental organizations and experts from Ukraine, who are developing and pushing legislation in different economic and social spheres, meeting weekly with the government and parliament members and monitoring reforms.

The fact that the new authorities have become more prone to dialogue with civil society is one of the most significant changes brought about by Euromaidan, according to Iryna Stavchuk of the National Ecological Centre (NECU). “Eight out of the ten years that I have been working on climate change we could not move forward, looking for a policy officer interested to cooperate. It is only in the last two years that the government and ministries started opening up. There are also progressive parliamentarians with whom we can meet very quickly, discuss and move things forward together.”

Challenges in the Energy Sector

Yet, major challenges of power supply in Ukraine remain as the country’s energy balance is still dominated by fossil fuels and nuclear energy. Despite the Chernobyl catastrophe 30 years ago, nuclear energy today accounts for more than 50 percent of electricity production and for some 20 percent in primary energy supply in Ukraine. Most of the nuclear power plants are aged, which increases the accident risk and the problem of spent nuclear fuel is still unsolved.

Although discussions on Ukraine within the EU were dominated by the gas sector, coal dependency is another major problem in the country. The coal sector accounts for more than half of Ukraine’s CO2 emissions, providing 40 percent of primary energy supply and 30 percent of electricity production. In 2014, supplies from the largest coal provider, the eastern Donbas region, stopped almost entirely, but in August 2015 resumed again through the involvement in the Minsk process. Ukrainian oligarch Rinat Akhmetov owns much of the coal production in the Donbas region.

The reform process in the framework of Ukraine’s membership in the Energy Community did not influence the coal sector, though. According to Johannes Baur, the EU has no coal legislation, which could leverage change in Ukraine. Another huge barrier is the social dependence of the population on coal. “The income of many families in eastern Ukraine depends on coal and they can be very vocal,” says Baur. “The state of coal production is very dire and it is a question of social policy, how to accompany changes in the energy sector”.

Olexii Ryabchyn, Ukrainian member of the parliament and member of the cross-party Euro-optimists group originally comes from the Donbas region. “This is an old industrial region, the way the German Ruhr region was. We have seen a lot of positive examples of old coal regions in Europe that were transformed into modern regions. Europe could share this experience with Ukraine”, Ryabchyn says. “Such a modernisation strategy could be a key to winning the conflict with Russia over Donbas.”

Some reforms are on the way to overcome old structural problems and deep-rooted corruption in the energy sector. In the framework of the Energy Community obligations, the Ukrainian government has approved the reform of the state oil and gas company Naftogaz. According to it, gas transmission and storage will be unbundled. Yet, a range of reforms, including the new electricity law, state regulation for energy and communal sectors are still in the process of review and consideration. And that process reminds “walking in the fog”, some international experts say.

Climate Change, Renewables and Efficiency

Environmental protection and climate change for years were missing on the political agenda in Ukraine. Economic recession and military operations have further worsened the situation. According to Svyatoslav Pavlyuk of RPR, the main logic behind most of the recent energy reforms was saving money rather than the environment. The priority was ending the country’s dependence on gas imports and cutting the enormous subsidies to the sector.

But recently even here some positive developments are under way. “We have seen a tremendous change in the political rhetoric. Until the last year, the Ukrainian government did not make any statements about decarbonisation and 100 percent renewable energy,” Iryna Stavchuk of NECU says. “And after signing the Paris Agreement, the environment ministry and even the energy ministry, which used to be very conservative, started talking about implementation of the agreement and a coal phase-out by 2050.”

Now it is time to translate the rhetoric into action, Stavchuk says. Ukraine’s current climate policies and targets are not taking into account the obligations made under the Energy Community membership. The climate target, submitted by Ukraine in the run-up to the 2015 UN climate change summit in Paris, supposes 40 percent emission reduction below 1990 levels by 2030. According to Stavchuk, this target is based on a business-as-usual scenario and means de facto a further growth of emissions. “Unfortunately, there is just no political will to reduce emissions and put additional pressure on industry at the time of economic recession.”

Meanwhile, climate action and deployment of renewable energy could help the country to end the country’s dependency on fossils fuels and overcome the economic crisis. Until now, its great potential remains largely untapped. The share of renewables in electricity is currently only 1 percent. In May 2016, Ukraine has applied for membership in the IRENA. But the largest barrier remains a huge lack of capacity in the ministries, according to Nataliya Boyko, Energy Reform Manager of the National Reforms Council. “Currently, there is not a single responsible person for the development of renewable energy in any of the ministries.”

To develop the clean energy sector, it is vital to have clear renewable energy targets as only they can give security to potential investors, Annalena Baerbock, member of the German Parliament and Spokesperson for Climate Policy of the Green Party says. “To make a good business case for an investor, it is important that your targets give a clear track, which share of renewables you want to achieve and until when. The German energy transition would not have been possible without clear targets and the feed-in-tariff law. And you need someone who fights for it.”

The situation with energy efficiency also still needs to significantly improve. The energy intensity of Ukraine’s economy is currently three times higher than on the average in the European Union. In the residential sector, the metering level of water and gas remains extremely low, which leads to inefficient consumption and leaves a lot of space for corruption. According to Pavlyuk, clear policies are lacking in the sector. “At the moment, seven Ukrainian ministries are responsible for energy efficiency implementation and none is responsible for the policy development. We urgently need one centre for energy efficiency policy planning.“

Lack of common vision of a long-term energy and climate change strategy is a major problem, both Ukrainian and German experts agree. The new concept of the Energy Strategy of Ukraine until 2035, currently under consideration of the government, offers a chance for including a long-term vision, though. For that, it needs to be freed from influences from numerous lobby groups, former advisor to the Ministry of Energy and Coal Vadim Virchenko says. “In each new draft of the energy strategy we have seen hidden interests and benefits for different energy interest groups in Ukraine”. According to the analysis of NECU, the current energy strategy 2035 does not mention the need to align with the Paris Agreement targets and envisages construction of new coal and nuclear power plants.

Role of Germany and the EU

Reforming the energy sector in Ukraine was mainly pushed by the EU’s conditions that needed to be fulfilled to forge closer economic ties with Ukraine, as well as preconditions for international financial assistance. They add up to the growing pressure from civil society and technical support provided by the EU. Ukraine is recipient of the largest EU micro-financial assistance to a non-EU country. Since 2010, it reached 3.4 billion euros.

Both for the European Commission and Germany, the focus of cooperation has so far been on energy efficiency measures, especially in the housing area. In mid-June, Ukrainian Prime Minister Volodymyr Hroysman has announced the launch of a new mechanism aimed at further reducing energy subsidies and stimulating the economy. The German Ministry for the Environment helped the Ukrainian government to develop the instrument.

“This mechanism will make sure that the saved energy subsidies will not go directly to the state budget, but will be used for new investments in the sector”, Jürgen Keinhorst of the Federal Ministry for the Environment says. “As a next step we want to address the financial problem and help to create the energy efficiency market.” Germany is also involved in the development of the energy efficiency fund.

In the past many of the technical assistance programmes in energy, including pilot projects on energy efficiency in buildings and the emission trading system, have had little effect in Ukraine, Keinhorst says. Even more so “the new reform readiness of the Ukrainian governments since the last two years is the biggest window of opportunity in Ukraine and its partners”, he says.

Among key recipients of international support should be municipalities, according to experts. “We found out that cooperation with municipalities can be crucial, as they are very close to the problem, have better understanding, but do not have solutions”, Christiana Hageneder of the GIZ says. That is why cooperation in the framework of the Covenant of Mayors and twinning projects are important, in expert’s opinion.

One of such success stories comes from the town of Slavuta in western Ukraine's Khmelnitskyi Region, where a revolving fund for energy efficiency loans was established with the support from the Heinrich Böll Foundation, Ecoclub Rivne, and Slavuta municipality. The fund provides loans for energy efficiency measures in private households and training for citizens.

Iryna Stavchuk of NECU believes that the technical support from the European Union and Germany is especially important in bringing about not only the urgently needed reforms, but also the transformational changes in society. “This is a new experience, whereby people start taking responsibility and collectively solve problems. It is extremely important for society changes and democracy as such.”

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