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Energy economy. Is it beneficial for the government?

13 July 2017

The period promised by the government – early 2017 – expired a long time ago, and out of the large package of laws on introduction of a state system for supporting energy efficiency, the parliament has approved only the framework document – the law on the Energy Efficiency Fund. This model is based on European Directives, and it has been successfully tested in the EU states.

What was the obstacle? Was it negligence of the members of parliament or an attempt to keep the non-transparent gas and utility payments using subsidies for tens of billions of hryvnias for as long as possible? Or, maybe, such delay conceals the attempts to gain control of the financial flows in a new system, where dozens or even hundreds of billions of dollars will be circulating every year to increase energy efficiency?

Having talked to independent experts, members of the government, and the parliamentarians, Hlavkom came to a conclusion that the slowdown of the Fund's launch can to a certain extent be explained by each of these reasons.

The concept of the Fund, developed jointly with the EU experts, as well as reform projects in the related spheres such as individual heat supply accounting, energy efficiency in buildings and regulation of contractual relations between utilities providers and consumers prevent abuses and corruption, but smart business people are looking for new opportunities. Hlavkom sources say that members of parliament belonging to different political forces easily “vote down” the laws necessary for the state and the people by introducing numerous amendments to the bills approved by the respective Committee and presented in the session hall for voting.

One can see that in every faction there is a group of MPs who do not vote for the draft laws that would decrease the utility payments for an ordinary Ukrainian several times and make a modernized house not only warmer, cozier and safer, but increase its value as well.

Over the last four years, the volumes of subsidies from the budget for compensation of utility payments grew from 8 to 50 billion hryvnias (the actual needs in 2017 is 75 billion hryvnias). The key idea of the Fund’s concept is to ensure that the “energy” subsidies are used to finance the energy efficiency activities, and the related law should create appropriate conditions for this Fund to function.

In order to stimulate consumers’ saving and to turn the subsidies into investments in energy efficiency, the remaining amounts of unused state support should be monetized. The government promised to do this by early 2017. However, the state subsidies continue to be actively used in the clearing settlements of Naftogaz of Ukraine with the municipal energy sector enterprises and the state budget despite the fact that the transfer to bilateral settlements between all market participants using only hard cash should have taken place a long time ago.

Will the EU accelerate adoption of legislation?

On 8 June, MPs adopted a draft law of the Energy Efficiency Fund prepared for the second reading. According to the information provided to Hlavkom by a Member of Parliament, Chair of the VR Subcommittee on Energy Saving and Energy Efficiency Oleksii Riabchyn, four sessions of the working groups had been convened before this. “The first was with representatives of international organizations. We talked to the donors in order to understand their concept. The following meetings were with banks, embassies, and with consumers of the services (of the Energy Efficiency Fund – Hlavkom). I was especially interested to hear the opinion of the main clients – the condominiums (associations of co-owners of multi-apartment buildings). All comments have been taken into consideration,” the MP assured us.

The parliament had to accelerate the process of adopting the law on the Energy Efficiency Fund because due to its absence the European Union could slow down the decision on the first installment of macro-financial assistance for Ukraine – 600 million Euros. “Before making a decision to provide assistance, the EU had to make sure that Ukraine complies with the so-called indicators, which include the law on the Fund,” said a Member of Parliament, Deputy Chair of the VR Committee on Construction, Housing and Utility Infrastructure Aliona Babak.

The government promises to turn the Fund into a long-term investor in modernization of the extremely dilapidated housing stock of Ukraine. Furthermore, Ukraine has to fulfill the commitments agreed with the West concerning implementation of the EU directives on energy efficiency (Ukraine’s commitments to the Energy Community and to the EU in accordance with the Association Agreement).

At the same time, adoption of a single framework document will not solve the problem in general. MPs should not forget that the Fund is only one in the package of the required steps, and the EU’s intentions to finance its activities are connected to the need to adopt all necessary laws, of which the EU representatives remind the Ukrainian MPs again and again. In order to launch the Fund’s work, a number of other laws have to be adopted, namely On Energy Efficiency of Buildings, On Commercial Accounting of Heating Energy and Water Supply, On Housing and Utility Services. All of them were only adopted in the first reading. Some of them did not pass through the second reading and were returned to respective committees for revision.

Monetization of Subsidies Is Still a Dream

During the pompous Energy Efficiency Forum held in June 2016, which gathered more than 1 000 participants, Prime Minister Volodymyr Hroisman promised that the Fund would be launched in early 2017.

The contribution from ordinary consumers to the Fund, in addition to the bank loan, could be the remaining unused amount of completely monetized subsidies. This is a requirement of the international partners of Ukraine. However, it looks like the period of implementation of the project will be postponed for years, although it should have been done even before the new prices for gas, electricity, and heating were introduced.

According to various estimates, Ukraine consumes 3-5 times more energy producing materials compared to the developed Western countries, which means it has an extensive potential for saving. The proposed model of modernization of the housing stock in Ukraine has been successfully tested in the European Union states. One figure is enough to justify the feasibility of modernization: every year, the Ukrainian budget spends about $ 3 billion of external loans to buy gas.

Every Ukrainian will be able to invest part of the subsidies in modernization of his/her house as well as receive a soft loan, low interests on which are promised by foreign donors at the expense of grant resources. As a result, heat losses of households can be reduced by 50–70%, which means a decrease of utility bills; this would enable the state to reduce its expenses on subsidies.

“If we reduce energy consumption, then the need for subsidies will decrease. So far, this money is being used inefficiently. Every second family in Ukraine is poor, and these people will not run to banks and receive loans, having no possibility to use for heat insulation of their houses the saved money provided by the state as subsidies,” Aliona Babak says emphasizing the need for complete monetization of subsidies – the funds provided by the state should be transferred to each family’s bank card. Simultaneously, subsidy recipients should be audited to detect fictitious grounds for receiving subsidies, and control of the provided subsidies should be much tougher, which in its turn will also save significant budget funds.

Annual gas consumption for heating residential and public houses totals almost 19 billion cubic meters. According to expert assessments, the reduction potential exceeds 11 billion cubic meters – this is almost 60% of the volume imported by Ukraine every year. To buy gas, Naftogaz of Ukraine uses loans increasing the debt to international financial organizations.

When the Fund Will Start Working

The law on the Energy Efficiency Fund was adopted, but how long will it take for it to become operational? For instance, the launch of the NABU activities – from the moment of adoption of the law in October 2014 to the oath taken by the first detectives – took one year. The process of establishing the new membership of the energy regulator – the NERC – has not started yet, although the law was adopted as far back as the end of September 2016. The most optimistic expectations regarding the Fund are those of the Cabinet of Ministers. “Organizational issues should be resolved by the fourth quarter of 2017. Our Western partners emphasize that their reform process lasted 10-15 years, yet Ukraine has a unique chance to use their experience and do everything much faster. All the necessary draft laws are being prepared for the second reading. We hope that the parliament will pass them in due time”, Hlavkom was told by the Vice Prime Minister for Regional Development, Construction, Housing and Utilities infrastructures Hennadii Zubko.

According to him, “in order to launch the Fund, seven governmental documents have to be adopted – they are being drafted by the Ministry of Regional Development”. “There are already basic draft documents available, first of all – the statute. However, their final wording depends on the final version of the law on the Fund”, the Vice Prime Minister assured us.

However, the parliament does not believe this will happen. “The government is being optimistic – they promise the Funds will be created before the beginning of the upcoming heating season. However, I think this will happen next year,” MP Oleksii Riabchyn says. “Still, by-laws will be needed. Money for the Fund has already been allocated from the State Budget (400 million hryvnias – Hlavkom), but the money promised to us by the European Union –100 million Euros – will only come to us in April 2018 – this is their bureaucratic procedure”.

Yet, the Energy Efficiency Fund on its own will not give us positive results if the state fails to create respective environment for business. “The main role of the state in this process is to change the business environment and not just to create the Fund,” says Serhii Maslichenko, Associate Director of the Energy Efficiency Department of the European Bank for Reconstruction and Development (EBRD).

Experience of implementation of similar projects in Ukraine shows that the Fund will not start its work within the time lines promised by the government. Most likely, it will happen no earlier than in two years. So, the wallets of ordinary consumers will continue to be emptied by the high payments for supply of heating, gas, and electricity.

What Will Prevail: Monetization or Mutual Offsets

Experts are convinced that before introducing the world prices in the domestic gas market and transferring to the new tariff-setting model, appropriate legal and organization conditions should be created and state support should be introduced for projects aimed at decreasing the volumes of energy consumption by households. “One of the stages of transformation of the tariff-setting model is preparation for monetization of subsidies. If the state has made a political decision to replace one tariff-setting model with another, then monetization of subsidies, organization of accounting of the consumed energy producing materials, market regulation, and introduction of energy efficiency – all this should have been done if not before then at least during the process (of the transition to another model – Hlavkom). None of this has been done…” Oleksii Riabchyn says.

The need to start monetization of subsidies is also actively emphasized by the Deputy Chair of the VR Committee on Construction, Housing and Utilities Infrastructure Aliona Babak. “MPs adopted a law obliging the government by 17 March of the current year to prepare a resolution on monetization of subsidies. But the resolution still has not been prepared. Unfortunately, the process is hampered by the absence of a vision of how monetization should work,” the MP says. She stresses that the key authors of this document are the Ministry of Finance and the Ministry of Social Policy jointly with the Ministry of Regional Development and the National Bank, which is responsible for establishing special accounts for subsidy recipients.

However, the strongest resistance is that of the lobbyist MPs, who are trying to preserve the possibility for Naftogaz of Ukraine to continue making clearing settlements with heat utility companies and other organizations – using subsidies. According to the Ministry of Regional Development, more than 85% of all payments using subsidies are made in the form of mutual offsets, which means non-transparent clearing payments take place. Hlavkom already wrote that the government admitted inappropriateness of non-transparent mutual offsets that lead to the growth of gas debts of utility companies to Naftogaz.

“It should be controlled by the Ministry of Finance. The procedure is complicated and non-transparent, and the monitoring is also weak,” Vice Price Minister Zubko admits. However, Head of the Ministry of Finance Oleksandr Danyliuk ignored the journalists’ request for information about the results of monitoring the clearing payments of Naftogaz and the detected misuses.

Commenting on non-transparency of mutual offsets, Hennadii Zubko said that monetization should be introduced as soon as possible: “The first step toward solving this problem is transition to the payments of subsidies with hard cash. This will make the system transparent, decrease the possibilities for manipulations and make it possible to clearly identify the party which is not performing its obligations,” the Vice Prime Minister says. He explains the delay in this process by the need to complete the process of verification of the recipients of social payments – last year, the Ministry of Finance started examining legitimacy of provided subsidies.

At the same time, the head of Naftogaz in one of his interviews clearly stated that he supports complete monetization of subsidies as a way to get rid of the inefficient system of payments and the “locomotive for development of the energy efficiency system [1]”. It is quite possible that this can really coincide with Naftogaz’ interests since absence of funds in the accounts of heating utility companies deteriorates the already catastrophic situation with many years of debts of the latter to Naftogaz for the supplied gas.

The question about what is really behind the Government’s benevolence with subsidies used for the clearing payments of Naftogaz, will be answered more completely by the Accounting Chamber. MP Aliona Babak says she found a violation of the budget law and sent a request to this agency.

The investigation was carried out within the framework of the USAID Transparent Energy project. The author’s position may not coincide with the position of the United States Agency for International Development and the DiXi Group Analytical Center

Natalka Prudka, Glavkom

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