6 General Review of Energy Strategy of Ukraine ENG

D R A F T

Concept Note 6

COMPLEMENTARY TECHNICAL ASSISTANCE TO THE EU FUNDED BUDGET SUPPORT TO UKRAINE’S ENERGY STRATEGY IMPLEMENTATION

CONCEPT NOTE ON THE ENERGY STRATEGY OF UKRAINE FOR THE PERIOD UNTIL 2030

Prepared by Heikki Lehtimaki Project Key Expert/Energy Poicy

Kyiv, July 2010

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1. SUMMARY OF THE ENERGY STRATEGY OF UKRAINE FOR T HE PERIOD UNTIL 2030:

A. Strategic Objectives, Priorities and Policy and Implementation Measures of the Strategy (KANTOR ConsortiumTechnical Proposal from December 2009 (Page B-20)

Strategic Objectives

• Maintain role as a key transit country for oil and gas

• Enhance energy security

Priorities

• Sustain / increase volumes of oil and gas transit

• Reduce energy intensity and improve energy efficiency

• Integrate domestic energy sector into the European energy system

• Enhance domestic energy production

Policy and implementation measures

• Modernise oil and gas transportation infrastructure• Diversify energy supplies and transportation routes• Increase domestic production of coal and nuclear power generation• Introduce new energy efficient technologies and modern systems of control, management and metering in

all parts of the value chain• Gradually implement EU Energy Market law• Ensure prices reflect and recover production costs• Create strategic oil stocks

B. KANTOR Consortium Technical Proposal from Decemb er 2009 (Page B-21)

The Inception Period analysis of the Energy Strategy confirms the need of updating of the Strategy as foreseen in the Technical Proposal.

• “The Energy Strategy to 2030 represents a significant milestone as it provides an all-encompassing overview and comprehensive strategy of the energy sector, by building upon the various state programmes developed mostly in the 1990s for the various sub-sectors. Nevertheless, some of the projections in the strategy are contentious as they were not developed on the basis of detailed statistical data and models. There also appears to be too strong an emphasis on supply measures at the expense of energy demand and efficiency. More importantly, the strategy lacks specific measures to meet its stated objectives and it is therefore difficult to assess likely developments and the probability of realising its targets (and over which timeframe).

• By way of example, the strategy calls for significant energy savings by the end of the projection period (specifically, a 50 per cent reduction in energy intensity compared to 2005), which is anticipated to derive from structural shifts in the economy, as it moves away from heavy industry and toward the tertiary sector, and significant “technological improvements”. The document also envisages a doubling or more in the production of coal and nuclear power to reduce reliance on natural gas. While the projected energy savings and structural changes are feasible, in the context of other countries’ experience, the document lacks detailed, specific and concrete actions (including demand-side measures, financing and regulatory/legislative changes) that are necessary to meet the ambitious targets set by the strategy. We expect that this and other similar issues could be discussed and further elaborated in the context of “Component 2” of the present project.”

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Analysis of the current situation, various documents and discussions with various Stakeholders as well as Technical Assistance requests from them confirm the need to revise and modernize the Strategy. These can be summarized as follows and have been taken into account while developing the 6-month Working Plan following the Inception Period (Table 11):

• Review and analysis of The Energy Strategy of Ukraine for the Period of Until 2030;

• Energy Strategy review articles of (See Table 8 for details)

o Geletukha and Geleznaya;

o Yermilov;

o Kulyk;

o etc.

• Resolution of the Cabinet of Ministers of Ukraine of 19 May 2010 #1073-r on Adoption of Priorities for Ukraine’s Integration into European Union for 2010 (19.05.2010);

• Economic Reform Programme for 2010 - 2014, Committee for Economic Reform of the President of Ukraine (02.06.2010);

• Resolution of the Cabinet of Ministers of Ukraine No 992-p on Action Plan for 2010 on Initiating “LNG Supply to Ukraine and Construction of Re-gasification Terminal” Investment Project (31.03.2010);

• On the market development of energy resources within the framework of Ukraine’s Energy Strategy until 2030 (Presidential Decree N 681/2009) / National Security and Defense Council of Ukraine (27.08.2009);

• Technical Assistance requests from the Ministry of Fuel and Energy of Ukraine (17.05.2010 and 18.05.2010);

• Technical Assistance requests from NJSC Naftogaz of Ukraine (08.06.2010 and 16.06.2010);

• Analysis of the Energy Strategies of Russia, Poland, the UK, Slovakia, etc.;

• Assistance to Ukraine in carrying out the energy policy analysis and in promoting the idea of joining the Energy Community Treaty - Report on “Energy Sector Development and Policy Assessment”, KANTOR Framework Consortium (28.04.2009);

• Analysis of Ukraine’s energy policy documents produced by the IEA, the World Bank and the EBRD.

An extract of the recent KANTOR Study is reproduced here to summarize the Energy Strategy elements:

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C. Summary of the Energy Strategy of Ukraine to 203 0 (2006)

From KANTOR Study “Assistance to Ukraine in carryin g out the energy policy analysis and in promoting the idea of joining the Energy Com munity Treaty - Report on “Energy Sector Development and Policy Assessment” (Pages 49 - 53),

“Major provisions of Energy Strategy of Ukraine to 2030 are:

■ strategy for coal sector development;

■ strategy for oil and gas sector development;

■ strategy for electricity sector development;

■ strategy for nuclear sector development;

■ directions for heat supply system development;

■ directions for AESF development and usage;

■ priority directions and scope of energy saving;

■ directions of Ukrainian energy policy with regard to provision of country’s energy security;

■ analysis of financing sources and instruments for energy sector development; and

■ directions of legal and normative basis improvement for energy sector operation and

development.

The development of the following major programmes and measures is a prerequisite for the

implementation of goals and objectives of the Energy Strategy of Ukraine to 2030:

■ energy saving;

■ development of TPP and CHP plants (new build, rehabilitation, modernisation);

■ development of hydro power (new build, rehabilitation, modernisation);

■ safety enhancement of operating NPP units;

■ extending the life of operating NPP units;

■ constructing new nuclear generation capacities;

■ development of 220-750 kV transmission and interstate lines;

■ integration of Ukrainian energy system in European (integration into UCTE);

■ development of distribution network 0,4-110 kV;

■ development of electrical heating;

■ modernisation of DH utilities;

■ development of uranium, zirconium and NPP nuclear fuel production;

■ improvement of export potential of national fuel and energy sector (electricity, oversees oil

and gas production, construction of power facilities);

■ development of URES;

■ system reform of price and tariff policy;

■ development of WEM;

■ formulation of natural gas and fuel markets;

■ scientific and engineering support of the FES;

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■ adaptation of Ukrainian energy legislation to EU law;

■ codification and systematisation of energy legislation and drafting a framework

(fundamental) law on energy sector;

■ legal framework for establishment and operation of communal companies; and

■ ownership reform in the energy sector.

According to the Energy Strategy of Ukraine to 2030, the above programmes and measures are scheduled to take place in the period 2015-2020. They should be sufficiently detailed, and include design of specific facilities and technologies, specify the scope of and possible range of financing sources, as well as measures to reduce environmental impact of fuel and energy facilities. The Action Plan to 2010 on implementation of goals and objectives scheduled in the Strategy shall be prepared.

Measures towards further development of the WEM and preparation of concepts on formulation and improvement of markets for other fuels shall be carried out to 2010. This would allow competition to develop further, and create favourable conditions for integration of Ukrainian energy market with that of the EU.

Programmes for thermal and nuclear energy development, and in particular sections on scope of commissioning of new thermal and nuclear units, on rehabilitation and modernisation of TPP, on decommissioning of thermal and other units, should all take into account the adjusted indicators of a number of other programmes which are drafted in line with the Energy Strategy of Ukraine to 2030. The indicators to be taken into account include demand growth forecasts and reduction of energy consumption forecasts.

Action Plan for 2006-2010 on implementation of Ener gy Strategy of Ukraine to 2030

In pursuance of the Energy Strategy of Ukraine to 2030, the CMU approved an Action Plan for 2006-2010 on implementation of Energy Strategy of Ukraine to 2030, which enacted the following special-purpose programmes:

■ development, modernisation and rehabilitation of TPPs and CHPs;

■ development of hydro energy;

■ development of transmission network to 2030;

■ development of nuclear energy (modernisation, new construction and extending the life of existing plants);

■ improvement of the export potential of the Ukrainian fuel and energy sector (electricity, oil and gas, construction of power facilities);

■ system reform of price and tariff policy;

■ scientific and engineering support of fuel and energy sector; and

■ adaptation of Ukrainian energy legislation to EU law.

Major Energy Policy Goals

Major energy policy overall goals and objectives include:

■ creation of favourable conditions for ensuring demand for energy products is met continuously and at a high quality level;

■ identification of ways, and creation of favourable conditions, for ensuring safe, reliable and sustainable operation of the fuel and energy sector and its utmost efficient development;

■ ensuring Ukraine’s energy security;

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■ reducing the harmful influence of the fuel and energy sector upon the environment, and ensuring civil protection against possible technological hazards;

■ reducing specific costs in production and ensuring rational use of energy products through the introduction of energy saving technologies and equipment, the rationalisation of State sector energy production structure and the reduction of the share of energy-intensive technologies in the production mix;

■ integrating the UES of Ukraine into the European energy system, with gradual growth of electricity exports; and

■ strengthening Ukraine’s position as an oil and gas transit country.

Achievement of the above goals is believed to promote creation of favourable conditions for rapid development of economy and improvement of living standards in the country.

Major Energy Policy Specific Objectives

Major specific objectives of energy policy implementation are:

■ formulation of a uniform and effective State control and regulation system in the fuel and energy sector of Ukraine, and development of competition in the energy markets;

■ creation of conditions conducive to the radical reduction of intensity of energy use in Ukraine, with the introduction of new technologies, advanced standards, modern control and metering systems in all stages of energy products production, transport and usage;

■ development of market instruments to provide incentives for energy saving in all branches of economy;

■ improvement of export potential, mainly in electricity, through modernisation and rehabilitation of generating capacities, transmission lines, including interstate ones;

■ development of national power engineering, instrument engineering and know how in construction of new power facilities, as a prerequisite for ensuring Ukrainian competitiveness in domestic and overseas fuel and energy sector projects;

■ optimal production of domestic energy resources, with due consideration of international market supply conditions, price levels and geopolitical situation; increasing scope of energy and energy products produced by URES;

■ diversification of external energy supply sources, as well as diversification of transit/

transportation routes;

■ creation of a uniform state system of statistics, strategic planning, monitoring of energy products production and usage, and production / demand balances;

■ reformulating price policy with regard to energy products, to ensure energy production costs recovery and to create favourable conditions for reliable operation and sustainable development of the fuel and energy sector companies;

■ establishing appropriate legislative environment conducive to the implementation of the Energy Strategy goals, considering current and foreseen commitments by the Energy Charter Treaty, Kyoto protocol, bilateral international agreements, and requirements of the EU Energy Acquis; and

■ creating a favourable investment climate in the fuel and energy sector to stimulate FDI

inflows for the financing of energy infrastructure projects.”

D. Summary Tables of the Energy Strategy of Ukraine for the Period Up to 2030:

• Primary Energy Consumption in 2005 – 2030 according to Various Scenarios • Consumption of Domestic and Imported Energy Resources in 2005 and in 2030 • Conclusions

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D.1 Primary Energy Consumption in 2005 – 2030 accor ding to Various Scenarios

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D.2 Consumption of Domestic and Imported Energy Res ources in 2005 and in 2030

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2. ESBS Project Team Comparison of Latest Energy St rategies of Various Countries

Ukraine Russia Poland Slovakia England

Name of the Document:

Energy Strategy of Ukraine for the

Period Until 2030

Energy Strategy of Russia for the

Period Up to 2030

Energy Policy of Poland Until 2030

Energy Security Strategy of the

Slovak Republic

1: Meeting the Energy Challenge – A White Paper

2: The UK Low Carbon Transition

Plan 3: The UK

Renewable Strategy

Period covered:

2005 - 2030 2008 – 2030 2009 – 2030 2008 – 2030 1: 2007 – 2030

2: 2009 – 2020

3: 2009 - 2020

Year of publication:

Approved by the Cabinet of Ministers

on 15.03.2006

Approved by the Government on

13.11.2009, Published in 2010

Approved by the Council of Ministers

on 19.11.2009

Approved by the Council of Ministers

on 15.10.2008

1: May 2007

2: 20.07.2009

3: July 2009

Ministry in charge:

Ministry of Fuel and Energy

Ministry of Energy / Institute of Energy

Strategy

Ministry of Economy Ministry of Economy 1: Department of Trade and Industry

2: HM Government

3: HM Government

Approach and methodology:

• Deep analysis of existing situation, but does not seem to be based on a detailed statistical model of Ukrainian energy economy

• Contains clear targets (or, declarations) but is lacking a detailed Action Plan or measures to achieve the stated objectives and does not provide details on sources of financing

• Detailed policy document, including also Regional and Inter-industrial sections

• Includes detailed sectoral investment plans and a Road Map for implementation of the Strategy

• Detailed policy document with an Action Plan for the Years 2009 - 2010

• A detailed policy document and Scenario analysis on energy security and environmental aspects

• Detailed Policy Papers on energy and on meeting the challenges of climate change

• Contain clear targets

• Provide tools for practical implementation and information on sources of financing

• Open for consultation e.g. via the internet during preparation

• Part of continuous planning process

• Proactive approach