• Українською
  • Energy Sector Reform

    The Government's effort to reform the energy sector aims to improve Ukraine's energy complex to a thoroughly and qualitatively new level of development, harmonize it with EU rules and standards, liberalize and form genuine markets of natural gas and electricity with transparent and competitive pricing and proper protection of vulnerable consumers. These activities are also designed to optimize the energy balance and improve economic, energy, and environmental security, especially in the context of foreign aggression. The main goal behind these transformations is to increase Ukraine's energy independence, cater for the fuel and energy needs of the society and economy, and create a solid foundation for the country's sustainable energy future.

    Why changes are needed?

    The energy industry is one of Ukraine's strategically critical sectors of economy. Its success, stability, and sustainable development underlie the livelihood and quality of most areas of social life and people's welfare itself. The Ukrainian energy sector also is important globally, because Ukraine plays an important role in providing energy security of the entire European continent.

    Today, Ukraine's fuel and energy sector operates robustly and continuously. However, large-scale upgrade and reform is required to achieve goals defined in the Energy Strategy of Ukraine until 2035, with the key goal of integration into European energy markets. This means both modernization and construction of overhead power lines and substations, and the implementation of market mechanisms due to the necessity to compete in the market. But there are burning issues that need to be resolved, including low energy efficiency, high wear and tear of the energy infrastructure, dependence on import supplies of energy resources.

    The Ukrainian energy sector has significant potential for raising investment. However, it has lacked transparent, competitive, and clear rules of play for market players for a long time, it has been dominated by monopolies and excessive regulation. When combined, all these factors created the negative effect that prevented active progress and modernization of the Ukrainian energy sector. The system of cross subsidization and budget grants held back energy price growth for the public but channeled huge amounts out of the budget, created unequal conditions preventing modernization and development, the introduction of new technologies by fuel and energy enterprises.

    The reform aims to harmonize domestic laws with EU laws, rules, and standards as required by the EU–Ukraine Association Agreement. Completed implementation of European laws and introduction of European standards will not only accelerate positive transformations in Ukraine's energy sector, but also release Ukraine's significant potential in the newest segments of the energy industry such as renewable energy. All these steps combined will improve our country's energy independence and the quality of service for household consumers.

    Key results

    What does the reform involve?

    The Energy Strategy of Ukraine until 2035 is the fundamental industry document that has been modified several times and involves three stages of transformation of Ukraine's energy industry. According to them, the regulatory framework should be in place by 2020.

    Then the country proceeds to development stages — optimization and innovative development of the energy infrastructure (by 2025) and the sector's achievement of sustainable development (by 2035).

    However, the foundations of reform of Ukraine's energy sector were laid in 2014 by the Agreement on the Coalition of Deputies' Fractions in the Verkhovna Rada of Ukraine of Eighth Convocation and further reinforced in the Government's 2020 Medium-Term Priority Action Plan with priorities such as:

    1. Enhancing energy independence

    Ukraine's energy independence has become an especially pressing concern with the onset of the Russian hybrid aggression against our country. Aggression in the economic sphere, unrelenting blackmail by Russian state-owned corporations and a threatened disruption of energy deliveries from Russia (natural gas, nuclear fuel, petroleum and petroleum products) have forced the Government to develop an absolutely new vision of energy independence.

    The Government's plans to improve energy independence include primarily diversifying energy sources and ways of delivery to Ukraine, which will put an end to absolute dependence of the country's energy sector on Russia.

    Another important component of this process is increasing domestic output of energy resources. For this purpose, the extractive industry has been significantly deregulated by reducing the number of licenses and authorizations, canceling a number of outdated requirements. Subsoil use rules in Ukraine have been comprehensively revised, a non-transparent mechanism of issuance of special licenses for subsoil use revoked.

    Of course, it is impossible to improve energy independence without modernizing the national energy infrastructure, applying new modern effective and energy-efficient technologies. This problem could be most effectively resolved by increasing domestic and foreign investment in the energy sector. For this purpose the Government makes effort to demonopolize the energy sector, enhance competition, introduce European rules and market principles of operation in the energy sector. A transparent and fair energy market with clear rules of the play will guarantee progress in the Ukrainian energy sector.

    2. Implementing the principles of the EU's Third Energy Package

    Ukraine is a full participant of the Energy Community — an international organization that includes both EU members and non-EU countries. The goal of the Energy Community is to liberalize and integrate member countries' energy markets, while Ukraine has assumed an obligation to implement the principles of the EU's Third Energy Package as a member of this organization.

    Still, the Third Energy Package is much more significant for Ukraine as part of a wider change that involves rebuilding the domestic energy market to meet EU rules and harmonize it with common European standards. Two basic Laws of Ukraine have been adopted — On the Electricity Market and On the Natural Gas Market, opening the way for implementation of European rules and standards in Ukraine's energy markets.

    However, the ultimate and main goal of the Government's effort in implementing the principles of the Third Energy Package is to create fully functional natural gas and electricity markets in Ukraine. This will in turn enable our country to integrate into ENTSO-G, the European Network of Transmission System Operators for Gas, and ENTSO-E, the European Network of Transmission System Operators for Electricity.

    In practice, the implementation of the Third Energy Package principles means a reform of electricity and gas supply markets and of corporate governance at state-owned operators (such as Naftogaz of Ukraine). For example, the Third Energy Package principles include the so-called unbundling — separation of the functions of a distribution system operator and supply functions and creation of a market operator. Such change will ultimately make the supply of electricity and natural gas to consumers more reliable, protect their rights better, and make the market more transparent, competitive, and attractive for investment.

    3. Providing energy efficiency and energy saving

    An inefficient use of energy resources, losses of heat in buildings with no heat insulation and of electrical energy in networks, energy-intensive production causes huge losses for Ukraine and affects national energy security, economic development, the cost of products, the environment, and basically the quality of life and cost of living. According to expert estimates, inefficient energy consumption for heating of homes and public buildings in Ukraine alone causes USD 3 bn of losses annually (or 3% of the country's GDP). Equally large losses for the country result from obsolete and inefficient technologies in the industry.

    Therefore, the Government's effort in the area of energy efficiency and energy saving primarily aims to encourage market players and ordinary household consumers to use energy resources efficiently by introducing energy-saving and energy-efficient technologies. Special focus in this respect is put on thermal modernization of housing, because 85% of Ukrainian homes are not designed for economical consumption of energy.

    A program of so-called "warm loans" was already carried out as part of activities to improve energy efficiency and energy saving in Ukraine.

    However, activities under the current energy reform require a more systemic effort in this area. This includes setting up a system of energy certification of buildings, introducing an advanced energy audit system, and creating an Energy Efficiency Fund that will support people's various energy efficiency initiatives.

    4. Promoting renewable energy

    Promoting renewable (or green) energy not only is a popular global trend in the contemporary energy sector but also plays an important role worldwide. Fossil fuels that create a basis for energy production in our world have limited reserves that will be depleted sooner or later. So, it is an objective of not only Ukraine but also of all countries caring about their own future to balance electricity generation in a manner preventing dependence on resources that are only available for a limited time.

    It is especially critical for Ukraine to actively use renewable energy sources because our country imports a part of conventional fuels and energy resources. So, increasing the percentage of green energy fits well with the overall national strategy of diversification of energy sources and will reinforce energy independence.

    The Government's effort in this area is focused primarily on improving the sector's investment appeal, introducing legislative changes to make operations in the market more transparent and clear, and bringing advanced technologies into the country. There are also plans to expand the mechanism of promoting electricity generation from renewable sources, for example, transition from the green tariff to the green auction. Overall, the Government plans to increase renewable energy to 11% of total consumption in 2020.

    What has the reform changed already?

    • Diversification of natural gas supply: Ukraine has gone without Russian gas purchases for four years in a row, importing reverse fuel from EU countries instead. For example, gas was delivered in 2018 to state-owned NJSC Naftogaz of Ukraine by 18 European suppliers.
    • Subsoil use: in 2018 the Government denounced a controversial and non-transparent mechanism of issuing special licenses for subsoil use. Instead, it is introducing the practice of open auctions for field exploration and mineral extraction licenses. The first auction was conducted in October 2018. In 2019, SSGS plans to auction licenses through ProZorro.
    • In 2018,the production of petroleum with gas condensate was increased to 2.15 mln tons (by 3%), including to 1.9 mln tons (+ 40 thousand tons) at NJSC Naftogaz of Ukraine enterprises.
    • Diversification of nuclear fuel supplies: the dependence of Ukrainian nuclear power plant on Russian nuclear fuel has substantially dropped in recent years, from 85% in 2016 to a 46/54% ratio today (with 46% of nuclear fuel supplied by Westinghouse). The state nuclear energy operator NNEGC Energoatom actively pursues further cooperation with the alternative fuel supplier. Currently, alternative fuel is successfully used in active zones of six (out of 15) Ukrainian power units.
    • CSUNF construction: the Government in cooperation with Holtec International (USA) is actively building a Centralized Storage for Used Nuclear Fuel not far from Chornobyl Nuclear Power Plant. Implementation of this project will enable Ukraine to stop taking used nuclear fuel to Russia, which costs the national budget about 200 million US dollars annually.
    • Renewable energy: the percentage of electricity generated from renewable sources is steadily growing. 742.5 MW of new green capacity was commissioned in 2018, with green energy accounting for 2% of the energy balance.
    • The electricity market: Ukraine is introducing the electricity market in 2019.
    • The Energy Efficiency Fund has been established and acting Director appointed. The Fund is expected to start its activities in Q2 2019.
    • A commercial process model for creation of a strategic reserve of petroleum and petroleum products was designed.

    Goals and objectives for the current year

    • Introducing transparent e-auctions to sell special subsoil use licenses;
    • Introducing a fully functional gas and electricity market;
    • Unbundling the state-owned gas monopolist and monopolists in the electricity market as required by the EU's Third Energy Package;
    • Further diversifying nuclear fuel supplies;
    • Moving away from the green tariff towards the green auction in the renewable energy sector;
    • Launching the Energy Efficiency Fund

    The initiative effort is made by

    the Ministry of Energy and Coal Industry of Ukraine, the Ministry of Regional Development, Construction, Housing, and Utilities of Ukraine, the Ministry of Ecology and Natural Resources of Ukraine, the Ministry of Economic Development and Trade of Ukraine, the Ministry of Finance of Ukraine, the State Service for Geology and Subsoil of Ukraine, the State Agency on Energy Efficiency and Energy Conservation of Ukraine, NCSREPU, the VRU Committee for the Fuel and Energy Complex, Nuclear Policy, and Nuclear Security, the VRU Committee for Construction, Town Planning, Housing, and Utilities, the VRU Committee on Environmental Policy, Nature Management, and Liquidation of the Consequences of Chornobyl Disaster, NJSC Naftogaz of Ukraine, NAEK Enerhoatom, NEC Ukrenerho, the Reforms Delivery Office

    Key documents and useful links