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Freie Stellen Text
Gastwiss. Programm Text

2.3. Reforms in detail with comments and links

Brief critical review of the energy part of the Programme of Economic Reforms in Ukraine in 2010-2014

Dr. Petra Opitz, DIW econ

The energy part of the Programme of Economic Reforms of the new Ukrainian government covers the electricity, the coal and the oil&gas sectors. Energy efficiency is also included, as this topic is most important for energy dependent and energy intensive Ukraine.
Common characteristic of the respective explanations in the Programme is good analysis of the current situation and of the main reasons for the so far shortcomings of the sectoral developments. To a large extend the Programme outlines important steps in order to improve the situation. However, many of the proposed measures are well known from previous strategies and programmes and many of the proposed measures are formulated too general in order to access whether they would lead to success. The devil will be in the details how measures will be designed.


Electricity sector and energy efficiency

It is good news that a target is set to improve energy efficiency of the GDP by 20% until 2014. Although this target is not very ambitious from the point of view of the tremendous efficiency potential of the Ukrainian economy, it seems quite challenging being aware that there was not much success in this area during the past. On the other hand, the Programme misses a straight forward policy design with the respective instruments and incentive schemes how to reach that goal.
The stated general aim to bring tariff subsidisation in all energy sectors to a termination would, of course, provide a substantial incentive for energy efficiency improvement. But first, that would not be sufficient and second, the proposals for improvement of tariff setting and deregulation of energy prices mentioned in the Programme are not fully convincing.
The proposed implementation of the programme for installation of meters of electricity, gas and heat is a long lasting non-success story since the end of the 1990s. The secondly proposed implementation of the branch programmes for energy efficiency 2010-2014 will heavily depend on state budget funding as the programme itself focuses on project by project realisation and does not set a stimulating frame for energy efficiency improvement.
Enhancing independence of the regulatory authority, which is required according to the Programme, is indeed needed. But how this goal could be achieved is not elaborated further.
Some of the described steps towards cost covering electricity tariffs are quite concrete and convincing. Thus, abolishment of the moratorium on electricity price increases, termination with electricity price subsidisation of industrial and communal consumers, step by step reduction of electricity price subsidisation for the residential sector combined with the development of a system of direct financial compensation for law income households are important requirements since many years. The same is true for the proposals to develop a functioning electricity market and to privatise the energy supply companies and the heat generating companies as well as to allow for free access to fuel resources for electricity generation. However, if it comes to the details of implementation procedures, some contradictions appear.
The explained approach, that retail electricity tariffs will be "determined on the basis of covering economically reasonable costs of generation, transportation and supply of electricity taking in mind both the interest of final costumers and the aim to give an incentive for energy saving", does not seem to be in line with termination of subsidisation and developing a real electricity market. The same is true for the stated intention to elaborate a new tariff system which would stimulate investment and improvement of efficiency of energy companies. In a real electricity market the only area for regulation would be the grids. No regulation for generation or final costumer prices would take place. Thus, the proposals in the Programme leave much room for different policies to be carried out and it is not yet clear they would really lead to development of market based prices.


The coal sector

This sector is still highly subsidised and the described plans to split the sector into three categories of mines - profitable mines, which attract private investors, potentially profitable mines, which might become attractive for investors in case favourable condition will be provided, and non-profitable mines, which need to be closed down - are being discussed and half-implemented since 1999 at least. Also the analytical part for this sector is lacking explanation why and where all the huge money has been lost, which was already spent for mine closure, modernisation and making mines more profitable. This was and still is a major obstacle for the coal sector reform, but not mentioned at all in the Programme. Therefore, not surprisingly there is much doubt about the success of the proposed steps.
However, some of the proposed measures are more promising as they are quite concrete and therefore easier to control and to report on. First, the abolition of the existing requirement for electricity generators to buy the needed coal exclusively from the sate owned company "Coal Ukraine" and liberalisation of coal imports would be important steps to liberalise the Ukrainian coal market. However, the first step is not mentioned any longer when the steps are prioritised by time horizons and the second is planned to be carried out only until 2012, although it would be easy to implement this proposal immediately.
The proposals concerning price regulation for coal do not make sense in case the intention for coal marked liberalisation is serious.
To reduce mine subsidisation and to set up instead a programme of re-qualification and employment support for miners loosing their jobs by mine closures leads into the right direction. But, this approach was also already developed end of the 1990ies. The question will be, if this time, the approach will be implemented successful. The provided success indicator "lacking negative social economic effects in the mining regions", however, seems to be very extensile.


The oil&gas sector

The analysis of the in the Ukrainian oil&gas sector lights up some of the most important reasons for its permanent problems, which did not only put substantial pressure on the state budget (the debt of the national oil&gas holding NaftogazUkrainy amounted to 2,5% of GDP in 2009) but also led to instability and risk of the gas transit to Europe.
As main areas for improvement the Programme marks:

  1. Attraction of private investment and development of competition in the oil&gas sector in order to boost oil and gas exploration and production in Ukraine
  2. Restructuring and unbundling of NaftogazUkrainy
  3. Increase of gas tariffs
  4. Reduction of non-payment
  5. Increase of the quality of refineries' output via introduction of EU quality standards

While proposed measures for the first area seem to be quite adequate, the measures for the remaining areas are less concrete, sometimes repeating non-fulfilled requirements from the past. However, the divestment of the high pressure gas pipelines and the gas storages from NaftogazUkrainy into a separate state owned company would be an important first step in order to increase transparency and reduce cross-subsidisation in the gas sector. Guaranteed and transparently regulated third party access to the pipelines and vertical unbundling would be first steps in order to improve the framework for private investment into gas exploration and production.
The proposed measures to improve tariff regulation and pricing policy are still not precise enough and not sufficient for development of a real market oriented gas sector. There is no vision until 2014 in the Programme for introduction of a market based pricing system but still the aim to improve price regulation in all levels of the vertical chain. Thus, it remains unclear if such an approach would provide enough incentives for private investors and would help to overcome the situation of underinvestment in the whole sector as well as terminate subsidisation from the state budget until 2014. Although the introduction of a system of direct subsidisation of low- income households instead of the current general subsidisation of gas prices for residential consumers is scheduled for 2012, it remains unclear, why finalisation of restructuring of NaftogazUkrainy is planned for 2014 only.
Summing up, the Programme focuses on the right problems but it remains unclear whether the proposed measures will lead to the needed and planned success.


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