Heating in housing and utilities sector_25.03.2016

Heating in housing and utilities sector:
Status and Prospects

DOCUMENT FOR DISCUSSION

The report was prepared in cooperation with the Government of Germany, the EU Delegation to
Ukraine, the EU Support Group to Ukraine, Berlin Economics, Coordination Center for Interaction with
the CMU at the President of Ukraine, National Refom Council, the State Agency for Energy Efficiency
and Energy Saving of Ukraine, experts of the World Bank Group in Ukraine

The Ministry of Regional Development, Construction,
Housing and Communal Services of Ukraine

March 25th
, 2016

Heat energy in housing and utilities sector: Status and Prospects (DOCUMENT FOR DISCUSSION)
2

Contents
1. Executive summary .................................................................................................. 4
2. Review of HUS market for households .................................................................... 5
2.1. Estimation of HUS market capacity for households ........................................ 5
2.2. Payment for utility services by the population ................................................ 5
2.3. HUS payment by subsidies ............................................................................... 7
2.4. Reforming the gas payment system (commitments to the IMF) .................. 10
3. Impact of heating efficiency on energy balance and macroeconomic indicators 12
3.1. Energy balance and consumption efficiency ................................................ 12
3.2. Heat production, supply and consumption ................................................... 13
3.3. Economic evaluation of losses. Costs of inaction ......................................... 13
3.4. Assessment of overall investment needs and gas consumption reduction
potential ..................................................................................................................... 14
4. Individual heating ................................................................................................... 15
4.1. Energy resources for individual heating ........................................................ 15
4.2. Centralized gas supply system (Oblgazes) ..................................................... 16
4.3. Tariffs for centralized gas supply and market capacity ................................ 19
4.4. The system of payments for centralized gas supplies ................................... 23
5. Centralized heating ................................................................................................ 24
5.1. Heat energy production ................................................................................. 24
5.2. Heat energy transportation ........................................................................... 28
5.3. Heat energy consumption .............................................................................. 29
5.4. Tariffs for centralized heating and hot water supply .................................... 31
5.5. Commercial metering and heat consumption norms ................................... 34
6. Analysis of the scheme of payments for centralized heating for the population . 38
6.1. Analysis of deadline to pay for centralized heat consumed by the population
and Naftogaz gas supplies to DHP ............................................................................. 38
6.2. Scheme of payments for centralized heating for households ...................... 40
6.3. Algorithm for mutual payments with HUS subsidies ..................................... 41
6.4. Debt to DHC for compensation in the difference of tariffs ........................... 41
6.5. Analysis of accumulated debts in the sector ................................................. 42
6.6. Suggested approach to debt restructuring .................................................... 42
7. DHC investment needs and expected effect ......................................................... 43
7.1. Assessment of overall investment needs ...................................................... 43
7.2. Assessment of minimal investment needs to modernize heat networks .... 43
7.3. Assessment of first prioirity investments in the replacement of boilers ...... 44

3

8. The current state of DHP investment projects and barriers to their
implementation .............................................................................................................. 45
8.1. Analysis of completed investment works at heat production in 2015 ......... 45
8.2. Analysis of programmes on energy efficiency of heat production,
distribution and consumption ................................................................................... 47
8.3. IBRD programme effeciency .......................................................................... 52
8.4. The introduction of procurements for project implemenation on the
example of Sweden .................................................................................................... 53
8.5. Barriers to the implementation of DHP modernization projects .................. 54
9. Legal regulation of HUS market ............................................................................. 57
9.1. Legislative framework .................................................................................... 57
9.2. Licensing and control of companies (NEURC) ............................................... 58
10. Glossary .............................................................................................................. 60
11. Sources ............................................................................................................... 62
12. Annexes .............................................................................................................. 63
12.1. Annex 1. HUS bill for an individual house heated by gas .......................... 63
12.2. Annex 2 Scheme of gas purchase financing till 2015 ................................ 64
12.3. Annex 3. Reference on HUS key indicators ............................................... 65
12.4. Annex 4. Change in total HUS bill for a multistory building appartment in
the month of heating season ..................................................................................... 66
12.5. Annex 5. Formulas for shares of received funds under the CMU No 217 67
12.6. Annex 6. Reference on reduced natural gas consumption at the heat
supply objects of all forms of ownership as of December 2015 ............................... 70
12.7. Annex 7. Reference on the replacement of natural gas consumption at
the heat supply objects of all forms of ownership as of December 2015 ................ 72
12.8. Annex 8. Supply with heating and/ or hot water using alternative fuels . 74
12.9. Annex 9. Reference on key energy efficiency investment programmes .. 75
12.10. Annex 10. Reference on technical assistance programmes in energy
efficiency area ............................................................................................................ 78
12.11. Annex 11. UDHEEP expected results for 2021 .......................................... 80
12.12. Annex 12. Basic legislation regulating housing and utility sector ............. 82
12.13. Annex 13. Composition of the Working Group ......................................... 85

4

1. Executive summary
• Residential and public sector accounts for 60% of the total natural gas
consumption in Ukraine
• The dependency on natural gas imports (19.5 billion m³ in 2014 and 16.4
billion m³ in 2015) is the biggest challenge to Ukraine's energy security
• Centralized heating sector is one of the biggest natural gas consumers - 7.2
billion m³ in 2015)
• The sector has huge inefficiencies in terms of heat production and
transmission (outdated DHP and TEP facilities) and in terms of consumption
(large losses in buildings). According to our estimates, gas consumption could
be reduced by 5.0 billion m³ annually
• In terms of investment efficiency exaclty the modernization of supplies
(isolation of networks and upgrading of boiler houses) has the greatest
potential, thus, having invested about USD 6.0 billion, the reduction in gas
consumption may be about 2.4 billion m³
• As of today the international financial institutions and donors are ready to
invest greately in DHP (about USD 0.8 billion), but to ensure the effective use
of the funds and attract new ones it's needed to solve a number of industry
problems:
− To restructure debts throughout the supply chain (population / DHP /
Naftogaz)
− To review the payment system, which is largely controlled by the state
and creates significant "liquidity" gaps for market players
− To review the tariff-making system that currently does not motivate
businesses to invest in facilities
− To streamline the sectoral legislative framework and align it with the
EU standards
− To review the governmental procedures for selecting and approving
projects, which significantly slow down the implementation of
investments
• The main positive industry trends are the fulfillment of Government
commitments to the IMF, namely:
− A significant progress in installation of commercial metering devices
(about 50% of buildings as of the end of 2015)
− A gradual increase in tariffs for population to economically justified
level based on gas import price and reduced deficit of the JSC
"Naftogaz"
− Transfer to a target public subsidy system, which, on the one hand,
reduces the State Budget expenditures and, from the other hand,
motivates people to save energy

5

2. Review of HUS market for households
The population is the main housing and utilities services (HUS) consumer and target
group aimed by the state policy in this sector. The state and legal entities are also HUS
consumers, but their share in total consumption is much lower and, for example, for
central heating it makes up about 30%.
The HUS sector in Ukraine is characterized by a significant state intervention in
economic relations, including the service price setting. This applies particularly to
energy services (heating, gas and electricity supplies) for which the final household
prices are much lower than an economically justified level.
2.1. Estimation of HUS market capacity for households
As of today, the HUS market capacity is far from the economic realities in terms of
prices for end users. But Ukraine is actively reforming this sector and the main
objective is to transfer to the market principles of tariff setting. Thus, according to the
commitments to the IMF, since April 2017 the household price for natural gas and
heating should be based on natural gas import price (for more details see Parts 5 and
6).
In 2015, in the final prices the HUS market capacity for households made up UAH 82.7
billion, but in 2017 the capacity may raise up to UAH 136 billion (mainly due to the
increase in heating and gas tariffs).
Diagram 2.1.The structure of HUS charges, billion UAH

Source: data of State Statistics Service of Ukraine, Working group analysis
2.2. Payment for utility services by the population
The amount of HUS bill is characterized by considerable seasonality that explains the
need for building heating. In the winter months the HUS bills may be twice more than
HUS bills in the summer months.

65,0
(79%)
17,6
(21%)
population
budget
Sources
28%
12%
23%
17%
11%
8%
1% Gas for individual heating
Gas for other purposes
heating
electricity
Building maintenance
Water
Waste
Total UAH 83 billion in 2015
26%
11%
31%
17%
8%
6% 1%
Total UAH 136 billion in 2017
The HUS sector in
Ukraine is
characterized by a
significant state
intervention in
economic relations
and service price
formation
The HUS market
capacity for
households in prices
will raise from UAH
82.7 billion to UAH
136 billion (mainly
due to the increase
in heating and gas
tariffs)

6

Diagram 2.2. The total HUS charges paid by households, UAH billion

In 2015 the households paid UAH 61.9 billion that made up 95.2% of the charged UAH
65.0 billion. For comparison, in 2014 the households paid UAH 47.0 billion or 93.4% of
the charged UAH 50.3 billion.
Total household debt to HUS companies is UAH 11.5 billion as of the end of 2015.
Diagram 2.3. The structure of budget payments for HUS benefits and subsidies

Source: Naftogaz data, Working group analysis
According to Naftogaz in 2015 the gas subsidies were charged about UAH 7.8 billion
more than actual consumption. Thus, the real need in subsidies was UAH 17.6 billion.
Diagram 2.4. Level of services paid by households, billion UAH

5,9
5,7
5,1
2,2 2,9 2,5 2,7 2,9 2,9
3,8
5,9
6,8 6,2 6,3
5,6 5,6
4,4
3,7 4,0 3,663,7
4,5
7,0
8,3
-4
+1
+9 +12
+19
+20
+24 +23
+18
+10
+2
-1 0 0
+7
+12
+18
+23
+24 +25
+20
+9
+6
+3
-10
-5
0
5
10
15
20
25
300
1 000 000
2 000 000
3 000 000
4 000 000
5 000 000
6 000 000
7 000 000
8 000 000
9 000 000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Fen Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014
(50,3 bln)
2015
(65,0 bln)
charged temperature
19,9
subsidies
5,5
benefits
3,0
14,0
8,4
Charged for HUS "Real money" Clearing payments Budget debt as of
31.12.15
25,4
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Fen Mar Apr May Jun Jul Aug Sep Oct Nov Dec
110%
100%
90%
2014 2015
In 2015 the
households paid
UAH 62 billion that
made up 95% of
the charged UAH 65
billion

7

As for the HUS charging and household payments in 2014-2015 there are two factors
that should be noted:
1) a significant increase in tariffs (mainly for energy resources) resulted in bigger
charged amounts and affected the possibility of households to pay the bills.

2) a significant increase in HUS subsidies, in particular, the budget for subsidies
and loans for the population raised from 6 to 25 billion hryvnia. It reduced the
charged amounts and positively influenced the level of payments (as far as the
subsidies are provided to the least solvent households).
Approximation of economically reasonable rates and increased social support are
generally positive for the HUS market. The negative point is that in the current system
the most subsidies are clearing payments, which in turn is a barrier to finance the
operating activities of the industry (for more details see Part 7).
The level of HUS payment by the population largely depends on the regions. The worst
indexes are in Dnipropetrovsk and Donetsk regions, where the period outstanding
exceeds 5 months. For comparison, a significant number of regions (mostly in Western
Ukraine) have much better payment discipline.
Diagram 2.5. Population debts for HUS by regions as of 31.12.2015 (excluding
electricity)

Remark: A negative debt means that the region has an overpayment for HUS, which was mainly
formed due to "excessive" subsidies (see Part 3.3).
2.3. HUS payment by subsidies
Despite the fact that the beneficiaries are households, the most subsidies are
transferred to the accounts of enterprises as payments for services and are not "real"
money (used as clearing payments, see Part 7). Moreover, the Budget fulfills its
payment obligations with delay that leads to the formation of debts to HUS
companies.

Lugansk
Donetsk
Zaporizhia
Kirovograd
Dnipropetrovsk
Kyiv region
Vinnytsia
Zhytomyr
Volyn
Lviv
Zakarpattya Ivano-Frankivsk
-217
- 2 370
5,2 1 309
5,7
-174
-
245
2,9
732
3,4
130
0,6
-18
-
-63
-
356
4,9
551
2,1
Kyiv city
Chermigiv
Sumy
Poltava
Kharkiv
KhersonOdesa
Mykolvaiv
Cherkasy
Khmelnytsk
Rivne
Ternopil
Chernivtsi
942
3,4
163
1,6
396
2,0
-282
-
-77
-
216
2,6
-190
-
1 903
3,5
-124
-
-368
-
1 564
3,7
-274
-
-88
-
-173
-
8 829 mln. hrn.
Total debt for HUS
2.1 month
Average term of debt for HUS in
Ukraine
In 2015 the State
Budget covered 17.0
billion for HUS benefits
and subsidies

A real need in subsidies
considering excessive
gas subsidies is UAH
17.7 billion

8

Diagram 2.6. Budget expenditures for public benefits and subsidies

Source: Budget of Ukraine, Working group analysis
In addition, according to Naftogaz about UAH 7.7 billion was excessively charged for
household gas supplies as of 31.12.2015. Thus, a real need in subsidies and benefits
made up UAH 17.6 billion in 2015. Most of these excessive charges are explained by
different application of two-level tariff for billing and subsidy calculation:
• gas volume for preferential tariff UAH 3.600 is 1.200 m³ for the entire
heating season, i.e. in the end of the season the bills will be mainly calculated
under bigger tariff UAH 7.188 and will be much higher
• at the same time, the monthly subsidy is fixed for the entire heating period

The amount of excessive subsidy charges is expected to decrease to UAH 6.2 billion by
the end of the heating season.
Under commitments to the IMF in May 2016 the subsidies and benefits are expected
to merge and most beneficiaries have to be transferred to the subsidy system that will
ease the burden on administration of both systems.
In 2016 the Budget of Ukraine allocates UAH 35 billion for the payment of subsidies
and benefits that makes up 5.1% of budget expenditures. According to the IMF
assessments in 2017 the need in HUS subsidies may reach up to UAH 80 billion (or
10% of the State Budget). The Resolution of the Cabinet of Ministers of Ukraine No
106 of May 2015 greatly simplified the subsidy adoption procedure. It resulted in an
increased number of subsidy applicants and amount of state social support for HUS
services.

5,8
17,0
35,0
80,0
1,5%
3,0%
5,5%
10,0%
-2,00%
3,00%
8,00%
0
50
100
2014
(financed)
2015
(financed)
2016
(Budget)
2017
(potential)
HUS subsidies and benefits, UAH billion
% of Budget
Budget expenditures for
HUS subsidies are likely
to reach 10% of the
Budget in 2017

UAH 35 billion is
budgeted for 2016
for public subsidies

9

Diagram 2.7. The number of households that receive subsidies in the respective
month, million households

Thus, 4.6 million households received HUS subsidies and about 0.7 million citizens
received benefits in December 2015. The HUS subsidies in the amount of UAH 19.9
billion and benefits in the amount of UAH 5.5 billion were totally charged in 2015.
Diagram 2.8. HUS subsidies charged in 2014-2015, million UAH

Source: data of State Statistics Service of Ukraine
Diagram 2.9. Average amount of HUS subsidies, UAH

Source: data of State Statistics Service of Ukraine

1,1 1,1 1,2 1,0
0,3 0,4 0,4 0,5
0,1
0,4 0,7
1,11,1 1,2 1,3 1,2
0,4 0,9
1,4
2,0
2,7
3,4
3,9
4,6
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014
2015
262 257 253 126 6 25 34 31 30 45 253 528561 528 510
864
197 244 386 424 455
2 800
5 390
7 521
2014
2015
354,2 326,4 273,9 335,2 267,6 205,2 212,8 190,9 143,8
321,3
771,5
1090,9
UAH 25.4 billion
subsidies and
benefits charged to
the population in
2015
In December 2015
the average amount
of charged public
subsidy was UAH
1091

4.6 million
households received
subsidies in
December 2015

10

2.4. Reforming the gas payment system (commitments to the IMF)
On July 21, 2015 Ukraine signed a Memorandum that envisages a number of reforms.
The Memorandum implementation is a key factor to stabilize and improve the
economic and political situation in the country as well as to attract funds from the IMF
and other IFIs.
According to the commitments, the main focus of reforms in energy sector is to
reduce the deficit of "Naftogaz" and increase the liquidity of its cash flows. First of all,
it will be done in two ways:
• Reform of Naftogaz funding system;
• Increase in heating and gas tariffs to the justified world market prices.
Reform of Naftogaz funding system
The formula for distribution of payments for centralized heating that come to the DHP
accounts shall be reviewed. It will enable Naftogas to collect gradually the debts of
companies.
Historically the Government directly supported Naftogas by replenishing the
authorized capital (in 2010 – 2015 the authorized capital was replenished to the
amount of UAH 160 billion). The replenishment was financed by issuing domestic
treasury bonds.
Diagram 2.10. Financing the deficit of Naftogaz in 2010-2015 (USD 160 billion)

Source: Working group analysis
Since 2017 any state support to companies shall be in the form of subsidies to the
population, rather than through direct subsidies.

Contribution of government bonds
in the authorized capital
Sale of government bonds
Government Naftogaz
NBU State banks
Funding secured by
government bonds
Naftogas deficit in
2010-15 is the
government debt
(DSB)

11

Diagram 2.11. Overall budget expenditures for Naftogaz funding and HUS payment
social support, USD billion

Source: actual data of IMF, data of Ministry of Social Policy; IMF forecast (under the current
subsidy system)
As a first but important step towards the introduction of subsidies, the CMU
Resolution No 106 of May 1 abolished all restrictions on the right to receive public
subsidies, other than the purchase to the amount of UAH 50 thousand during the
previous 12 months. In addition, consultants were engaged to work on
recommendations to reduce the receivables of Naftogaz.
Increase in heating and gas tariffs to the justified world market prices.
To fulfill the commitments to the IMF in April 2016 the tariff rates for gas and heating
should be at the levels that cover 75% of the costs and 100% till April 2017 on the
basis of world prices.
Diagram 2.12. Ukraine's historical commitments to bring gas prices to the
economically justified level

Source: Memorandum with IMF, Working group analysis
In April 2015 the gas and centralized heating tariffs for end consumers raised by 285%
and 67% respectively.
Government commitment:
Market price for 3 years
till the end of 2011
Market price for 2,5 years
till May 2013
Market price for 2 years
till May 2017
0
100
200
300
400
500
01.2007 11.2008 09.2010 03.2015 05.2017
Actual price The Government obligations to the IMF
IMF programme
worth $16,4 bln
IMF programme
worth $15,5 bln
IMF programme
worth $17,5 bln
Gas price for households,$ per thous.m3
In 2015 the prices for
gas and centralized
heating increased by
285 % and 67%
respectively
Since 2017 any state
support to Naftogaz
will be provided only
through public
subsidies

12

3. Impact of heating efficiency on energy balance and
macroeconomic indicators
Excessive energy consumption causes substantial costs and risks in the areas of energy
security, government spending, trade balance, economic and social activities, and
environmental protection, and therefore it has a great potential for improvement.
3.1. Energy balance and consumption efficiency
Ukraine heavily depends on energy imports that in the current geopolitical conditions
causes high risks for energy independence. Natural gas takes the biggest share in
imports of energy amounting to 19.5 billion m³ (or 15.7 million tons of oil equivalent).
Diagram 3.1. Total supplies of primary
energy in 2014 (105.7 million tons of oil
equivalent)

Diagram 3.2. Energy trade balance in 2014
(net import 28.0 million tons of oil
equivalent)

Source: data of State Statistics Service of Ukraine (excluding the AR of Crimea and "ATO" zone)
Diagram 3.3. Centralized heating
fuel consumption in 2014
(12,2million tons of oil equivalent)

Diagram 3.4. Fuel consumption on
production of electricity in 2014

Diagram 3.5. Energy consumption
by population incl. transformation
and transportation losses in 2014

Source: data of State Statistics Service of Ukraine (excluding the AR of Crimea and "ATO" zone), Working
group analysis

34%
31%
22%
10% 3%
Coal Gas
Nuclear energy Oil
Renewables
-5,5
-15,7
-7,5
0,7
Coal Gas Oil Electricity
73%
22%
3% 2%
Gas
Coal
Biofuel
Other
3%
42%
2%
53%
Gas
Coal
Renewables
Nuclear
41%
47%
12% Electricity
Heat
Other
Natural gas makes up
about 55%ofenergy
imports
Less dependency on gas
imports is one of the key
tasks of the national
security of Ukraine

13

Most of the natural gas is consumed by residential and public buildings sector.
Industrial sector consumes only ~40% of gas.
Diagram 3.6. Natural gas consumption and progress toward market relations
3.2. Heat production, supply and consumption
The sector of residential and public buildings heating has one of the largest potentials
for improving energy efficiency in Ukraine. The annual consumption of natural gas for
heating purposes is estimated at 18.6 billion m³ with the reduction potential (when
reaching the current level of losses in the EU) of 11.4 billion m³ of gas (~58% of
Ukrainian imports):
Diagram 3.7. Estimation of possible reduce in natural gas consumption by directions,
billion m³.

Source: Working Group analysis
3.3. Economic evaluation of losses. Costs of inaction
Excessive energy consumption to heat residential and public buildings has permanent
negative consequences that re-occur every year.
Table 3.1. Economic evaluation of annual losses caused by excessive energy
consumption for heating.

~ USD 3.0 billion (~3% GDP)
excessive consumption without a real economic stimulus
7,3
1,7
1,1 1,3
Building thermal
insulation
Individual boilers
change
District boilers
modernization
Insulation of networks
11,4 bln m³ - total potential
~ USD 3 billion (or~3%
GDP) is excessively
consumed annually
without the stimulus for
economy, of which ~USD
2.5 billion spent on gas
imports

The highest potential
possessed by measures
von the level of buildings
(thermal rehabilitation
and replacement of
individual boilers)

14

~ USD 2.5 billion
excessive expenditures on gas imports (pressure on trade balance)

> USD 1.0 billion
excessive expenditures of state budget on energy subsidies
Source: Working group analysis, at the rate of import gas price USD 225 per thousand m³
3.4. Assessment of overall investment needs and gas consumption reduction
potential
The sector of residential and public buildings heating has one of the largest potentials
for improving energy efficiency in Ukraine. The annual consumption of natural gas for
heating purposes is estimated at 18.6 billion m³ with the reduction potential (when
reaching the current level of losses in the EU) of 11.4 billion m³ of gas (~58% of
Ukrainian imports):
The solution of problems related to building heating requires the attraction of
significant investments:
Table 3.2. Preliminary assessment of overall investment needs
Sector
Investment
needs
Gas consumption
reduction potential
Gas consumption
reduction per USD 1
billion of investments

Rehabilitation of multistory
buildings
USD 17 billion 2,3 billion m³ 135 million m³

Rehabilitation of individual
houses

Replacement of individual
boilers by more efficient ones

Rehabilitation of public
buildings

Modernization of heat
production system and
networks
Total ~ USD 57 billion 11,4 billion m³
The modernization of heat production and distribution takes only 21% of the total
capacity to reduce gas consumption, but it requires significantly less investments than
the thermal rehabilitation of buildings. Therefore, the investments in DHP have the
greatest potential in terms of impact on the reduction of energy consumption per unit
of invested funds.

~57 billion dollars –
assessment of overall
investment needs on
energy efficiency of
heating

DHP modernization has
the greatest potential in
terms of impact on the
reduction of energy
consumption per unit
of invested funds

15

4. Individual heating
4.1. Energy resources for individual heating
About 50% of households use individual heating (this figure may vary depending on
the region).
The factors that households can reduce gas consumption for individual heating are
likely to be a high gas price and more prudent use of gas because of concerns about
its lack.
Diagram 4.1. Share of fuels in heat generation Diagram 4.2. Use of gas for household needs, billion m3

Source: data of State Statistics Service of Ukraine,
Working group analysis
Source: Naftogaz data, Working group analysis
Gas is 75% of all resources used by the population for individual heating. In the West
of the country people mostly use individual gas heating and the centralized heating
prevails in the east.
Diagram 4.3. Structure of household heating resources

11%
9%
6%
74%
Coal Firewood for heating
Other solid fuels Gas
19
17
18
17
18
17 17 17
15
11
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Lugansk
Donetsk
Zaporizzya
Kirovohrad
Dnipropetrovsk
Kyiv region
Vinnytsia
Zhytomyr
Volyn
Lviv
Zakarpattya
Ivano-Frankivsk
Kyiv city
Chernigiv Sumy
Poltava
Harkiv
Herson
Odessa
Mykolaiv
Cherkasy
Chmelnytskiy
Reivne
Ternopil
Chernigiv
46%
16%
38%
Gas heating Other resources Central heating
54%
27% 19%
45%
22%
33%
43%
5%
52%
31% 23%
46%
51%
37%
12%
65%
35%
0%
34%
13%
53%
81%
9% 10%
62%
4%
34%
42% 42%
16%
42%
18%
40%
68%
1%
31%
48%
17%
36%
36%
20%
45%
55%
3%
42%
46%
31% 23%
53%
10%
37%
78%
11% 11%
38%
10%
52%
41% 36%
23%
60%
18% 22%
45%
27% 28%
60%
23% 17%
53%
23% 24%
3% 0%
97%
Resources used for heating
The use of gas has
decreased by 43%
over the last 10 years

16

4.2. Centralized gas supply system (Oblgazes)
The natural gas is provided to consumers, DHP and enterprises in the regions by
regional gas companies (Oblgazes). "UkrGazEnergy" company controls about 70% of
gas supply territory in Ukraine.
Diagram 4.4. Group impact zones by regions

UkrGazEnergo KES-Holding
Naftogaz Others
The gas network consists of main pipelines and distribution networks:
• In case of large industrial consumers that have direct branches on the main
pipeline, gas goes directly to the consumers and Oblgaz is not involved at all

• In case of most medium and large industrial consumers, other companies are
suppliers, they pay to Oblgaz only for transportation

• In case of small enterprises, households and government institutions, gas is
supplied via a local network of pipelines, which is controlled by one of
Oblgazes that also acts as a supplier

17

Diagram 4.5. Simplified system of gas flows in Ukraine

11.3 billion m3
of natural gas was released for individual heating of the population in
2015.
Diagram 4.6. The largest gas consumers by regions

The biggest gas consumers are historically industrial regions: Donetsk, Lugansk,
Dnipropetrovsk, Kyiv regions and Kyiv city.
Today the gas pipeline in Ukraine is in a poor state due to lack of funding. Many parts
of pipeline have not been changed since Ukraine's independence.

Main pipeline
Owner of pipeline: State
Gas transporter: UkyTransGaz
Distribution network
Owners of pipeline: State, Oblgaz
Gas transporter: Oblgaz
Постачальник газу: Oblgaz, other suppliers
Gas
Owners of pipeline:
Subsidaries of Naftogaz
UkrGazEnergo
Local manufacturers
~65% ~35%
Population DHP
Gas consumption in 2013, billion m3
0-1 1-2 2-3 3-4 4-5 5-6
65% of gas is used for
public needs and
35% - for DHP with
the purpose of heat
production
The biggest gas
consumers are
historically industrial
regions
55% of pipeline is
more than 20 years
old

18

Diagram 4.7. Breakdown of of gas transportation system pipes by age, years

Only some residents of Ukraine can get gas through the main pipeline and this
problem is currently solved only by supplying LNG (liquefied natural gas), which is
more expensive and not as easy to use as the central pipeline.
Diagram 4.8. The level of gasification in Ukraine

According to the Law of Ukraine "On the natural gas market" with the purpose of de-
monopolization of gas supply market the regional gas companies are not allowed to
supply natural gas to consumers. According to the CMU Resolution No 74 dated
02.03.2015 the agreement on gas supply becomes a trilateral agreement, where the
first partу is the supplier, the second - a gas distribution company, the third - a
consumer.
But this change is rather conditional, since the subsidiary enterprises to supply natural
gas were created on the basis of Oblgazes, thus the control of natural gas supplies is
"in the hands" of Oblgazes.

0% 20% 40% 60% 80% 100%
270
300 305 320 310
330
350
45% 47% 50%
58%
62%
70%
80%
0%
20%
40%
60%
80%
100%
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008 2009 2010 2011
thous km of pipeline Gasification level
10 20 25 30 40
Based on RGCs the
subsidiary enterprises
were created to
supply natural gas
that retains the
control of natural gas
supplies "in the
hands" of RGCs.

19

Diagram 4.9. Scheme of cash flows in the gas supply system

4.3. Tariffs for centralized gas supply and market capacity
Gas tariffs are controlled by the NEURC that has a bilateral nature. On the one hand,
the Commission's tariff policy acts more in the interests of energy companies and
sometimes at the expense of gas companies. On the other hand, the Commission
controls the gas sector less strictly that allows the Oblgazes to operate more
independently.
Although, the NEURC sets the household gas tariffs, according to the CMU No 758 the
Cabinet of Ministers sets marginal retail prices for natural gas for the population and
religious institutions in the transition period (from April, 1 2016 till March 31, 2017).
Also this Resolution sets the maximum retail margin for natural gas for suppliers.
At the tariff as of the end of 2015 the individual house of 80 m2, which is heated with
gas, pays for gas used for heating about UAH 2736 a month that is 84% of the total
HUS bill amount. In 2017 considering market prices the payment for gas may reach
UAH 3696 (80% of the total HUS bill amount). A detailed description is given in Annex
1.
The tariff for gas supply is calculated according to the methodology stipulated in the
"Procedure for setting tariffs for natural gas transportation via distribution pipelines
on the basis of a long-term incentive regulation".

20

Diagram 4.10. The methodology for gas tariff calculation

Source: NEURC Resolutions
Diagram 4.11. The structure of natural gas tariff for the population

Source: NEURC Resolutions
According to the NEURC Resolution No 583 of April 1, 2015 the household gas tariff is
7.188 UAH/m3
.
The main change in the structure of billing system is the establishment of a single
tariff rate, regardless of the gas consumption volume. But from October 1 to April 30,
2016 the CMU sets a preferential rate of 3.6 UAH/m3
provided the consumed volume
is less than 1200 m3
in this period, which is paid by 60% of consumers. Thus, the
average weighted tariff is 5.035 UAH/ m3
.
Diagram 4.12. Average weighted tariff for household gas, UAH / m3

Source: IMF report on Ukraine, Working group analysis
70%
3%
4%
5%
1%
17%
Actual cost of gas
Fee (extra charge)
Cost of transportation through pipeline
Cost of transportation through distribution pipeline
Cost of gas supplies to houses
VAT
1,048 1,308
5,035
5,810
7,746
since
01.08.2010
since
01.05.2014
since
01.04.2015
since
1.04.2016
since 2017
+285%+25% +15% +33%
Gas tariff is a two-
rate tariff
The average
weighted tariff is
5.035 UAH / m3

21

Diagram 4.13. Calculation of gas market tariff, UAH/thous. m3

The household gas tariff is one of the lowest in Europe.
Diagram 4.14. Comparison of gas tariffs, Euro/m3
(two-rate tariff in Ukraine)

Source: Eurostat data
The NEURC sets tariffs for the Oblgazes for transportation in the amount that under
their assessment will cover costs of Oblgazes and provide a revenue (5.2% -6.0%
according to the latest tariff update).
Setting tariffs for gas companies the NEURC has to do complex calculations for tariff
balancing, which includes transportation tax of gas companies and UkrTransGas tariff
that is identical throughout Ukraine.
In 2014 the population used 15 billion m3
of gas, of which ~ 11 billion m³ - for
individual heating (Working group assessments). Considering the current average
weighted tariff for gas in the amount of UAH 5.035 USD per m³, the overall
expenditures of the population for individual heating of buildings made up ~ UAH 55
bilion per year.
If gas price changes in 2016 and 2017, the annual expenditures of population for
individual heating will increase by ~ 53% in 2017 against 2015.

5423,5 216,9
815,0
1290,9 7746,3
Gas price ($225) special fee 4% Transportation VAT Market tariff
0,525
0,478 0,443
0,326
0,281
0,141
Poland Estonia Lithuania Romania Ukraine
The expenditures for
individual heating
will increase by ~53%
in 2017 against 2015
Gas market tariff is
~7.74 UAH /m3

22

Diagram 4.15. Analysis of household annual costs for individual gas heating

The household gas cost is calculated in two ways:
Table 4.1. Methods of charging for gas consumed by households

With metering devices
• Under metering devices
As of 2015 ~100% of gas for
heating is consumed through
metering devices;
Without metering devices
• under rates based on per
capita and homesteading
Source: CMU Resolution No 630
Diagram 4.16. Comparison of consumption rates for the population, m3

,
Source: Report " Estimation of HUS consumption" prepared in the framework of USAID project

55,3
63,5
84,7
5,0
5,8
7,7
0,0
2,0
4,0
6,0
8,0
10,0
20,0
40,0
60,0
80,0
100,0
120,0
2015 2016 2017
Annual expenditures for gas individual heating, billion UAH
Gas price,hrn./m³
5,8
17,6
6,0
18,0
3,0
9,0
Gas supply if hot water is
available
Gas supply if water heater is
available
Real consumption
Rate for subsidy charging
Rate for service cost calculation
100% of gas
consumed by
population for
heating is metered

Rates used for
calculation of gas
consumption without
metering devices are
lower than average
consumption

23

4.4. The system of payments for centralized gas supplies
Before the Memorandum adoption the old system for gas purchasing for Naftogas
was used (Annex 2). But to fulfill commitments to the IMF the financing structure for
gas purchasing for Naftogas was changed from direct business subsidies to public
subsidies.
So, if in the past all payments for gas were in cash, now the scheme also includes
subsidy settlements.
Diagram 4.17. A simplified current system of payments for centralized gas supplies to
the population

Source: CMU Resolution No217, CMU Resolution 20, Order of the Minenergy and MFU No
493/688, Minregion, Working group analysis
Таблиця 4.2. Explanations to payment scheme
Money flows Subsidies
1) The population pays for HUS to
the special account
2) NEURC according to the CMU
Resolution No 217 approves rates
for money allocation from the
special account
3) Funds are transferred to other
market participants
4) Naftogaz imports gas
1) The population applies for subsidies
2) All market entities sign the protocol
on mutual payments
3) The Budget on the basis of MSP
data transfers subsidies to gas
suppliers as clearing payments
4) The mutual settlements for gas are
carried out hierarchically
5) Naftogaz or Ukrgazvydobuvannya
carry out mutual subsidy
settlements with the Budget in
exchange for taxes or rental fee
Source: CMU Resolution No217, CMU Resolution 20, Order of the Minenergy and MFU No
493/688, Minregion data, Working group analysis

– Subsidy “liabilities”/
Mutual payments
– Gas supply
– Real money
Naftogaz
Transporter
Distributor
Supplier
Bank
(spec. account)
NERC
Population
Subsidy account
Gas import
Ukrgazvydobu-
vannya
Budget
Approves funds
distribution rate
The system of direct
subsidies to Naftogaz
was replaced by its
financing through
public subsidies

There are two
sources of payments:
1. Payments of
households
2. HUS subsidies
HUS subsidies
received by DHP and
RGCs are clearing
payments

24

5. Centralized heating
5.1. Heat energy production
Centralized heat supply covers 40% of the population. Heat energy is produced on
the plants of two types: central heating plants (CHP) and thermoelectric plants (TEP).
Diagram 5.1. Number of households by
different types of heating, million

Source: Minregion data
Diagram 5.2. Breakdown of production at
CHP and TEP, mln tonnes of oil equivalent

Source: data of the State Statistics Service of
Ukraine
Ukrainian heat energy market in recent years tends to decrease. Given the dynamics
of production change (decline in the crisis years), the reduction is explained by
decreased demand of industrial enterprises. During the period 2005 - 2009 the market
has shrunk by 29%. Drop in 2014 was driven by exclusion of AR of Crimea and "ATO"
zone.
Diagram 5.3. Heat energy production, million Gcal*

* data for 2014 excluding the AR of Crimea and "ATO" zone
Source: data of the State Statistics Service of Ukraine
The population is the largest heat energy consumer each year. The share of energy
supplied to the population is ~ 65%. In addition, the energy market is inefficient. It is
proved by heat losses, which are about 15% of served energy. It should be noted that
data on losses is normative. The real losses, according to experts, can be up to 50%.
Thus, improving the efficiency of transport and use of heat energy by population
should be the first priority task.
5,49
6,59
2,26 Centralized
heating
Gas heating
Other
3,8
6,1
Thermoelectric
plants
Central heating
plants
127,2 124,6
112,1
104,7
98,0
104,1 104,7 104,1
96,5
73,0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
For 4 years the
heat production
market has
decreased by 29%.
The population is the
largest heat energy
consumer (~65%)

25

Diagram 5.4. Heat energy released by segments (TEP and DHP), million Gcal

The main role at heat energy market is played by the biggest boiler houses that
produce heat energy for consumers in big cities. Thus, reforming the DHP sector the
the biggest boiler houses should be of first priority.
Diagram 5.5. Breakdown of heat
production by boiler houses with
different capacities in2014 (total
62.6mln Gcal)

Source: data of the State Statistics Service
of Ukraine
Table 5.1. Number of boiler houses with
different capacities

Capacity Number (%)
<3 Gcal/h 27 772 (89,6%)
3-20 Gcal/h 2616 (8,4%)
20-100 Gcal/h 443 (1,4%)
>100 Gcal/h 161 (0,5%)
Total 30 992 (100%)

Ukraine
Ukrainian DHP are dependent on gas. Gas takes the largest share in the structure of
heat energy sources, although this proportion tends to decrease. However, gas is
replaced by less efficient and more environmentally harmful sources: coal and peat.

63%
25%
13% Population
Public and commercial buildings
For production need
12%
16%
18%
54%
Up to 3 Gcal/h 3-20 Gcal/h
20 - 100 Gcal/h >100 Gcal/h
> 50% of heat energy
is produced by 161
boiler houses
Gas is replaced by
more
environmentally
harmful sources: coal
and peat

26

Diagram 5.7. Structure of heat energy sources in 2007-2014

Use of DHP gas has a greatly pronounced seasonality, i.e. consumption in the winter
months is 10 times higher than in the summer months. Thus, gas use directly depends
on heating season. In addition, it gives a rough idea of DHP costs during a year.
Diagram 5.8. Plan of gas use by DHP for 2016, million m³ (total 9 413 million m³)


82,6% 80,4%
73,9% 79,3% 79,9% 77,8% 74,1% 71,4%
14,1% 15,2%
17,2%
16,3% 16,1% 17,9% 20,7% 22,8%
1,2% 1,8% 2,0% 2,1% 2,1% 2,5% 3,0% 3,6%
2,1% 2,5% 7,0% 2,4% 1,9% 1,8% 2,2% 2,2%
2007 2008 2009 2010 2011 2012 2013 2014
Natural gas Coal and peat Biofuels and waste other
1774
1525
1313
515
175 154 159 149 175
636
1218
1603
In winter gas
consumptions is 10
times higher
> 50% of heat
energy is produced
by 161 boiler
houses
Gas is replaced by
more
environmentally
harmful sources: coal
and peat

27

Diagram 5.9. Forecast of gas use for centralized heating and hot water supply (HWS)
for 2016, billion m3

Source: Minregion data, Working group analysis
Most regions of Ukraine significantly depend on gas supplies. The volume of used gas
is driven by the number of big cities with centralized heating. The exception is
Zakarpattya region, where indirect heating systems are mostly used.
Diagram 5.10. Plan of gas use by DHP for centralized heating and HWS by regions for
2016, million m3 (total 9.4 billion m3
).


7,5
1,9 Centralized
heating
HWS
Zakarpattya
Chernigiv
Sumy
Poltava
Charkiv
Lugansk
Donetsk
Zaporizzya
Cherson
Odessa
Mykolaiv
Kirovohrad
Dnipropetrovks
Cherkassy
Kyiv
Vinnytsia
Zhytomyr
Chmelnitska
Rivne
Ternopil
Volyn
Lviv
Ivano-Frankivsk
Chernivtsi
Kyiv city
3 073
2
1 028
354
334
152
76
83
62
192
134
110
148
329 160
121
122
235
209 244
222
957
490
480
84
DHP in 5 regions
consume ~65% of all
gas
DHP use 80% of gas
for heating

28

5.2. Heat energy transportation
Today the majority of residential buildings are connected to centralized heating or
through central heat stations (diagram 5.11) or directly to HS / TEP / boiler houses
(diagram 5.12).
Diagram 5.11. Scheme of connection to centralized
heating through central heat stations

Source: World Bank report

Diagram 5.12. Scheme of direct connection to
centralized heating

Source: World Bank report

The total network length is about 21 thousand km, and average losses in the networks
make up 16% according to the State Statistics Service of Ukraine. However, according
to market operators, the real losses in some spots can reach up to 50% and need an
immediate repair or replacement.
Diagram 5.13. Assessment of heat losses in networks in 2014, thousand Gcal

CHP, TEP
Central Heat
Station
consumers
consumers consumers
consumers
CHP, TEP
consumers
consumers consumers
consumers

29

5.3. Heat energy consumption
Three largest regions consuming heat energy make up nearly 50% of the market.
Diagram 5.14. Analysis of heat energy consumption by the population in the overall
structure for 2014, million Gcal (total 62.6 million Gcal, including for the population -
39.4 million Gcal)

Heat consumption in Ukraine is inefficient. The actual consumption in some regions is
more than 60% higher than the EU standard.
Diagram 5.15. Map of energy efficiency in heat and hot water consumption in 2013,
Gcal/ m²

Source: "New social and economic policy"
0,28
0,4
0,6
0,7
0,7
0,8
1,0
1,1
1,2
1,3
1,4
1,4
1,5
1,5
1,7
1,8
2,2
2,4
2,4
3,4
3,6
3,7
7,0,0
8,6
11,9
Zakarpattya
Chernivtsi
Ternopil
Ivano-Frankivsk
Kirovohrad
Kherson
Lugansk
Volyn
Vinnytsya
Zhytomyr
Rivne
Mykolaiv
Khmelnytsky
Chernihiv
Cherkassy
Sumy
Kyiv
Lviv
Odesa
Donetsk
Zaporizhia
Poltava
Kharkiv
Dnipropetrovsk
Kyiv city
Total
Population
Chernigiv
Sumy
Poltava
Charkiv
Luhansk
Donetsk
Zaporizzya
Cherson
Odessa Mykolaiv
Kirovohrad Dnipropetrovsk
Cherkasy
Kyiv
Vinnytsya
Zhytomyr
Chmelnitskiy
Rivne
Ternopil
Volyn
Lviv
Zakarpattya
Ivano-Frankivsk
Chernivtsi
0,13 0,10
-24%
0,16
0,09
-42%
0,19
0,08
-56%
0,18
0,08
-53%
0,14 0,09
-36%
0,16
0,09
-44%
0,17
0,09
-46%
0,14
0,09
-35%
0,22
0,09
-60%
0,12 0,09
-24%
0,21
0,08
-60%
0,17
0,08
-51%
0,17
0,09
-47%
0,14
0,08
-41%
0,21
0,09
-54%
0,15
0,09
-41%
0,17
0,09
-46%
0,18
0,09
-49%
0,20
0,08
-58%
0,13
0,09
-32%
0,15
0,09
-40%
0,15
0,09
-37%
0,14 0,09
-34%
0,15
0,09
-39%0,18
0,07
-63%
Kyiv city
0,17
0,09
Actual
consumption
Potentail according
to the EU¹ standard
-49%
Average in Ukraine
Three largest regions
consume 50% of heat
energy
In some regions the
consumption of heat
exceeds the EU
standard by 60%

30

One of the reasons of ineffective consumption is an obsolete housing stock. Most of
the existing housing stock (about 85%) in Ukraine was built before the independence
of Ukraine. Most buildings were not designed for efficient heat consumption.
Diagram 5.16. The breakdown of residential buildings by the years of construction as
of 01.01.2015

Despite the fact that the structure of housing stock by the years of construction in
some European countries doesn't differ significantly, in these countries the buildings
were renovated.
Table 5.2. The breakdown of buildings by the years of construction in Ukraine and
European countries as of 2008
Period
ofconstruction
Ukraine Germany
Czech
Republic
Lithuania
Till 1919 5% 14% 11% 6%
1919 – 1945 13% 14% 14% 23%
1946 – 1970 51% 46% 25% 33%
1971 – 1980 16% 13% 22% 18%
After 1981 15% 13% 28% 20%
% refers to the number of buildings
Source: Report "Market Assessment “Residential Sector of Ukraine"
The housing stock shall be modernized in both apartment buildings and private
buildings, as far as their share in the total housing stock is almost equal. Additional
data on the housing stock is provided in Annex 3.

4.8%
11.5%
23.5%
21.6%
14.4%
9.2%
4.2%
10.8%
Till 1919 1919-45 1946-60 1961-70 1971-80 1981-90 1991-2000 2001-14
About 85% of the
housing stock is older
than 25 years

31

Diagram 5.18. The breakdown of
housing stock by type, mln. m²

Source: Report "Market Assessment
“Residential Sector of Ukraine"
Diagram 5.19. The breakdown of housing
stock by type, ths buildings

Ukraine

5.4. Tariffs for centralized heating and hot water supply
To fulfill obligations to the IMF the heating and gas tariffs are to reach the market
level based on import gas price from April 2017. Of the total payment for HUS heating
is about 50%, but after the market price setting the cost could rise up to 60%. More
detailed information is given in Annex 4.
Centralized heating tariff
Tariffs for centralized heating depend on and are sensitive to changes in prices for gas,
since the fuel price constitutes nearly 3/4 of the tariff, and for district heating
providers exactly natural gas is the main fuel.
After NEURC tariffs review the structure of tariff for centralized heating was changed
in April 2015. The share of gas increased significantly, while other costs remained
almost the same. Thus, the review of tariffs did not affect the formation of resources
for investments at DHP.
Diagram 5.20. The structure of the average weighted cost of thermal energy for the
needs of the population before and after 01.04.2015

Source: NEURC data

501
565
Appartment
buildings
Private buildings
240
6 500
Appartment
buildings
Private buildings
61,6%
75,9%
21,4%
12,4%
9,1%
7,1%
7,9% 4,6%
before 01.04.2015 after 01.04.2015
Other expenditures
Electrical energy
Costs of labour
Fuel
The review of tariffs
did not impact on the
formation at
enterprises of
resources for
investment

32

According to the NEURC Resolution No1171 dated May 1, 2015 the centralized
heating tariffs were increased. These tariffs are determined for each heat
organization.
It is worth noting that in recent years the tariffs did not cover the cost of heat energy
production for DHP, the difference between the cost and tariff was covered with local
or state Budget in the form of grants.
Diagram 5.21. Dynamic pattern of average weighted tariff and the cost of 1 Gcal of
heat energy, UAH/Gcal

Source: Minregiona data, Working group analysis
Diagram 5.22. Calculation of market heating tariff, UAH/Gcal

Source: Budget of Ukraine 2016, NEURC Resolution No 3159, 1888, Working group analysis
The tariff is segmented by consumers. Budgetary and commercial consumers actually
pay the market price for heat. The tariffs for the population and religious
organizations are 2.3 times less.
Diagram 5.23. Imbalance of tariffs for different consumers as in the case of
"Kyivenergo" in 2015, UAH/ Gcal

Source: Kyivenergo data
In result of tariff segmentation some consumers have to overpay for others, especially
it is relevant to the understated heating energy tariff for the population.

358,2 389,8
654,2
1134,7
1513,0
475,5 509,2
708,8
2013 2014 2015 2016О 2017О
Tariff (with VAT)
1 Gcal cost
657,2 709,5
1 503,4 1 503,4
Population Religious Budgetary Other consumers
Market heating tariff
is about UAH 1513
Residential tariff is
less than for
budgetary
institutions 2.3 times
less
+8,5%
+68%
+33%
+73%

33

Diagram 5.24. Comparison of DHP revenues and the volume of supplied heat energy
by consumers in 2014

The tariff can be calculated in two ways: for customers with metering devices - for
consumed hihakalori, and for consumers metering devices - per square meter
calculated at the rate of 0.0245 Gcal /month for Kyiv.
The price of centralized heating for the population remains one of the lowest in
Europe.
Diagram 5.25. Comparison of tariffs for centralized heating, Euro/Gcal

Source: the IMF Report #15/218(August2015)
Heat energy tariffs are non marketable and do not solve the problem of DHP financial
security. Despite the increase in the average weighted tariff, the level of cost
reimbursement by the tariff remains at about the same level - 75%.
Hot water supply tariff
In most cases the heat producing companies provide the population with heat and hot
water simultaneously. For this reason, hot water tariffs are adopted in parallel with
heat tariffs individually for each company.

80,3%
54.8%
4,4%
8,9%
9,5%
22,9%
5,8% 13,3%
Heat energy supplied Revenue from sales
population state budgetary institutions
local budgetary institutions other consumers
96.3
77.8 75.0
55.6
24.1
Lithuania Estonia Romania Poland Ukraine
Tariff covers only
75% of heat energy
cost

34

Diagram 5.26. Dynamics of tariffs for centralized hot water supply of "Kyivenergo" for
the population (average), UAH.

Diagram 5.27. Calculation of market tariff for hot water, UAH/ m3

The residential tariff is almost twice less than the tariff for budgetary institutions and
other customers and almost the same with religious institutions.
Diagram 5.28. Imbalance in tariffs for different consumers in 2015, UAH.

5.5. Commercial metering and heat consumption norms
There are a few ways of introducing heat metering on the basis of its actual
consumption. It is worth noting that some of them, except for metering functions, also
improve the quality of centralized heating services.
The model of connection to building meters allows consumers to pay for actually
consumed energy energy. However, the most perfect model is to connect consumers
through individual heating station (IHS) that gives the possibility to perform metering
and regulate the volume of energy supplied.
Through the program of the Minregion jointly with NEURC the heat metering devices
are being installed in houses. According to the plan it is expected to reach 80% of heat
energy metering till the end of 2016. The investment need to reach 100% of metering
makes up about USD 100 million.

16.24
24.24
40.92
65.85
87.80
2011 2014 2015 04.2016 04.2017
39,91 40,92
79,44 79,44
Religious Population Budgetary Other consumers
Market tariff for hot
water is about ~88
UAH/m3

Model of connection
with IHP ensures the
metering and increases
the quality of
centralized heating
services

35

Diagram 5.29. Equipment of buildings with heat metering devices

The introduction of commercial metering solves the following problems:
• Obtaining accurate data on service consumption that will give NEURC the
possibility to set reasonable rates.
• Households will pay the reasonable cost of consumed services rather than
under the rates established by the state.
• Cash flows coming from the population to service providers will become
transparent.
• The population will be stimulated to reduce energy consumption and improve
energy efficiency in buildings and homes.
Also, increasing energy efficiency by introducing heat metering is one of the
conditions for granting Ukraine the third tranche from the IMF. The national energy
efficiency action plan till 2020 envisages to reach 100% of heat and water metering by
2019.
For better efficiency of funds use it is reasonable to install IHPs, since in addition to
heat metering it saves about 15-20% of heat.
About 64% of hot water is consumed throught meters and only ~50% of residential
buildings, which are connected to centralized heating, have metering devices.
38%
51%
80%
2014 2015 2016F
By the end of 2016 it is
planned to reach 80%
of heat energy
metering.
IHPs allow to save
about 15-20% of
consumed heat

36

Diagram 5.30. Equipment of buildings with the devices to meter heat (01.01.2016) and
hot water consumption (30.03.2015)

The Rules for provision of centralized heat and hot water supply are regulated by the
NEURC Resolution No 630. Thus, if the building is equipped with heat metering
devices, its dwellers pay on the basis of meter readings. In case the metering devices
are not available the payment for consumed services is charged:
• from centralized heating – under rates (norms) per 1 square meter and
considering the actual outdoor temperature and actual number of days of the
service provision;
• from centralized water supply – under rates (norms) based on per capita and
homesteading.
The norms for utilities are unreasonably high, consequently, the majority of people
without metering devices have to pay more than they consume.
Diagram 5.31. Average heat supply norms in Ukraine, Gcal / m2

Source: KTM 204 Ukraine 244-94. Report on the research work "Development of scientific-
based proposals on setting of social consumption rates"
Lugansk
Donetsk
Zaporizzya
Kirovohrad
Dnipropetrovsk
Kyiv region
Vinnytsya
Zhytomyr
Volyn
Lviv
Zakarpattya
Ivano-Frankivsk
Kyiv city Chernigiv Summy
Poltava
Charkiv
Cherson
Odessa
Mykolaiv
Cherkassy
Khmelnytsk
Rivne
Ternopil
Chernivtsi
51%
64%
Heat supply Hot water
67% 64%
34% 61%
41% 54%
37%
71%
31%
100%
60% 67%
46%
84%
46%
79%
40%
100%
14% 23%
73% 85%
68% 98%
32% 19%
24%
51%
45% 41%
41% 52%
7%
57%
56%
31%
50%
32%
62% 65%
27%
44%
31%
66% 62%70% 62%
Aviability of metering devices
-
0.140
0.129
Consumption norm Evaluation of real
consumption
Heat supply rates have
not been changed
since 1993
A person that lives in
the building without
heat meter overpays
about 10%
People without
metering devices
have to pay under
unreasonably high
rates of
consumption

37

Diagram 5.32. Average norms of hot water consumption in Ukraine, m3
/month per
capita

Source: KMSA Resolution No 579. Report on the research work "Development of scientific-based
proposals on setting social consumption rates"
Diagram 5.33. Comparison of water (hot + cold) consumption with other countries,
m3
/month per capita
Source: Report on the research work "Development of scientific-based proposals on setting
social consumption rates"
The rates of heat energy and hot water consumption are outdated and exaggerated.
In addition, the consumption rate concept leads to the fact that the people do not
have any incentives for energy efficiency. Thus, the ensuring of 100% of heat energy
metering is a prerequisite for further reform of centralized heating sector.
5.6 The capacity of centralized heating market
The capacity of centralized heating market in consumer prices grows, despite the
decrease in heat energy supply. It should be noted that having applied the market
tariffs, the capacity of centralized heating market may increase more than 2 times.
Diagram 5.34. Overall capacity of centralized heating market in Ukraine, billion UAH

Source: Minregion data, Working group analysis

1,65
2,8
3,6
Real average consumption
in Ukraine
Norm of consumption in Kyiv Average norm of Ukraine
1.7 1.8
2.4 2.5
1.8
3.6
Netherlands Spain Belarus England Average value
in Western
Europe
Ukraine
(norm)
29.6
69.5
2015 2017

38

6. Analysis of the scheme of payments for centralized heating
for the population
The system of mutual settlements for heat consumed by the population and relevant
gas supplies has significant "gaps" in liquidity due to fail of the state to fulfill its
commitments on HUS subsidy payment and difference in tariffs. By this, the burden of
liquidity "gaps" falls on DHP:
• As of 01.01.2016 the state debt on HUS subsidy is UAH 7.7 billion, including
UAH 1.1 billion debt to DHP.
• As of 01.01.2016 the state debt for difference in tariffs is UAH 4.7 billion,
including UAH 1.8 billion debt to DHP. The Budget 2016 does not envisage
subsidies for the difference in tariffs, so the debt will grow.
• According to Naftogaz the DHP and TEP debt for gas in 2015 is UAH 4.0
billion, thus it can be paid by 73% (UAH 2.9 billion) due to the debts for
subsidies and difference in tariffs.
The existing regulations additionally "punish" DHP for debts caused by the state's
failure to fulfill its commitments inter alia.
• New procedure under reviewed CMU Resolution No 217, which comes into
force from February 2016, introduces corrective coefficients depending on
DHP debts for gas that arise due to the state debts for HUS subsidies and
difference in tariffs. These coefficients reduce the share of "real" money
received by DHP.
These correction coefficients actually leave DHP without funds for operating
activities - in some cases DHP receive only a minimal share (Sm) in payments
for taxes and wages.
• The reviewed CMU Resolution No 217 envisages the mechanism to
"transform" the share of subsidies to "real" cash flow for DHP. But the
mechanism has significant implementation risks, so it is unknown whether it
will function effectively.
6.1. Analysis of deadline to pay for centralized heat consumed by the
population and Naftogaz gas supplies to DHP
• DHP have to pay for gas before (till the 14th day) they receive payments from
customers (mostly on the 15th-25th day) and mutual settlement for gas with
subsidies (before the 24th day) is made that "washes out" the current assets
of DHP.
• There is an imbalance in charging penalties for non-payment, i.e. Naftogaz
charges a penalty for the delay in payments for gas, but the penalty is not
charged to the population for failure to pay for consumed heat.
Mutual settlements for HUS subsidies on the basis of Common Decision Protocol
(CDP) (CMU Resolution 20, Order of the Minenergy and Minfin No 493/688)
• Frequency and time framework for mutual settlements are not regulated. Any
of the parties (Treasury, Naftogaz or business) can not sign CDP, then the
mutual payments will not be made.
The existing system of
payments for heat
leads to decrease in
system liquidity

DHP have to pay for gas
before getting
payments from
customers and mutual
settlement for gas with
subsidies is made that
"washes out" the
current assets of DHP
Mutual settlements for
subsidies are carried
out with 1 month delay

39

• Provided that all the parties are interested in a mutual settlement, it is made
with 1 month delay following the month when the services were provided.
• Certain DHP in a certain month may have several settlements and signed CDP
(a few mutual settlement "chains" or one "chain" settlement can be divided
into several CPD)
Diagram 6.1. Terms of mutual settlements for subsidies charged for January 2016
(compared to the payments for consumed gas)

Source: Minregion and Kyivenergo data

Household payments for consumed heat (CMU Resolutions No 217 and No 630)
• According to the CMU Resolution No 630 in case of failure to pay for heat till
the 20th day, "consumer shall pay a penalty in the amount envisaged by the
Law and agreement". But neither the Law nor agreement provides the penalty
amount, for this reason it is not charged in practice.

Diagram 6.2. Terms of household payment for heat in January 2016 (compared to the
payments for consumed gas)

Sourc: Minregion and Kyivenergo data

Naftogaz charges a
penalty to DHP for gas
debts but the penalty is
not charged to the
population for failure to
pay for consumed heat

40

6.2. Scheme of payments for centralized heating for households
There are two sources of payments for centralized heating and gas for households:
• Household payments come to special accounts in Oschadbank, and then they
are distributed between DHP, RGC and Naftogaz (CMU Resolution No 217)
• HUS subsidies, which are, actually, the mutual settlements between the
supply chain and State Budget (CMU Resolution No 20 and joint Order of the
Minenergy and Minfin No 493/688)
In 2015 there was a mechanism to pay the difference in tariffs, but in 2016 it does not
work, because the Budget for 2016 does not provide the appropriate funds (see Part
7.4).
Diagram 6.3. Simplified scheme of central heating settlements

Source: CMU Resolution No 217, CMU Resolution No 20, Order of the Minenergy and Minfin No
493/688, Minregion data, Working group analysis
• DHP may carry out mutual settlements on HUS subsidies with expenditures for
gas or electricity.
• The State Budget carries out mutual settlements on HUS subsidies with taxes
from Naftogaz and Ukrgazvydobuvannya.
• Since February 2016 (after the introductioin of amendments to the CMU
Resolution No 217 in December 2015) the mutual settlements for HUS
subsidies also influence the share of "real" money received by DHP from a
special account - the more Budget debt for subsidies to the DHP, the less
share of "real" money received by DHP from consumers (see Annex 5).
• The chain of mutual settlements may have more parties, but it starts with DHP
and ends with Naftogaz or Ukrgazvydobuvannya.
• The scheme of mutual settlements for household gas supplies differs with the
absence of DHP - the Budget carries out a mutual settlement with Oblgaz (gas
supplier).
Mutual settlements
occur only if there are
liabilities

41

6.3. Algorithm for mutual payments with HUS subsidies
• All the parties are obliged to have open accounts at the State Treasury of Ukraine
for mutual settlements.
• If at any stage of the chain there are no corresponding liabilities, the mutual
settlements do not take place that causes the delays in HUS subsidy payment
• Before the Treasury "issues" funds for subsidies it receives commitments from all
the parties to carry out mutual settlements in the form of Common Protocol
Decision.
• Maximum term of "transfer" from one party to another is 1 business day.
Diagram 6.4. Algorithm of mutual payments (on the example of DHP settlement
payments for gas)

Source: CMU Resolution No 20, Order of the Minenergy and Minfin No 493/688, Minregion
data, Working group analysis
6.4. Debt to DHC for compensation in the difference of tariffs
Tariffs for heat and other utility services are generally lower than real expenditures of
utility enterprises:
• NEURC is happen to review tariffs with a delay after the increase in the cost
of electricity, wages and other components. Moreover, the review
procedure may last up to 2 months;
• The volume of heat generation may be less than it is planned in tariff that
entails the increase in heat unit cost;
Therefore, according to the LU "On HUS" and the LU "On Heat Supply" the state has to
compensate the difference in tariffs. In 2015 there was a mechanism (CMU
Resolution No 375) that envisaged subventions from the State Budget for these
purposes and a relevant mutual settlement of subventions with DHP taxes and/ or
settlement for gas with Naftogaz. For 2015 the State Budget allocated UAH 5600
million for subventions (the Minregion is an administrator of these subventions), in
fact the mutual payments were made to the amount of UAH 4800 million.

Budget
DHC
Gas supplier
Naftogaz
Ukrgazvydobu-
vannya
The subsidy to the
account in the Treasury
Treasury
Signed by each party
Common protocol
decision with the
obligation to perform a
certain amount of
settlement
12
The order to
transfer subsidies
3
4
5
6
7
Taxes
“Payment” for gas in the
Treasury account
Treasury account
Treasury account
The Budget for 2016
does not envisages
funds to reimburse
difference in tariffs to
DHP

The state debt for
reimbursement of
difference in tariffs to
DHP as of 01.01.2016
is about UAH 1.8 billion

Mutual payments are
made through the
Treasury accounts

42

As of 01.01.2016 the state debt for reimbursement of difference in tariffs amounted
to UAH 4 762 million, including UAH 1 760 million debt to DHP.
The budget for 2016 does not envisage subventions to pay debts for difference in
tariffs, thus for 2016 there is no any mechanism to pay the debts that will continue
growing in the future.
6.5. Analysis of accumulated debts in the sector
The result of non-market regulated relations in the sector was a significant
accumulation of debts for heat and gas for its production:
Diagram 6.5. Debts in the sectof as of 01.02.2016

Source: data of Naftogas, Minregion data, State Statistics Service of Ukraine
6.6. Suggested approach to debt restructuring
Restructuring of existing debt is one of the necessary steps to financial recovery of the
sector, which is a prerequisite for industry modernization. But to avoid the
accumulation of new debts in the future, the system to regulate relations in the
sector has to be adapted to market realities:
Diagram 6.6. Suggested approach to financial recovery of the sector


A comprehensive
approach will allow to
avoid the accomulation
of debts in the future

43

7. DHC investment needs and expected effect
7.1. Assessment of overall investment needs
The possible reduction of natural gas consumption provided the rehabilitation of
buildings and modernization of DHC is 5 billion m³ per year.
First of all, it is necessary to carry out the measures that will have the greatest effect
and help to avoid the biggest expenditures in the network.
Table 7.1. Preliminary assessment of overall investment needs
Sector
Investment
needs
Gas consumption
reduction
potential
Reduction in gas
consumption by
USD 1 billion

Rehabilitation of
multistory buildings
USD 17 billion 2.3 billion m³ 135 mln m³

buildings

Modernization of heat
production system and
networks

Modernization and
replacement of heat
networks
Total ~USD 25 billion 5.0 billion m³ 200 mln m³
The most efficient use of funds can be achieved with the help of modernized heat
production systems and heat networks. Therefore, DHP modernization shall be of first
priority to improve the efficiency of gas consumption.
7.2. Assessment of minimal investment needs to modernize heat networks
According to preliminary assessments the total number of heat networks in need of
repair or replacement is 60%. The minimum investment amount for these purposes is
up to USD 1 billion, the effect of which could reach annual gas savings of more than
500 million m³.

The minimum
investment amount for
modernization of heat
networks is about USD
1 billion
Overall investment
need is about EUR 25
billion

44

Diagram 7.1. Assessment of first priority needs for different types of repair and
replacement of heat systems in Ukraine

7.3. Assessment of first prioirity investments in the replacement of boilers
The monitoring results showed that the total number of NIISTU-5 boilers is 4 332. This
type of boilers is the least effective, for this reason it shall be replaced in the first
priority. The estimated cost is USD 86 million. Reduction in gas consumption can be
over 160 million m³ / year.
Diagram 7.2. Number of NIISTU-5 boilers and the cost of their replacement

Lugansk
Donetsk
Zaporizzya
Kirovohrad
Dnipropetrovsk
Kyiv region
Vinnytska
Zhytomyr
Volyn
Lviv
Zakerpattya
Ivano-Frankivsk
379
29441%
13%
6%
3153
10%
30%
20%
1628
11%
30%
19%
376
33%
17%
11%
63
37%
14%
9%
1366
24%
30%
6%
320
23%
30%
7%
1014
38%
21%
1%
605
26% 30%
4%
835
19%
30%
11%
387
12%
30%
11%
2676
11%
30%
11%
Kyiv city
Chernigiv Sumy
Poltava
Charkiv
Cherson
Odessa
Mykolaiv
Cherkassy
Chmelnytskiy
Rivne
Ternopil
Chernivtsi
1083
51%
6% 3%
416
8%
30%
22%
636
27% 30%
3%
429
10%
30%
20%
714
41%
16%
3%
319
36%
17%
7%
2073
30%
16% 14%
305
14%
30%
16%
583
24%
30%
6%
550
21%
30%
19%
286
11%
30%
19%
607
30%
14% 17%
50%
30%
20%
23% 25%
12%
Worn-out and
unsafe
Need
replacement by
previously
isolated
Engineering
commissioning
of residential
buildings
21096 km
total length of heating networks
Forecasted investment
amount for NIISTU-5
boilers replacement is
about USD 86 million
Consumption reduce is
over 160 mln m³/year

45

8. The current state of DHP investment projects and barriers
to their implementation
8.1. Analysis of completed investment works at heat production in 2015
Completed works are aimed at replacing natural gas consumption in 2015
Diagram 8.1. Sources for funding works
on the replacement of natural gas
consumption (total USD 286 million)

Diagram 8.2. Number of boiler houses and
new boilers redirected to alternative fuels
(total 801)

More detailed information on the reduction and replacement of gas consumption is
given in Annex 6 and 7. Information on facilities that use alternative fuels is given in
Annex 8.
Diagram 8.3. Number of boilers redirected to alternative fuels in 2015 and expected
volume of natural gas substitution

17%
16%
18%12%
37%
State budget
Regional budget
Local budget
DHP funds
Other (grants, private investments, etc.)
72%
13%
3%
7% 5%
Wood / pellet / wood chips
Coal
Biomass
Oil fuel
UAH 286 million was
invested in redirection
of boilers and boiler
houses to alternative
fuels
Hence the
consumption of gas
was reduced by 52 mln
m³/year to the amount
of about UAH 290
million (at gas import
price of USD 225)

46

Works aimed at reducing natural gas consumption in 2015
Diagram 8.4. Number of modernized
boiler houses and boilers

Diagram 8.5 . Sources for funding
measures to reduce natural gas
consumption (total UAH 183 mln)


Diagram 8.6. Completed works on reducing natural gas consumption in 2015


483
901
number of boiler
houses
Number of boilers
5% 4%
16%
53%
18%
State budget
Regional budget
Local budget
DHP funds
Other (grants, private investments, etc.)
The most current
programmes are
aimed at DHP
modernization and
rehabilitation of public
buildings
UAH 183 million
invested in
modernization of
boilers and boiler
houses

Hence the consumption
of gas was reduced by
28 mln. m³/year to the
amount of about UAH
150 mln. (at gas import
price of USD 225)

47

8.2. Analysis of programmes on energy efficiency of heat production,
distribution and consumption
A few national, donor and IMF programmes on funding the energy efficiency
measures are being implemented or developed in Ukraine. The key institutions that
manage these programmes are the following:

• SAEE and NEURC from the side of state
• EBRD, IBRD, EIB, KfW, NEFKO, Е5Р, SIDA from the side of IMF and donors

Despite the fact that the greatest investment need is in the residential sector, the
most programmes are focused on upgrading of district heating providers.

Diagram 8.7. Assessment of investment potential of existing programmes, million
USD

Source: official information, Working group analysis
In practice from the existing USD 1 billion for the projects aimed at DHC
modernization or rehabilitation of public buildings in the active phase there is not
more than 30% of this amount (see Parts 9.2 and 9.3).
The list of investment programmes is given in Annex 9. The list of technical assistance
programmes is given in Annex 10.
Programmes for DHC moderniation and rehabilitation of public buildings
The overall financial potential for upgrading district heating providers and renovation
of public buildings in the framework of current programmes is USD 1 billion that is
about 12.5% of total investment needs in this sector.
These programmes are managed by IFI and donors (EBRD, IBRD, EIB, KfW, NEFKO,
Е5Р, SIDA) and are usually structured in one of two ways:
1. Financing programmes against the state guarantees and with the involvement
of central executive authorities (Minfin, Minregion, CMU, etc.). Examples of
such programmes are "Improving energy efficiency in the sector of centralized
heat supply" (IBRD) and "Municipal Infrastructure Development Programme"
(EIB).
2. Financing the projects against municipal guarantees without the involvement
of central executive authorities. For example, EBRD projects on financing the
upgrading of district heating providers.
75
250
750
Rehabilitation of residential
buildings
buildings
Modernization of DHCs
Programmes for DHP
modernization and
buildings are financed
against the state or
municipal guarantees

Potentional funding of
existing programmes is
USD 1 billion

The projects are
financed against the
state and/or municipal
guarantees
Most programmes are
focused on modernization
of district heating
companies or
buildings

48

Diagram 8.8. Scheme to provide state guarantees

Financing against the state guarantees requires complicated and long-term
procedures determined by both Ukrainian legislation and IFI rules:
Diagram 8.9. The process of project selection (using the example of IBRD financing
programme)

Minregion as responsible ministry announces
the selection of projects
Utility company (UC) develops project
justification following the IBRD elements, which
is approved by the municipal council session
Minfin provides the conclusion on
UC financial status (on the basis of
credit terms)
Expert Working group (Minregion, Minfin, MEDT,
NERC, public council) considers projects
CMU approves the list of projects and authorizes to
sign the Loan Agreement
Minfin, Minregion and IBRD sign the Loan Agreement
UC, Minfin, Minregion and NERC sign sub-loan
agreements
1
2 3
4
5
6
7
Potential of existing
investment
programmes is used
by ~ 30%
The process of project
selection takes more
than 1 year

49

The project selection process may take more than one year, depending on the quality
of existing DHP covered by the projects. Also, if it is necessary to undergo the
procedure under the CMU Resolution No 1027 (it is optional provided the Verkhovna
Rada of Ukraine ratified the agreement with the IMF), the procedure period is about 1
year more.
Diagram 8.10. Project initiation (selection and approval) according to the CMU
Resolution No 1027

Moreover, the process of tenders and preparation for payments to contractors may
take about 1.5 year.

Implementation of the
procedure under the
CMU Resolution No
1027 complicates the
process and increases
the period of project
selection and approval
for about 1 year
The process of tenders
and preparation for
payments to
contractors may take
about 1.5 year

50

Diagram 8.11. Duration of the procedure for tenders and contract payments (7-18
months)

Also according to the CMU Resolution No 560 the approval period depends on the
project cost and it is 2 months more, if the cost exceeds UAH 100 million:
Diagram 8.12. Project justification approval under the CMU Resolution No 560

The efficiency of project implementation depends on the teamwork of all parties
involved to the process. The important role is played by the Central Project
Management Group (CPMG) and the Regional Project Management Groups (RPMG)
but the activities of CPMG are financed by the program (it is 1-2% of the total program
amount), and the RPMG - by own funds of utility companies (UC). Therefore, as a rule,
the RPMG competence is much lower compared to CPMG.

51

Diagram 8.13. Operational structure of project implementation

The Ministry of Finance of Ukraine plays an important role in the process of project
funding.
Diagram 8.14. Scheme of project funding


CPMG and RPMG play
an important role in
project implementation,
but CPMG is financed
by the programme, and
RPMG - by own funds
of utility companies
The Minfin plays an
important role in the
process of project
funding

52

8.3. IBRD programme effeciency
The Programme " Enhancing energy efficiency in the sector of centralized heat supply"
(UDHEEP) has covered 8 cities of Ukraine that will give the possibility to reduce fuel
use by 108 million m3 / year. Total financing for implemenation of approved projects
is USD 290.9 million. More detailed information on the work performed and the
expected results is provided in Annex 11.
Diagram 8.15. Geography of UDHEEP financing and results

Source: CPMG data

Table 8.1. Ke features of UDHEEP Programme
Date of project approval by the IBRD 22.05.2014
Current funding, including USD 315.5 million
IBRD loan USD 265.5 million
Clean Technologies Fund loan USD 50 million
Expected internal rate of return (IRR) 17.2%
Source: Project justification and CPMG data
Programme funding is provided by the EBRD and the CTF at low rates - 1%. However,
the loan is given in dollars, which increases the risk of non-payment in case of hryvnia
devaluation. This is one of the main risks in the provision of funding by donors.

Kharkiv
107,3
Dnipropetrovsk
22,2
Kherson
21,6
Mykolaiv
21,7
Vinnytsia
43,3
Kamenets-
Podilskiy
15,3
Chernigiv
34,9
Ternopil
24,6
Totally selected projects
290,9 USD mln
108 mln m³/year
Fuel saving (in gas
equivalent)
60,8%
Reduce in power
consumption
11,9%
Reduce in СО2
emissions
UDHEEP Programme
will give the possibility
to reduce fuel use by
108 million m3 / year
(gas equivalent)
Part of the funds
remains unallocated

53

Diagram 8.16. Distribution of funds in
UDHEEP Programme

Source: CPMG data as of 15.01.16

Diagram 8.17. Terms of UDHEEP Programme
financing

Source: CPMG data as of 15.01.16
8.4. The introduction of procurements for project implemenation on the
example of Sweden
To ensure a transparent funding of DHP modernization and upgrade from the side of
the state and MFIs the Procurement Agencies exist and are established in countries
such as Sweden and the UK. The Agency is a non-profit institution that connects utility
organizations and suppliers of equipment or services.
A long-term goal is to increase the product quality and enhance standardization level
that will make services competitive and more efficient.
Table 8.2. The Agency benefits for various market players
Benefits for utility companies: Benefits for suppliers: Benefits for the state:
• Easier attraction of
international and public
funding
• Access to the best
correlation of price and
equipment/ service
effectiveness
• Better guarantee of contact
execution
• The current procurement
methodology of the Agency
can implement innovations
• Use the established
connections
• Reducing operating
costs
• Reducing berries to
the market
• Access to the "wide
market"
• Single entry point to
the market

• Simplified attraction of
international investors
• Transparant purchase
system
• Simplified control
procedure
• Corruption prevention
• Facilitating the orverall
energy sector
modernization

Agency accelerates the marketing of new energy efficiency technologies that helps to
solve the energy dependence problem. In turn, the DHP have the right to purchase
without Agency.

290,9
5,5
1,1
18
Subprojects CPMG budget
Up-front commission Unallocated amount
0,25%
0,79% 0,75%
0,45%
IBRD crediting terms СТF crediting terms
Initial up-front commission Interest rate
commission for management

54

Diagram 8.18. General data of the Swedish Procurement Agency “Värmek”

Source: Värmek data
The process of such Agency launching in Ukraine may take about 1 year.
8.5. Barriers to the implementation of DHP modernization projects
The key barriers to project funding and implementation of a full potential of existing
programmes of IFO and donors are:
Lack of expertise at the local level to draft project documents and implement projects
following the IFO requirements.
The IFOs require organizaional and technical specifications to the project and
borrower, including the project registration. Unfortunately, only a few DHP have
appropriate competence and experience of coopeation with international
organizations. This causes delays in project implementation and significantly reduces
the number of DHP participating in such programmes.
Debts of utility companies and new legislation on DHC account blocking by Naftogaz
The new Law No 423-VIII was adopted on May 14, 2015 to stabilize the financial state
of Naftogaz. Under this Law Naftogaz can automatically collect payments from central
heat providers and block their accounts if they have overdue liabilities. Consequently,
Naftogaz has blocked the bank accounts of some central heat provides (including
Zhytomyr, Lutsk and Lviv). This new legislation will affect more or less all the central
heat providers in Ukraine and significantly limit their running costs. In addition, the
new Law allows Naftogaz to sell the DHP debts and assets to third parties that may
lead to the DHP shadow privatization.
One the consequences of this Law is that IFOs or donors will not provide loans and / or
grants to DHP if there is a risk that these funds will be used to repay old debts to
Naftogaz.The CMU Resolution "On amending the Resoluton of the Cabinet of
Ministers of Ukraine No 217" dated December 29, 2015 significantly increases the
liquidity of Naftogaz and reduces the level of current assets remaining at the disposal
of heat generating / heat supply companies, using the mechanism of consideratoin of
"calculaiton level" rate when calculating the ratio of funds transferring from the
accounts with a special use mode of heat generating / heat supply companies.
The basis for approval of any investment programme is the procedure for aproving by
joint Order of the Minregion No 630 and regulator Resoluton No 381. There are a few
problems with the current procedure:
• The procedure directly contradicts the IFO procurement rules because it
requires a detailed project documentation and prices (even the names of
specific manufacturers) before a tender is announced.
• The procedure requires to provide detailed calculations and project
documents for each object, such as a boiler house, pipeline section or
individual heating unit (IHU) that takes a lot of time.
Draft documents shall
comply with the
international standards
The blockings of DHP
accounts by Naftogaz
does not allow to
finance projects

The introduction of
accounts with “special”
use mode and certain
priorities in calculations
decreases the DHP
liquidity

55

• Despite the merger of two regulators over a year ago, the DHP still have to
provide and protect two separate investment projects: one project is for gas
boiler houses, pipelines, etc., and another one is for cogeneration plants and
alternative sources of heat supply, such as boiler houses using biomass. It is
not convenient and demotivates DHP to develop the alternative sources of
heat supply.
• Applying procedural provisions, the regulator also objects to the inclusion of
individual heating units (IHU) to the DHP investment projects saying that this
measure does not provide direct financial benefits. It means that DHP do not
want to co-finance the IHU, since they can not recover the costs through
tariffs.
• To approve investments the Minregon is still using the outdated building
standards. Moreover, the International agreements shall be aligned with the
European standards (for instance, FIDIC) to facilitate the implementation of
projects.
Adoption of central heat tariffs by the regulator and hryvnia devaluation against USD
and EUR
Timely and reasonable tariff amendments remain a key regulatory risks for all DHP
implementing the projects at the expense of IFO loan funds. The NEURC rarely adopts
tariffs in time that would allow to service the DHP debts. This problem is exacerbated
in the conditions of national currency devaluation, as far as the IFO loans are in USD or
euro.
VAT and customs exemptions for the grant financial component
Exemption from taxes and customs duties on grants and loans has been officially
enacted, but several obstacles still remain. Article 3.2 of the Tax Code of Ukraine and
the relevant international treaties ratified by the Ukrainian parliament allow the
exemption from taxes and duties on the purchase of goods, materials, works and
services with the use of grant funds. However, this exception is only at the level of
general contractor and does not penetrate to the level of subcontractors. There is no
mechanism to reclaim VAT paid by Ukrainian subcontractors. Thus, the current
legislation discriminates Ukrainian subcontractors and provides a competitive
advantage to international contractors or service providers.
Approval of municipal guarantees
The process of approving municipal guarantees has been greatly improved thanks to
cooperation with the Ministry of Finance. However, it should be more rational. For
example, the Ministry of Finance has recently begun to require the utility companies
to provide: (I) mortgages in municipalities and (II) meetings of the special tender
committees, which preliminary selected the investment projects following the
procedure approved by the CMU before the municipal guarantees are provided.
In fact, both requirements are unnecessary. As to the first requirement, utilities are
owned by respective municipalities and in most cases they only manage municipal
property, so utilities can not pledge the property of their owner, in addition, this
requirement is beyond the binding norms of the Budget Code of Ukraine. As to the
second requirement, it was initially intended for investment projects supported by
Hryvnia devaluation
creates additional risks
Current legislation
discriminates Ukrainian
subcontractors
The procedure for
approving municipal
guarantees contains
extra requirements
The investment
programme approval
procedure needs some
improvals
Sometimes MFI loan
funds are blocked in the
accounts of the
Treasury

Heating in housing and utilities sector_25.03.2016

Heating in housing and utilities sector_25.03.2016

Recommended

Recommended

More Related Content

Similar to Heating in housing and utilities sector_25.03.2016

Similar to Heating in housing and utilities sector_25.03.2016 (14)

Heating in housing and utilities sector_25.03.2016