Session 2 - Reforming Energy Subsidies in Ukraine by Olena Ivanova
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This document summarizes Ukraine's energy subsidies and reforms in its energy sector. It analyzes energy subsidies provided from 2012-2016 and shows direct transfers to the coal sector, compensation to energy companies for regulated tariffs, cross-subsidization of households, targeted support for low-income households, and state support for renewables and energy efficiency. Overall, Ukraine has made progress in reforming energy subsidies, including phasing out compensations to Naftogaz, increasing support for low-income households, and gradually providing more support for energy efficiency and renewables.
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Session 2 - Reforming Energy Subsidies in Ukraine by Olena Ivanova
- 1. Ministry of energy and coal industry of Ukraine Chief specialist Olena IVANOVA Energy subsidies and reforms in the energy sector of Ukraine
- 2. Law "On Electricity Market of Ukraine" , " On the natural gas market", The New Energy Strategy of Ukraine till 2035 was adopted, which is identify and fix the main directions of the energy sector, the level of energy security, energy efficiency, the transition to the energy saving usage and smart energy consumption with the introduction of innovative technologies, provides rapid development for green projects were adopted. Law " On the National Commission for state regulation in the energy and utilities" , “On the Energy Efficiency Fund”, " About housing and communal services ", "On commercial accounting of thermal energy and water supply", " On the Energy Efficiency of Buildings " were adopted. These laws are united, because they launch services and performers of services and also laws force consumers to move in this direction. Concept of development of the coal industry and gas was adopted and provides plan of action. Concept optimizes the structure of the coal industry and output it to the breakeven level and self-sustaining operation.
- 3. Analysis of energy subsidies in Ukraine Analysis is based on official and public sources of information: *reports of Treasury of Ukraine on budget execution; *resolution of the cabinet of Ministers; *report of the energy regulator. Sectors covered: coal and gas sectors, conventional electricity, electricity generation from renewables and support to energy efficiency. Preliminary results were discussed at the roundtable organized in cooperation with the Committee on Fuel and the Energy Complex, Nuclear Policy and Nuclear Safety of the Parliament of Ukraine on 25th of April, 2016.
- 4. Direct transfers to coal sector Source: prepared based on Treasury reports on budget execution (2013-2016) 0 5 10 15 20 25 30 2012 2013 2014 2015 2016 Construction and re- equipment of coal and peat mines Safety and rescue measures at coal mines Capital replenishment to settle arrears of wages Partial compensation of production costs Restructuring programme billion UAH
- 5. Source: Naftogaz (2014) True cost of gas for households (including heating) billion USD
- 6. Compensation of losses to energy companies for supplying services at regulated tariffs Source: prepared based on Treasury reports on budget execution (2013-2016), resolutions of the Cabinet of Ministers 0 20 40 60 80 100 120 2009 2010 2011 2012 2013 2014 2015 2016 Capital injection to NJSC "Naftogaz" (left axis) Subvention (transfer) form the state budget to local budets to compensate losses of energy and utility supply companies due to regulated tariffs Compensation to NJSC "Naftogaz" for the difference between the price of imported gas and its sale for heat production billion UAH
- 7. Cross-subsidization of households by industrial consumers (embedded in electricity tariffs) Source: prepared based on reports of the National Commission for State Regulation of Energy and Public Utilities 0 5 10 15 20 25 30 35 40 45 50 2012 2013 2014 2015 2016 billion UAH
- 8. Target support programme for low-income households Source: prepared based on Treasury reports on budget execution (2013-2016) 0 5 10 15 20 25 30 35 40 45 50 2012 2013 2014 2015 2016 to purchase solid and liquid furnace fuel and LPG to partially cover utility costs billion UAH
- 9. State support to renewables and energy efficiency in Ukraine Source: prepared based on Treasury reports on budget execution (2013 - 2016), NCSREPU and Ministry of Finance data 0 1 2 3 4 5 6 7 8 2012 2013 2014 2015 2016 Feed-in tariff for renewables Tax benefits for renewables Energy efficiency programme billion UAH
- 10. Overall progress of the subsidy reform in Ukraine Note: in 2016, opportunity cost to state-owned gas producers is assumed only for 4 month as gas price was increased to market level since May. Source: prepared based on government sources. 0 50 100 150 200 250 2012 2013 2014 2015 2016 Renewables Energy efficiency Revenue foregone Target subsidies Electricity consumption Gas consumption Coal production billion UAH
- 11. energy subsidies reform in Ukraine is in progress; as gas price was increased to market level compensations schemes to Naftogaz were phased out; targeted support programme for low-income households is improved and amount of funds allocated was increased substantially; support to energy-efficiency measures and renewables is gradually increasing; state energy-efficiency programme works effectively and demand for support from households and condominiums is huge; Energy Efficiency Fund will be launched in 2018 and will scale up efforts to improve energy efficiency.
Editor's Notes
- Note: Law On Electricity Market of Ukraine will promote the reform and further development and liberalization of the electricity sector; monopolization of the electricity market; encouragement of investments to the section, the development of competition in all segments of the electricity market, creating equal conditions for the participants; provide the ability to integrate the electricity markets of Ukraine and EU and Ukrainian energy system with the European energy system. Also, I would like to inform you that the main directions of reform in the nuclear industry aimed at improving energy security and independence from the monopoly supplier of nuclear fuel and equipment. Therefore, the strategic objective is to provide an alternative supply of nuclear fuel for Ukraine, the construction of a centralized storage facility for spent nuclear fuel and import phase-out.
- Analysis of energy subsidies in Ukraine is performed under the OECD project is based only on official and publically accessible sources…. reports of Treasury of Ukraine on budget execution; resolution of the cabinet of Ministers; report of the energy regulator. Next slides illustrate key results of analysis…
- 2005 рік: 145 шахт, 46 млн т вугілля 2013 рік: 82 шахти, 24 млн т вугілля Source: http://www.niss.gov.ua/articles/1495/#_ftn1 As coal seams had gradually depleted and moved coal extraction deeper in the ground, production costs had been increasing dramatically over the last ten years. In 2005, state mines spent on the average UAH 274 per 1 t of marketable coal while the market price of the latter was UAH 219. In 2013, market prices for coal constituted only 36% of production costs (UAH 1352/t) (NISS, 2014). According to the Resolution of the Cabinet of Ministers № 153, budget funds are used for financial rehabilitation of coal mining enterprises via partial compensation of the costs, which are included in the prime cost of finished marketable coal products, and can be used to cover expenditures for payment of wages and electricity consumed. Coal mining enterprises prepare estimates of forecast technical and economic performance indicators and submit it for consideration of the Ministry of Energy and Coal Industry according to the established procedure. The latter is responsible for the allocation of the state budget funds between coal mines if forecast prices for coal do not cover estimated production costs, approval of monthly performance indicators of coal mines (including production amount), defining production costs and losses for each coal mining enterprises depending on its assortment, quality indicators and forecast prices. Gradual phase-out of subsidies in the coal sector and closure of unprofitable mines accompanied by social programmes for ex-miners was planned by many strategic documents and state programmes but the pace of reform was rather slow and amount of budget transfers to the sector was growing year by year. In 2015, the amount of state support planned to cover losses of state-owned mines was reduced considerably as the majority of unprofitable mines located in the Donbass region were affected by military conflict. In 2014, UAH 8.7 billion was allocated to compensate losses for unprofitable mines. In 2015, only UAH 1.2 billion allocated for this purpose and in 2016 only UAH 1.4 billion.
- http://www.naftogaz.com/files/Zvity/Naftogaz_Annual_Report_2014_engl.pdf The gap (blue) illustrates the difference between the cost of imported gas (sold to households for their needs and also sold to large heat generating plants producing heat for households) and the cost paid by households under regulated gas and heat tariffs. So, the end beneficiaries are households. Next slide shows how this gap was compensated by the state through different subsidies schemes.
- Provision of heat and water supply services to population at prices (tariffs) lower than economically justified production costs is considered to be a quasi-fiscal operation approved by the Cabinet of Ministers № 692-р as of 1 August 2012. Compensation to utilities service providers for the difference between the actual cost of central heating and services of centralized water supply and wastewater treatment and actual tariffs is undertaken via subvention from the state budget in line with procedures approved by the Cabinet of Ministers for each year. Ministry of the Regional Development, Construction and Utilities is responsible for administration of this programme. To cover deficit of the NJSC “Naftogaz” accumulated because of selling natural gas to heat supply companies (for consumption of population) at prices lower than the import price capital injections were undertaken via the complex mechanism. Cabinet of Ministers increased statutory capital of NJSC “Naftogaz” by issuing additional shares to current nominal value and maintaining 100% of shares in state ownership. Ministry of Energy and Coal Industry arranges private placement of these shares. At the same time, Ministry of Finance issued state bonds and sold them on behalf of the state for additional shares of NJSC “Naftogaz”. The latter was obliged to use obtained state bonds according to its statute, particularly, to use funds obtained from selling sate bonds for payments for imported natural gas. For the period from 2009 to 2015, Ministry of Finance has issued state bonds to cover deficit of the Naftogaz at UAH 168 billion with 3 to 11 years maturity period at 9.95%-14.5% annual interest rate. As the government took a decision to increase gas price for domestic producers to market levels (based on import parity) starting from May 2016, this effectively eliminated all subsidies in the gas sector.
- The NJSC “Naftogaz” has accumulated a significant deficit by selling natural gas to both households and heat-supply companies serving households at prices lower than the import price. A complex, multi-step mechanism has been designed to cover this deficit. First, the Cabinet of Ministers increases the statutory capital of NJSC “Naftogaz” by issuing additional shares while maintaining their 100% ownership. Then, the Ministry of Energy and Coal Industry arranges a private placement of these shares. At the same time, the Ministry of Finance issues state bonds and sells them on behalf of the state for additional shares of NJSC “Naftogaz”. The latter is obliged to use the obtained state bonds according to its statute, particularly, to use the funds obtained from selling state bonds for payments for imported natural gas. As the government increased all gas prices to households to market level starting from May 2016, there will be no need for such measure any longer. Figure 7 illustrates this mechanism. For the period 2012, the Mini- 2015stry of Finance issued state bonds to cover Naftogaz’s deficit. The value of the bonds was UAH 142.1 billion with a 3 to 10 year maturity period at 9.95% - 14.5% annual interest rate.
- Cross-subsidization of preferential (primarily households) consumers on the expanse of industrial ones is designed via the system of so-called “subsidy certificates” . In order to compensate losses of energy companies, which supply electricity to preferential categories of consumers, the value of “subsidy certificates” is incorporated into the structure of the wholesale market price of electricity. The share of “subsidy certificates” in the latter was about 30.5% (0.25 UAH/ kWh) in 2014 (NCSERPU, 2015). The volume of cross-subsidization has increased from UAH 18 billion in 2009 to UAH 46 billion in 2016. As of 2014, tariff for households covered only about 22% of the costs on production, transmission and distribution of electricity. Elimination of cross-subsidization was planned many times but not implemented in practice. Previous Energy Strategy aimed to phase-out cross-subsidies by 2014 but failed to achieve this objective. Recently approved energy strategy has a target to eliminate cross-subsidization in the electricity sector. З стратегії: стимулювання підвищення енергоефективності шляхом адресної монетизації субсидій кінцевому споживачеві, мінімізація обсягів субсидування у перспективі; Kіквідація перехресного субсидування між споживачами, приведення цін для побутових споживачів до ринкового рівня;
- Households which pay for housing and utilities services higher than 10% - 15% of cumulative monthly average income of citizens registered in a given house/flat according to procedures defined in the Resolutions of the Cabinet of Ministers № 848 and №1156. Financing of expenditures of local budgets on implementation of state social programmes is undertaken through subventions envisioned in the state budget for a given year in line with the resolution of the Cabinet of Ministers № 256 as of 4 March 2002. As gas price for households was increased to market level starting from May, 2016, funding for targeted support of low-income households had to be increased considerably. In 2016, UAH 46 billion was allocated on targeted subsidies. 2017 budget plans about UAH 61 billion on target subsidies for households.
- In contrast to fossil-fuel subsidies, government support to energy efficiency and renewable energy producers has been quite limited until recently. However, the State Energy Efficiency Programme was considerably reinforced in 2015. This programme provides soft loans to households and condominiums willing to improve the thermal insulation of buildings. Feed-in tariffs (FITs) for renewable-energy producers have been the main policy incentive to stimulate the sector’s development. As the renewables sector has been growing rapidly, the total amount of induced transfers in the form of FITs increased from UAH 1.7 bln (USD 218 mln), in 2009, to UAH 6.1 bln (USD 278 mln), in 2015. Renewable energy producers also enjoyed a number of tax benefits over the observed period. State Energy Efficiency Programme was reinforced in 2015. This programme provides soft loans to households willing to implement specific measures identified in the programme. The programme envisions the reimbursement of 20% of the loan principal (but not more than UAH 12 thousand) to support the substitution of gas boilers with electric or solid fuel boilers, 30% - for individual households for the implementation of energy efficiency measures (but not more than UAH 14 thousand) and 40% - for condominiums (but not more than UAH 14 thousand per flat) (Cabinet of Ministers Resolution No. 1 056, 2011a). Furthermore, recent amendments to the State Programme introduced additional incentives for the recipients of targeted subsidies partially compensating utility costs. This category of households could obtain up to a 70% compensation of the loan principal (from 40% to 70% for condominiums depending on the number of residents receiving targeted subsidies). According to the State Agency of Energy Efficiency and Energy Saving of Ukraine, about 80 thousand loans worth UAH 1.3 billion were provided in 2015, of which UAH 302 million was compensated from the budget (SAEEES, 2015). It is planned that about UAH 790 million will be allocated for this programme in 2016.
- As can be seen in the figure, subsidies in the coal and gas sectors are largely phased put. Cross-subsidization in the electricity sector is still a challenge. Support to low-income households had to be increased. Support to energy-efficiency measures is gradually increasing.
- The Ukrainian Government has recently undertaken considerable efforts to reform fossil-fuel subsidies, which has helped to reduce the budget deficit. At the same time, generated savings were partially re-channelled to targeted subsidies for low-income groups and the energy-efficiency programme in the residential sector.