Energy

Russia's war against Ukraine has caused massive destruction of energy infrastructure and threatened the sustainability of electricity, heat and other basic services. In this context, it is becoming increasingly important not only to restore systems, but also to transform them in line with the principles of sustainability, security and energy independence.

One important area of the electricity sector that is gaining new significance is the transition from fossil fuel-based generation, particularly coal, to renewable energy sources (RES). Distributed generation is increasingly coming into focus — a network of relatively small facilities located within communities or businesses that can cover their own consumption and, if necessary, generate surplus for the grid. This approach is increasingly seen as an effective response to energy security threats and as a tool for increasing the energy autonomy of communities.

The development of distributed generation opens up new opportunities for communities, especially in the context of critical infrastructure. Installing solar power plants on municipal buildings or public utility facilities makes it possible to provide electricity for the most essential functions, even when access to centralised networks is limited. In many cases, such projects are already financially viable, with payback periods of between 3 and 5 years.

Against this backdrop, the structure of heat consumption is also changing. Over the past decade, the number of users of district heating (DH) has declined significantly, and in some cities such systems have ceased to exist. This is due to ineffective state tariff policy, which has led to a lack of investment in the sector. At the same time, the use of the latest technological solutions, including RES in centralised heating systems, can be very effective, but such measures are not supported at the state level. Therefore, it is too early to talk about decarbonisation reform of central heating. On the one hand, such processes create challenges for traditional models of heat generation and distribution, but on the other hand, they open up opportunities for local solutions, such as small cogeneration plants, heat pumps and/or hybrid systems including RES.

The experience of individual cities shows that even with limited resources, effective energy infrastructure management is possible. Thanks to the modernisation of heating networks, full consumption accounting, equipment upgrades and cooperation with international donors, some municipalities have achieved financial stability in their energy enterprises.

These examples demonstrate that practical models for implementing a more sustainable energy system at the local level exist. However, the process of change remains uneven. Financing difficulties, the technical condition of networks and other barriers significantly complicate the roll-out of sustainable distributed generation on a national scale. 

In this situation, it is important to consider both the potential of local initiatives and the systemic constraints that affect the pace and effectiveness of energy sector recovery.

Security threats

• Damage to infrastructure, risks of further attacks on energy facilities.

• Potential instability of gas supplies.

Financial barriers

• Frozen tariffs, lack of investment return mechanisms and, consequently, lack of motivation to invest in energy efficiency and RES.

• Limited funding for state programmes to support sustainable energy.

• Limited access to finance for municipalities (IFIs' minimum project size requirements).

• Gap between needs and current investments in the sector.

• Limited availability of new technologies, including due to high capital investment costs.

Regulatory issues

• Non-transparent tariff setting, refusal to include investment components.

• Lack of a comprehensive heat supply development strategy and uniform rules for all.

Institutional and administrative barriers

• Weakening of decentralisation: some decision-making has shifted from the local to  regional and national levels.

• Lack of competent personnel due to the war.

Technical constraints

• Insufficient development of demand management and RES balancing systems.

• Problems at the level of DSO operators, loss of distribution revenues.

• Worn-out infrastructure, high losses in heating networks (up to 30%).

• Lack of quality project supervision and poor project documentation.

Populism and political inertia

• Lack of sufficient and effective incentives for reforming the heat supply system.

Data and analytics

• Lack of open data for strategic planning.

• Unavailability of forecasts on electricity import/export volumes.

Objective: Develop distributed generation from renewable energy sources and scale up such projects to increase the resilience of communities and the energy system of Ukraine.

1.1. Support the development of distributed generation from RES at critical infrastructure facilities

• Update the tariff-setting methodology for critical infrastructure services to encourage the installation of RES generation (e.g. solar/wind power plants at water utilities and hospitals).

• Support small and medium-sized municipalities through state-owned banks to attract international financial assistance for the implementation of RES projects at critical infrastructure facilities.

• Support for RES pilot projects through public-private partnerships as a potentially effective mechanism for cooperation between communities and businesses.

1.2. State support for the development of self-production (active consumer) mechanisms

• Abolition or revision (increase) of price caps in various segments of the electricity market.

• Synchronisation of legislative acts describing the concept of active consumption: Rules of the retail electricity market; Distribution System Code; Law of Ukraine ‘On Alternative Energy Sources’; Law of Ukraine ‘On the Electricity Market’; Procedure for the sale and metering of electricity produced by active consumers and for payments for it.

• Ensuring the systematic work and coordination of the National Energy and Utilities Regulatory Commission (NEURC) with distribution system operators, commercial metering service providers and electricity suppliers, regarding the implementation of measures necessary for the operation of active consumers.

• Creation of step-by-step instructions by the NEURC on the application of the self-production mechanism for enterprises serving critical infrastructure facilities.

• Review of the volumes of electricity that an active consumer can release into the grid under the self-production mechanism, in order to increase the volumes that can be released.

• Ensuring flexibility in legislation regarding the organisational and legal forms of energy communities, providing for the possibility of their functioning as cooperatives, associations, limited liability companies or other legal entities. At the same time, it should be mandatory that the internal documents of such communities guarantee democratic control, open participation, social orientation of activities and a mandatory mechanism for reinvesting profits in infrastructure development or social needs of the community.

• Ensure integration of existing energy decentralisation tools (active consumer mechanism, aggregation, small distribution systems) into the overall legal and political context of energy community development, with the possible creation of a national support programme.

• Continuation of the State programme ‘Affordable loans 5-7-9%’ for financial support for the purchase of solar and wind power plants, as well as equipment for electricity storage.

1.3. Development and implementation of municipal energy plans (MEPs)

• Introduction of a system of ‘energy consultants’ for communities and other interested parties to assist with the identification of potential projects, analysis of energy consumption, development of technical specifications, feasibility studies, project implementation support and search for funding.

• Monitoring the availability and mapping of local energy plans, the targets set in these, key indicators and reports on their implementation. 

• Expert support to communities in preparing projects for financing: investment projects, feasibility studies and project and cost estimates for the most promising energy efficiency and RES projects.

• Improving the quality of documentation, work and relevant state supervision, in particular through support for the activities of energy managers. 

• Simplifying the methodology for developing MEPs and including a climate component in it.

• Regular training programmes/courses/workshops for community representatives on the implementation and realisation of energy efficiency and RES measures.

Decisions are taken by: Ministry of Economy of Ukraine, Ministry of Energy of Ukraine, Ministry of Community and Territorial Development of Ukraine, Ministry of Finance of Ukraine,  National Energy and Utilities Regulatory Commission (NEURC), State Agency for Energy Efficiency and Energy Saving of Ukraine (SAEE), local authorities.

Objective: To improve the efficiency and development/preservation of centralised heat supply systems, laying the groundwork for the future transition from fossil fuels to renewable energy sources.

2.1. Establishing economically justified tariffs

• Establishing transparent tariffs that encourage producers to invest in improving the efficiency/development of the heating system while protecting consumers from unfair monopoly prices.

• Updating the tariff-setting methodology to ensure that producers have an interest in implementing energy efficiency measures in their networks.

• Updating the tariff-setting methodology to motivate producers to use renewable energy technologies for heat generation. 

2.2. Ensuring targeted financing for the modernisation of enterprises/infrastructure in the heat supply sector

• Launching and replenishing credit, grant and state programmes (e.g. through the Decarbonisation Fund).

2.3. Improving heat efficiency in buildings with individual heating units (IHUs) and local heating systems

• Creating conditions for the development of a new service sector – maintenance of IHUs and other services that improve the efficiency of local heating systems. A new type of activity with free market pricing, i.e. without regulatory intervention.

• Supporting the development of decarbonisation in the sector, including through the use of geothermal energy for heating based on the networked use of heat pumps.

2.4. Creating the conditions for the development of district heating under uniform rules

• Preparing a simplified and transparent system for new heat producers to enter the market.

2.5. Consumer protection

• Publication of financial statements of heat producers and the amount of compensation for tariff differences received from budgets at all levels.

• Revision of the existing system of targeted subsidies for consumers: all low-income households pay for utilities in full and have incentives to invest in energy efficiency and renewable energy sources.

• Conducting a mass, comprehensive information campaign in the field of heat supply to reduce the risk of non-payment when prices rise.

2.6. Implementing pilot projects to modernise hot water supply

• Development and implementation of projects to modernise the hot water supply system in multi-storey buildings with a view to switching to RES for water heating in the summer.

Decisions are taken by: Ministry of Energy of Ukraine, Ministry of Community and Territorial Development of Ukraine, National Energy and Utilities Regulatory Commission (NEURC), local self-government bodies.

All-Ukrainian Agency for Investment and Sustainable Development, Association “Energy Efficient Cities of Ukraine”, Centre for Environmental Initiatives “Ecoaction”, DiXi Group, NGO Ecoclub, Energy Act for Ukraine Foundation, Energy Transition Coalition, Greenpeace Ukraine, Razom We Stand, RePower Ukraine Foundation.