Country Studies

3.4 Ukraine

3.4.1 Background Energy Situation in the Country

3.4.1.1 The Situation in Ukraine's Energy Sector

The energy sector in Ukraine includes five major institutions that are subordinate to the deputy minister of the fuel and energy complex:

• The Ministry of power engineering and electrification (Minenergo)
• The State Committee on Nuclear Energy
• The Ministry of Environmental Protection and Nuclear Safety
• The Ministry of the Coal Industry
• The State Committee on oil, gas and refineries

The energy industry in Ukraine includes the coal, oil, gas, peat and refinery sectors. Ukraine has large coal reserves, as well as oil, gas and other fossil fuel resources, but their extraction is not currently sufficient to meet domestic demand and their share of domestic primary energy products is relatively low; it reached 44.4% in 1995. The main figures for primary energy supply and consumption are shown in the table. Primary Energy Supply and Consumption in Ukraine⁽⁸⁵⁾

3.4.1.2 The Power Industry in Ukraine

Government Decree No. 244, "On the Market Transformation of the Power Sector of Ukraine" was issued in May 1994. This document stipulated the restructuring of the power sector of Ukraine and the development of a competitive national wholesale market for electricity. As a result of the Decree and other acts of government, today Ukraine's power sector comprises the following elements.

• four joint stock companies that own and operate the 14 largest thermal power plants;
• two joint stock corporations that own and operate eight hydropower stations on the Dnieper river and three hydropower stations on the Dniester river;
• a state grid company that owns and operates the high-voltage network (220 kV and above);
• 27 joint stock companies (oblenergos) that own and operate the low-voltage networks, some generation in the 25 oblasts (regions), and two city administrations (Kiev and Sevastopol);
• the nuclear generation company (Ukrenergoatom) and
• the National Electricity Regulatory Commission (NERC).

The installed generation capacity of the Ukrainian Power System (UPS) is 52,122 MW. It includes nuclear, thermal (fossil fuel), hydro- and industrial power plants (see table, Power Capacity Mix in Ukraine). The total effective generation capacity of the system is about 50 thousand MW, due to the de-rating of older power plants.

Table: Power Capacity Mix in Ukraine.⁽⁸⁶⁾

Electricity generation in 1995 was 193 TWh. Electricity generation, domestic consumption and exports all declined by 35%, 23% and 88% respectively during the period from 1990 to 1995.

3.4.1.3 Energy Policies in Ukraine

The official policy for Ukraine's energy sector has the following main goals:⁽⁸⁷⁾

• the development and implementation of a policy that promotes energy conservation
• economically and environmentally justified utilisation of domestic energy sources;
• restructuring of the economy to reduce the energy intensity of production;
• increasing reliance on alternative (renewable) energy sources.

For the power industry, the priorities are:⁽⁸⁸⁾

• extensive rehabilitation of existing thermal power plants;
• promotion of new technologies for the clean burning of low quality coal;
• utilisation of efficient gas turbine equipment;
• building of new nuclear units and reconstruction of already existing ones;
• capacity-building in nuclear waste management;
• completion of new hydro-power plants and pump storage plants and utilisation of small- and medium- size rivers for power generation;
• rehabilitation of existing hydro-power plants.

3.4.1.4 Potential for Energy Efficiency and Renewable Sources of Energy

Energy intensity in the Ukrainian economy is three to four times higher that in OECD countries, mainly due to the large share of heavy industry and poor energy efficiency in the country.

The National Energy Program gives the following estimates for energy efficiency potentials in Ukraine:⁽⁸⁹⁾ During the next two years, it is possible to reduce energy consumption by 10% without additional expenses or with only small investments. This is equivalent to 30 mil. tce (tonnes of coal equivalent) annually. With extensive controls for energy resource utilisation, new pricing policies and additional investments, energy savings could be 1.5-2 times higher than that.

The National Energy Program also includes figures on the potential for development of alternative and renewable sources of energy such as solar, wind and geothermal, small hydro and sea power, and the utilisation of biogas and mine methane (see table, below).

The State Program of Energy Conservation was approved by Parliament in 1996.⁽⁹⁰⁾ According to this Program, the "estimated general potential for energy efficiency in Ukraine on the basis of 1990 is 145-170 Mtoe per year, which includes 42-48% of primary energy resource consumption." (see table, Estimated Potentials for Energy Conservation in Ukraine on the Basis of 1990.)

Perspectives for Alternative/Renewable Energy Development in Ukraine up to 2010⁽⁹¹⁾

Estimated Potentials for Energy Conservation in Ukraine on the Basis of 1990⁽⁹²⁾

3.4.2 MDB Lending in Ukraine

3.4.2.1 Memorandum of Understanding (MOU) and MDB Energy Lending in Ukraine

The International Bank for Reconstruction and Development (the IBRD, or World Bank), and the European Bank for Reconstruction and Development (EBRD) both lend in the Ukrainian energy sector.

World Bank papers state: "In collaboration with EBRD, the Bank assisted the G-7 Nuclear Safety Working Group to develop an Action Plan that includes the phased closure of capacity at Chernobyl, the completion of replacement nuclear capacity, the safety upgrade of the remaining nuclear units, the rehabilitation of non-nuclear power plants and energy efficiency improvements. The Bank actively participated in the work of a joint Ukraine/G-7 Task Force that prepared the MOU signed in Ottawa in December 1995."⁽⁹³⁾

That MOU was signed by the government of Ukraine, the governments of the G-7 countries and the Commission of the European Communities and contains an agreement on the elaboration and implementation of a Comprehensive Program to support the decision of Ukraine to close the Chernobyl Nuclear Power Plant by the year 2000: "Ukraine and the G-7 will work with the international financial institutions as well as foreign and domestic investors to prepare loan-financed projects based upon least-cost planning principles."⁽⁹⁴⁾

Because of the MOU agreement, MDB energy investment packages in Ukraine contain elements of the "Comprehensive Program" proposed in the MOU, and their importance is that implementing such projects will directly or indirectly support the closure of the Chernobyl nuclear power plant. At the same time, such projects must be worked on with maximum attention from both MDBs and Ukrainian officials in order to effectively use the opportunity to develop and improve the Ukrainian energy sector.

3.4.2.2 The World Bank

The World Bank has been involved in the Ukrainian energy sector since early 1992. An Energy Sector Review⁽⁹⁵⁾ was issued in 1993, leading to the Energy Strategy Conference held in Kiev in June 1993. At the Conference, an understanding was reached that the Bank would focus on power generation, gas transmission, and gas distribution. It was also determined that lending operations should focus on the rehabilitation of existing assets rather than on capacity expansion, while supporting initiatives that increase the financial and operational autonomy of enterprises and foster competition.

The World Bank's Strategy for Ukraine

"The Bank's overall objective is to support Ukraine's efforts to accelerate structural reforms, and to promote efficient investments in high priority sectors in order to complete the country's transition to a market economy, accelerate its rate of economic growth, and increase efficiency. This will require strengthening key financial institutions; accelerating privatisation; extending the openness of the policy environment; rehabilitating and re-orienting the country's physical infrastructure; and extending the social safety net and the efficient delivery of social services."⁽⁹⁶⁾

Current World Bank Loans

The project descriptions listed in the present chapter are extracted from the Bank's official Project Information Documents and Staff Appraisal Reports, where available.

Hydropower Rehabilitation and System Control Project (114 mil. USD, total 117 mil. USD) This project includes the near-complete implementation of the rehabilitation program of the Kakhovka hydropower station; and partial implementation of the rehabilitation program for the Kiev, Kanev, Kremenchug and Dniprodzerzhinsk hydropower plants, installation of dam safety monitoring systems, upgrading of communications, dispatch, system and protection, and generating unit controls and assistance for project implementation, and optimisation of use of the reservoirs on the Dnieper river.

Coal Sector Adjustment Loan (300 mil. USD) The project supports implementation of economic restructuring of the coal sector including corporatisation, price, trade and export liberalisation, decommissioning of unprofitable mines and investment into profitable corporatised mines and social mitigation.

Electricity Market Development Project (317.0 mil. USD, total 377.6 mil. USD) The project includes building up fuel stocks at 14 thermal power plants to levels that are consistent with standard industry practices (about 40 days of stocks for coal and mazut), as well as building up the stocks of spare parts and carrying out deferred maintenance at the plants. It also includes installation of metering and communications equipment to improve recording and building of electricity flows at key wholesale market delivery points, and technical services and training for project implementation, financial management, and the development of a privatisation program.

In 1995, the Government of Ukraine asked for support from both the EBRD and the World Bank for the Electricity Market Development Project. The EBRD loan came first and is now signed and under implementation. In 1997, the World Bank suspended credits for its $317m loan for the Ukrainian power sector due to the Ukrainian government's refusal to introduce a 10-20% price differential between residential and commercial energy tariffs to reflect the higher cost of residential energy delivery, as was specified in the agreement for the loan. The Electricity Market Development Project was designed to address the following issues:

• improvements in payment collection at the level of oblenergos (Local power distribution companies) in order to stop the haemorrhaging of financial resources;
• provision of working capital for the generation companies in order to enable the power system to provide electricity to creditworthy customers;
• upgrading metering of electricity flows in order to improve the recording and billing of transactions between market participants;
• improving financial management in the power industry, particularly in the National Dispatch Centre (NDC). ⁽⁹⁷⁾

The objective of the project is to support the development of a competitive electricity market by providing working capital to thermal power generators for the purchase of fuel and spare parts, and installing the metering and communication equipment needed for proper functioning of the settlement systems.

Of the project's four components, the most costly is the building up of fuel stocks at 14 thermal power plants. For each of those plants, estimates were made for actual and required fuel stocks of coal, gas and mazut; this included estimates of how much of these fuels were required to have fuel inventories for a minimum of 40 days.

The second component includes maintenance and building up the inventory of spare parts and equipment in the following categories:

• coal storage and transportation equipment;
• water demineralisation equipment;
• boiler and mechanical equipment;
• electrical equipment;
• instrumentation and control equipment; and
• environmental impact mitigation and monitoring equipment.

The third component of the project, metering and communication, involves purchasing and installing the equipment needed to measure and record hourly energy flows and the equipment needed to forward the necessary information for commercial settlements and accounting.

The fourth component involves technical services. This foresees both project implementation support and institutional building, including:

• fuel and spare parts procurement;
• metering and communications implementation support;
• operation of the wholesale market;
• privatisation program.

A group of recommendations and agreements on pricing reached during negotiations on the loan are also include in the project.⁽⁹⁸⁾ As noted above, these pricing measures were a major reason that the World Bank suspended funding for the project, as the price differentials had not been achieved by the specified dates. Some of the project's recommendations and agreements are listed below:

• Adjustment of household electricity prices in order to achieve a 10% difference between average industrial prices and household prices by the end of 1996, and a 20% difference by the end of 1997;
• The introduction of consumption norms limiting the amount of subsidised electricity for privileged household consumers in 1996;
• A mechanism for setting wholesale electricity prices, including provisioning for bad debts, temporary support to generation companies, and the recovery of the cost of subsidies to privileged consumers;
• Following the rescheduling of payables and receivables accumulated before 1996, the generation companies' and NDC's payables and receivables will not exceed 40 days in 1996, 35 days in 1997, and 30 days thereafter;
• Commitment of the NDC and the generation companies to maintain a debt service coverage ratio of at least 1.5 during the term of the Bank loan;
• Auditing requirements for NDC and generation company accounts.

IBRD Projects in the Pipeline

Gas Distribution Rehabilitation (100 mil. USD) The project will support rehabilitation and upgrading of the gas distribution system in four areas, installation of gas meters for customers in the residential/ services sector, rehabilitation and/or replacing sections of the pipeline networks, and an institutional support program.

Dniester Hydropower Pump Storage Project (260 mil. USD) The aims of the project are completion of three units of the Dniester Hydropower Pump Storage Plant (DHPSP), completion of the after-bay (buffer) hydropower plant at the lower dam of the DHPSP, strengthening of the transmission system, further priority upgrades of the dispatch control and communications systems, and technical assistance for project implementation.

Kiev District Heating Improvement (200 mil. USD) The project includes rehabilitation and introduction of technologies and materials to the heating system in Kiev and support for the commercialisation and strengthening of project district heating companies. By December 1997, appraisal for the project was completed, and the EBRD was to provide co-financing.

Krivoy Rog Power Plant Rehabilitation Project (160 mil. USD) The project will facilitate general station rehabilitation at a major coal-fired thermal power plant to extend service life, increase efficiency and to reduce environmental impact, including boiler and turbine-generator rehabilitation at units 6,7,8, and replacement of the generator for Unit 2.

3.4.2.3 The European Bank for Reconstruction and Development

The EBRD's Strategy in the Ukrainian Energy Sector

The EBRD's objectives in Ukraine are to help reduce the economy's energy intensity, facilitate the closure of Chernobyl, and improve overall environmental performance in the energy sector.

Priorities are to:

• Improve performance, efficiency and environmental performance of power generation and in commercially-structured projects sponsored by private investors;
• Promote improved end-use efficiencies, and more rational use of energy through price reform and energy efficiency initiatives;
• Help to improve the reliability of the power and gas transport systems;
• Support re-organisation of the sector; and
• Assist in the development of domestic fossil fuel reserves.

This strategy will provide direct support to the G-7 Action Plan for Ukraine, which proposed a comprehensive package of nuclear safety upgrades, tariff increases, rehabilitation of thermal plants and completion of modern nuclear plants under construction to facilitate the earliest feasible permanent closure of Chernobyl.⁽⁹⁹⁾

EBRD Projects Under Implementation

Power Market Development Project (61.9 mil USD, total 72.5 mil.) The National Dispatch Centre (NDC) will on-lend the funds to four generating companies for important short-term repairs and maintenance at the main thermal power stations and to provide new meters and equipment for the new electricity wholesale market.

Poltava oil and gas extraction Project (8 mil. USD) EBRD financing is being used for the drilling of four new wells, connecting these wells to the operation and production base, and constructing a pipeline and rail export facilities.

Starobeshevo Power Modernisation Project (113.22 mil. USD, total 163.20 mil. USD) Replacement of an old coal-fired boiler with the installation of a 210 MW fluidised bed boiler with ancillary equipment at Unit 4 of the Starobeshevo Power station in Eastern Ukraine. The new boiler will use circulating fluidised bed boiler technology, which can burn low-quality coal and schlamm efficiently and cleanly.

EBRD Projects in the pipe-line

Lviv District Heating Commercialisation Project (total 62 mil. USD) This is a project to commercialise the district heating supply service in Lviv. Investments will assist the municipality in developing its utilities on a commercially and financially autonomous basis, enabling private agents to handle customer services, metering, billing and collection.

Kiev District Heating Rehabilitation (total 124 mil. USD) This project will finance the rehabilitation of the transport and distribution district heating grid of Kiev.

Krivoy Rog Power Plant Rehabilitation Project (total 290 mil. USD) The project consists of rehabilitating three units at Krivoy Rog, improving their efficiency, and reducing emissions of air pollutants.

Ukrainian Energy Saving Company (UkrESCO) Project (total 33 mil. USD) This is a project to establish the first Energy Saving Company (ESCO) in Ukraine and implement a range of energy saving projects in the public and private sectors.

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