Electricity grid

The state company Ukrenergo owns and operates the transmission grid (Specifically, Ukrenergo holds these assets on its balance sheet. This includes 220-750 kV transmission lines and almost all interstate transmission lines).

It is independent of the generation and distribution companies. Ukrenergo collaborates closely with the market operator, Energorynok, of which it is a member, but the two are separate entities with distinct budgets. It operates the central dispatch centre in Kyiv and the high-voltage transmission lines, and is also responsible for maintaining and upgrading those lines as necessary. NERC regulates the transmission tariff. Energorynok operates the wholesale power market and is a 100% state owned enterprise.

Energorynok has accumulated significant debt because oblenergos have not paid in full for their power purchases. In turn, generating companies did not get paid in full, which compromised the effectiveness of the market. The Ministry of Fuel and Energy frequently intervened to allocate fuel under emergency rules. These allocations reduced the ability of generators to freely compete in producing and selling power.

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Oil and Natural Gas

Ukraine relies heavy on imported oil and gas. These imports are high on the political agenda, particularly as prices rise. The government is planning to reduce the imports and enhance domestic production. Achieving this goal requires reforms to attract investment to the sector. Today, the oil and gas industry in Ukraine is largely dominated by state-owned companies, though private and foreign investors have made some inroads. The presence of the state is most direct and pronounced in exploration and production, main pipelines (both oil and gas), gas imports and transit, and gas distribution. In contrast, refining and distribution of oil products are mostly in private hands.

Coal and lignite

Distribution

Most of Ukrainian coal supply is transformed into other energy forms, such as power, heat and coke. According to the Ministry of Coal Industry, in 2005, 46% of coal was used in power or cogeneration plants. The coke and steel industries took a further 29%. Heat-only boilers in municipal district heating systems used 3% of total supply, and home owners used slightly less. The remaining 20% was used by other types of consumers.

Pricing and market mechanisms

Coal prices in Ukraine are theoretically freely set by the market. In reality, there are many price distortions. The largest are coal subsidies, state fuel allocation in the power sector and the influence of private, monopoly buyers. Because of their dominant role and exclusive contracts to buy coal from some mining companies, private industrial groups have tremendous market power. Thus in practice, the government and large industrial groups set the price in a non-competitive manner. There is a wholesale market for coal in Ukraine but the production costs exceed the prices at most mines. The government compensates a portion of the difference through direct production subsidies. In 2004, the government distributed subsidies of UAH 15.50 (about USD 3.00) per tonne of coal – equal to approximately 9% of the average wholesale price. The government also funds other, long-term coal mining costs at state owned mines, including many capital expenditures, and mine closure and decommissioning costs.

As part of the coal sector restructuring programs, the government has made significant investments in coal mines to try to make them profitable. However, these investments come directly from the government budget and are not reflected in the coal price. In 2005, the government made UAH 1.4 billion (USD 277 million) of capital investments in coal mine technology and paid another UAH 800 million (USD 158 million) for restructuring and closing mines (including addressing the environmental consequences of the mining operations). Additional funds have been allocated for job retraining and addressing the social consequences of mine closure.

[SEC Biomass]

Renewable energy

In 2008, renewable energy (including large hydro power stations) accounts just for some 2.8% of total primary energy supply in Ukraine. The Government Energy Strategy projects their growth. The Ukrainian Government is aware of the perspectives of renewable energy and launched various programs to develop strategies and specific projects.

Most of Ukraine’s renewable energy today is concentrated in large hydro power and biomass-fired heating boilers and stoves. There are also several wind power plants and geothermal heating systems. Ukraine has a scientific and industrial base for manufacturing renewable energy technologies, but the quality and reliability of existing Ukrainian technologies have to be improved.

Some forms and uses of renewable energy are already economically viable in Ukraine. For example, biomass-fired boilers are often competitive compared to gas fired boilers in areas with available biomass resources. Other renewable energy technologies are still on the stage of research and development or demonstration, and their share in energy supply is insignificant.

The “Energy Strategy of Ukraine for the period till 2030” adopted in March 2006 estimates the annual technical potential of renewable energy, waste and nonconventional energy sources at about 79 mill tce. At that consumption of RES is forecasted at 18.3 mill tce in 2030 (6% of total primary energy consumption). The largest increase is expected in the use of solar energy, methane gas from coal mines and heat pumps operating on low potential heat. The strategy envisages that the electricity production from renewable energy will increase up to 1.6 billion kWh in 2020 and 2.1 billion kWh in 2030.

The Scientific Engineering Center “Biomass” in cooperation with non-governmental organizations developed an alternative strategy for RES development till 2030. According to it the share of RES will be 16.5% of total primary energy consumption or 39.2 mill tce in 2030. The major sources, that can contribute to the generation of renewable electricity are wind energy, small scale hydro and biomass. In the strategy 2030 no separate targets have been set for the generation of renewable electricity.

In accordance with key principles of the EU green paper, the long-term renewable energy development in Ukraine should be based on economic competition with other energy sources, with the state providing support to renewable energy sources advanced technologies which reflect public interest as regards enhancing the energy security level, environmental cleanness and combating global climate change.At present only 0.8% of the energy in Ukraine is provided by renewable energy sources. According to the strategy 2030, this should be increased to 18.3% in 2030. The EU countries have agreed to generate 20% renewable energy in 2020.

Several stakeholders have presented alternative targets, showing a faster growth path and higher final targets, especially in the field of biomass and wind energy. In order to develop an effective and efficient renewable energy support framework, it is necessary to develop a clear view on future targets, which are both challenging and realistic.

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Hydropower

Hydro power is the most developed renewable energy source in Ukraine today. Large hydro is a mature technology and hydro power currently is the least expensive power source on the wholesale market. Of the country’s 4,700 MW of hydro power capacity, the majority is in large-scale hydro. Eight power stations on the Dnipro River have the total capacity of 3907 MW and the Dnistrovska station on the Dnistr River – an additional 700 MW. Combined, they produce 11-13 TWh/year. Ukraine has some 70 operational small scale hydropower stations, of which 50 are active and generate 0.25 TWh/year. Additionally, there are some 100 small hydropower stations that are not operational but could be eventually restored. Ukraine also has plans for 5 additional hydro power plants with a total capacity of 8,143 MW (EBRD 2005). Ukrainian environmental organizations project that hydropower production may reach 15.1 TWh/year by 2030 (including 3.7 TWh/year of small hydro) and up to 25 TWh/year in 2050.

[SEC Biomass]

Bioenergy

Ukraine has quite a big potential of biomass available for energy production. Expert estimation performed for 2007 shows that theoretical potential of biomass in Ukraine is about 50 mtce, technical potential comes to 36 mtce and economic potential amounts to 27 mtce.

Main components of the potential are agricultural residues and energy crops. Of the agricultural residues, the biggest economic potential falls on residues of sunflower production (stalks, husks, heads), then comes residues of production of corn for grain (stalks, leaves, ears); straw of grain crops and straw of rape occupy third and forth place correspondingly.

Economic potential of energy crops is even higher than that of agricultural residues. It includes not only biomass of the crops but in case of rape and corn is recalculated into biodiesel (plus straw) and biogas. Coming from the present level of the total primary energy consumption (TPEC) in Ukraine (210.7 mtce in 2007), economic potential of biomass can satisfy about 13% of Ukraine’s energy demand.

[SEC Biomass]

Wind energy

Ukraine has eight wind power plants: four in Crimea and one each in the Sea of Azov; near Mariupol; near Mykolaiv; and near Truskavets in the Carpathians. These plants have a total of over 70 MW of capacity15. Before 2006 wind energy development was funded from a charge of 0.75% on all electricity sales. At the beginning of 2006 the charge was cancelled, and fixed sum of money (about 80 mill UAH/year) for the support of wind energy was included in the state budget. Wind is the most expensive source of power on the wholesale market. The estimated technical potential of wind energy capacity is 16 000 MW, which could generate up to 30 TWh/year. The Ukrainian Energy Strategy of 2006 projects that wind power will generate 2 TWh/year in 2030 that will substitute consumption of 0.7 mtce/year.

[SEC Biomass]

Solar energy

There were about 1,000 collectors (10,000 m²) installed in Ukraine in 2002, according to experts’ estimates.16 Ukraine has potential for developing solar heating, particularly in the southern part of Ukraine, where solar radiation intensity reaches 1,450 kWh/m²/year (the country’s average is 1,200 kWh/m²/year). Solar heating could be attractive in areas with low population density, where district heating is not economically justifiable. Ukrainian environmental organisations project that solar collectors may supply up to 23 TWh/year of heat in 2050. Photovoltaic (PV) systems are practically not used in Ukraine because of their high cost. Most PV panels manufactured in Ukraine are exported.

[SEC Biomass]

Geothermal Energy

Ukraine has 13 MWth of geothermal capacity installed; there are plans to increase geothermal use for district heating to 250 MWth by 2010. There is also potential for small geothermal power plants using existing wells at abandoned oil and gas fields; a 1.5 MW pilot project in Poltava was being installed in 2005. The best conditions for geothermal energy development are in the Carpathian area, Crimea, Kharkiv, Poltavsk, Donetsk, Lugansk and Chernigiv regions. The Ministry of environment estimates thermal water reserves at 27.3 million m3/day. The technical potential is estimated at 53.5-97.7 TWh/year, but according to experts’ estimates no more than 8 TWh/year could be used by 2030 and 14 TWh/year in 2050.

[SEC Biomass]

Support Mechanisms and feed-in conditions for electricity from renewable energy sources

Law on green tariff

In September 2008 the Law on green tariff for electricity produced from renewables was adopted by Verkhovna Rada. (601-VI from 25.09.08).

Due to this Law: "green" tariff – special tariff according to which the electricity, produced on the power energy objects which use the alternative energy sources (excluding the blast-furnace gas, coke oven gas and including only small hydropower plants) is purchased;

small hydropower plant – power plant, which produces electricity using hydro energy with the installed capacity less than 10 MW”.

Wholesale Electricity Market of Ukraine is obliged to purchase electricity, produced on the power energy objects which use the alternative energy sources (excluding the blast-furnace gas, coke oven gas and including only small hydropower plants) according to the “green” tariff, and those electricity, which wasn’t sold by the negotiated prices directly to consumers or to the power supply companies, which perform economical activity concerning the electricity supply by the regulated tariff.

Electricity, produced from the alternative energy sources could be sell according to the “green” tariff by the direct agreements with consumers. In this case electricity consumer receives from the authorized by the Cabinet of Ministers of Ukraine agency the appropriate document with the set form, which confirms the purchase of electricity, produced from the alternative energy sources, and defines itself usage order”.

"Green" tariff is accepted by the National Electricity Regulatory Commission of Ukraine on the electricity, produced by the market participants at the power objects using the alternative energy sources (excluding the blast-furnace gas, coke oven gas and including only small hydropower plants). The size of the “green” tariff is established annually for the each market participant at the level not less than twice as higher as the average weighted tariff on electricity, which is purchased from the power generating companies, which work on the Wholesale Electricity Market of Ukraine for the price bid of the year, before that one for which the green tariff is established. Such an order of incentives on electricity production from the alternative energy sources is applied for each market participant during ten (10) years starting from the date of tariff establishment”.

As can be seen, the Ukrainian green tariff is not differentiated according to energy source (solar, wind, biomass, etc.) or the capacity of the power plant, as it is stipulated, for example, in the German Renewable Energy Sources Act. Nor it depends on the date of commissioning (the later a power plant begins operation, the lower the green tariff is) as it is in Germany. Instead of that, a single average tariff shall be introduced, regardless of the peculiarities of each energy source and investment costs.

Until October 2008, when the “Law on green tariff” was adopted, the priority for the development of renewable energy sources was initially in the wind sector and since 1994 a number of documents have been issued by the President, Parliament and the Cabinet of Ministers regarding the construction of new and extended wind farms.

• The Resolution of the Government of 15 June 1994 No. 415 “On Construction of Wind Farms” provided for funding by applying a 0.5% levy to electricity tariffs, accumulating these funds in a separate account of the Ministry of Energy and Electrification allocating them for the construction of wind farms and extending facilities for the production of wind-power equipment.
• In 1996, a Decree of the President of Ukraine (03.02.96 No. 159) “On Construction of Wind Farms” increased the value of the levy to that of 0.75% of total power output. This Decree also instructed the Cabinet of Ministers of Ukraine to approve a State Programme for Wind Farm Construction by the end of 1996. The Comprehensive Wind Farm Construction Programme was adopted and approved by the Resolution of the Cabinet of Ministers of Ukraine (02.03.97 No. 137).
• Legal confirmation of the priority development of the wind sector is contained in the Law of 06.08.2000 No. 1812-III “On Introducing Changes and Amendments to Certain Laws of Ukraine on the Promotion of the Development of Wind Power Industry of Ukraine” which introduced changes for the period until 1 January 2011, particularly, in the Law of Ukraine “On Power Sector” that required:
  • promotion of the wind power industry as a principle of state policy;
  • purchase/sale of electricity generated at wind farms exclusively on the Wholesale Electricity Market;
  • the establishment of a target surcharge of 0.75% of the existing tariff for electricity sold by electricity producers on the Wholesale Electricity Market to finance the construction of wind farms in compliance with the Comprehensive Programme.

With regard to solid BM, presently no law supports utilization of wood waste, straw, husk and other types of solid BM as a fuel. In our opinion, it is essential gap in Ukrainian legislation. We think that under present conditions, first of all it is necessary to encourage and support introduction of boilers for solid BM combustion.

Production and utilization of liquid and gaseous fuels obtained from BM is determined and promoted by the Law of Ukraine “On alternative kinds of liquid and gaseous fuel” (N 1391-XIV from 14/01/2000). According to the law alternative fuels of such kind include alcohols and oils produced from biomass, coal methane, biogas of different types, producer gas and some other fuels. Due to this law financial support must be given to landfill gas utilization projects, biogas projects and production of liquid fuel from biomass. Again, it is a declaratory law, which supports activity in this area on the whole, mentions about possible subsidies, exemptions from tax and other privileges but does not define them and does not indicate concrete mechanisms how to obtain them.

Activity on liquid biofuels production, biodiesel and bioethanol, has livened up lately and is supported by the state. Before, development of the production was restricted by non-competitiveness of liquid biofuels with traditional ones. After rise in price of petrol and diesel in Ukraine in 2005, cost of biofuels and traditional fuels became nearly equal.

In 2005 the Cabinet of Ministers of Ukraine approved conception for the development of biodiesel production in Ukraine for the period till 2010. In a year, in 2006, “Program for the development of biodiesel production” N 1774 from 22.12.06 was approved.

There was developed in Ukraine the technology for production of high-octane oxygen containing admixture to gasoline (HOA) – Ukrainian name of bioethanol. The law giving real support to utilization of HOA by introducing reduced excise tax was accepted in February 2006. The law has been in force since 1 January 2007.

Among other laws which may be favourable for bioenergy development, one should mention the law concerning so called technological parks. This is the Law of Ukraine “On amendments to the Law of Ukraine “On special regime of innovative activity of technological parks” and other laws of Ukraine”, N3333-IV from 12.01.06. The law creates favourable conditions for implementation of innovative projects including ones in bioenergy area. Besides, in March 2007 a law encouraging activity on energy saving was passed. The full name of this law is Law of Ukraine “On amendments to some legislative acts of Ukraine regarding stimulation of energy saving activity”, N 760-V from 16.03.07. The law has been in force since 01.01.2008. According to the law, equipment employing non-traditional and renewable energy sources, energy saving equipment and materials are free of custom duty and taxes when they are imported to Ukraine provided certain conditions are met. Besides, if an enterprise manufactures and sells equipment employing non-traditional and renewable energy sources, energy saving equipment and materials, metering and control devices for fuel-energy resources, and equipment for production of alternative fuels, its income is free of taxes.

Mechanisms for Promotion of the Use of Renewable Energy Sources

Article 9 of the Law of Ukraine “On Alternative Sources of Energy” stipulates that the promotion of production and consumption of energy from alternative sources should be carried out by:

• applying the economic incentives provided by the legislation on energy conservation and environment protection with the purpose of extending the use of alternative sources of energy;
• creating favourable economic conditions for construction of alternative energy facilities.

The Law also establishes that financing of alternative energy sources shall be from the funds provided for in the wholesale tariffs for electricity and heat (through introduction of a special target surcharge to the tariff) and from private and other funds not specifically banned by the legislation. A procedure for forming the fund for target financing of the stated measures and carrying out control over the proper use of these funds is established by the Government.

The Cabinet of Ministers was charged, within six months, to develop the financial mechanism for promoting the development of alternative energy and submit the proposals on its legal support for consideration by the Verkhovna Rada. NERC developed a Procedure for forming the fund and controlling its proper use as detailed in its letter of 22 July 2003 and this Procedure was adopted by Resolution of the Cabinet of Ministers. However, the Cabinet of Ministers has yet to approve the procedure for forming the support fund for alternative energy sources and, therefore, no financial support mechanism has been introduced. Measures to promote alternative energy are therefore specified by the Law but are not supported by the relevant secondary legislation.

The Law “On Energy Conservation” adopted in 1994 also specified the need to promote energy conservation, particularly, by granting tax incentives to enterprises – manufacturers of energy-saving equipment, devices and materials, metering equipment, control and energy management systems and to enterprises using equipment operated by non-traditional and renewable energy sources. It also envisaged the need to establish increased rates of depreciation of fixed assets, provide priority credits for energy efficiency measures, and to give state and other grant aid for research in the area of energy-saving technologies and non-traditional types of energy. However, this has not been further developed in Ukraine tax legislation making implementation impossible.

The Law “On Introducing Changes in Certain Legislative Acts of Ukraine on Promotion of Measures on Energy Conservation” No. 760-V of 17 March 2007 introduced changes in a number of laws on taxation and envisaged tax incentives for alternative energy facilities. Changes in the Law “On Common Customs Tariff” envisaged the exemption from duties for:

• equipment operating on non-traditional and renewable sources of energy, energy-saving equipment and materials, metering, control and energy management systems, equipment and materials for production of alternative types of fuel (hereinafter referred to as the goods) imported in the customs territory of Ukraine by domestic enterprises provided that these goods are used by them for their own production if identical goods are not produced in Ukraine;
• materials, equipment and components which are imported into Ukraine and used for the production of equipment operating on non-traditional and renewable energy sources, energy-saving equipment and materials, metering, control and energy management systems, equipment and materials for the production of alternative types of fuel if identical goods are not produced in Ukraine.

Simultaneously, changes were introduced in the Law of Ukraine “On Value Added Tax” regarding applying an exemption from value added tax for the above goods. In accordance with the changes in the Law of Ukraine “On Enterprises Profit Tax” introduced by the Law No. 760-V of 17 March 2007 the profit of enterprises received from the sale of equipment in Ukraine which operate on non traditional and renewable energy sources of their own manufacture according to the list established by the Cabinet of Ministers of Ukraine shall also be exempted from tax.

These changes in the Law “On Common Customs Tariff”, “On Value Added Tax” are valid from 1 January 2008 for three years from the date of coming into force of the Law. The provisions of the law that stipulate introduction of the changes in the Law “On Enterprises Profit Tax” are valid for five years from the date of receiving the first income due to the increase of energy efficiency of production.

Changes were also introduced in the Law “On Energy Conservation” requiring the formation of State and Local Energy Conservation Funds with the purpose of targeting the financing of the rational use and saving of the fuel-energy resources. Article 16 specifies measures regarding the promotion of energy conservation and the establishment by the Cabinet of Ministers of a Procedure for priority funding for energy efficiency measures, a Procedure for making grants for research works relating to energy-saving technologies and non traditional types of energy, for production and improvement of new types of energy-saving devices and methods. With a view to implement the provisions of Article 16 of the Law “On Energy Conservation” which stipulates the need to establish increased rates of depreciation of energy-saving fixed assets, it is proposed to relate certain types of energy-saving equipment to group 4 of fixed assets which attract a depreciation rate of 15% of the book value. The development of the applicable equipment list by the Cabinet of Ministers would still be required.

These regulatory legal acts of the Government have yet to be developed making practical implementation of the provisions of the Law on the promotion of measures on energy conservation - except for tax incentives effective from 2008 - impossible.

[SEC Biomass]