heating in housing and utilities sector

Heatinginhousingandutilitiessector:

StatusandProspects

DOCUMENTFORDISCUSSION

ThereportwaspreparedincooperationwiththeGovernmentofGermany,theEUDelegationto

Ukraine,theEUSupportGrouptoUkraine,BerlinEconomics,CoordinationCenterforInteractionwiththeCMUatthePresidentofUkraine,NationalReformsCouncil,theStateAgencyforEnergyEfficiency

andEnergySavingofUkraine,expertsoftheWorldBankGroupinUkraine

TheMinistryofRegionalDevelopment,Construction,

HousingandCommunalServicesofUkraine

March25th,2016

Heatenergyinhousingandutilitiessector:StatusandProspects(DOCUMENTFORDISCUSSION)

2

Contents1. Executivesummary..................................................................................................4

2. ReviewofHUSmarketforhouseholds....................................................................5

2.1. EstimationofHUSmarketcapacityforhouseholds........................................5

2.2. Paymentforutilityservicesbythepopulation................................................5

2.3. HUSpaymentbysubsidies...............................................................................7

2.4. Reformingthegaspaymentsystem(commitmentstotheIMF)..................10

3. Impactofheatingefficiencyonenergybalanceandmacroeconomicindicators 12

3.1. Energybalanceandconsumptionefficiency................................................12

3.2. Heatproduction,supplyandconsumption...................................................13

3.3. Economicevaluationoflosses.Costsofinaction.........................................13

3.4. Assessmentofoverallinvestmentneedsandgasconsumptionreductionpotential.....................................................................................................................14

4. Individualheating...................................................................................................15

4.1. Energyresourcesforindividualheating........................................................15

4.2. Centralizedgassupplysystem(Oblgazes).....................................................16

4.3. Tariffsforcentralizedgassupplyandmarketcapacity................................19

4.4. Thesystemofpaymentsforcentralizedgassupplies...................................23

5. Centralizedheating................................................................................................24

5.1. Heatenergyproduction.................................................................................24

5.2. Heatenergytransportation...........................................................................28

5.3. Heatenergyconsumption..............................................................................29

5.4. Tariffsforcentralizedheatingandhotwatersupply....................................31

5.5. Commercialmeteringandheatconsumptionnorms...................................34

6. Analysisoftheschemeofpaymentsforcentralizedheatingforthepopulation.38

6.1. AnalysisofdeadlinetopayforcentralizedheatconsumedbythepopulationandNaftogazgassuppliestoDHP.............................................................................38

6.2. Schemeofpaymentsforcentralizedheatingforhouseholds......................40

6.3. AlgorithmformutualpaymentswithHUSsubsidies.....................................41

6.4. DebttoDHCforcompensationinthedifferenceoftariffs...........................41

6.5. Analysisofaccumulateddebtsinthesector.................................................42

6.6. Suggestedapproachtodebtrestructuring....................................................42

7. DHCinvestmentneedsandexpectedeffect.........................................................43

7.1. Assessmentofoverallinvestmentneeds......................................................43

7.2. Assessmentofminimalinvestmentneedstomodernizeheatnetworks....43

7.3. Assessmentoffirstprioirityinvestmentsinthereplacementofboilers......44


3

8. ThecurrentstateofDHPinvestmentprojectsandbarrierstotheirimplementation..............................................................................................................45

8.1. Analysisofcompletedinvestmentworksatheatproductionin2015.........45

8.2. Analysisofprogrammesonenergyefficiencyofheatproduction,distributionandconsumption...................................................................................47

8.3. IBRDprogrammeeffeciency..........................................................................52

8.4. TheintroductionofprocurementsforprojectimplemenationontheexampleofSweden....................................................................................................53

8.5. BarrierstotheimplementationofDHPmodernizationprojects..................54

9. LegalregulationofHUSmarket.............................................................................57

9.1. Legislativeframework....................................................................................57

9.2. Licensingandcontrolofcompanies(NEURC)...............................................58

10. Glossary..............................................................................................................60

11. Sources...............................................................................................................62

12. Annexes..............................................................................................................63

12.1. Annex1.HUSbillforanindividualhouseheatedbygas..........................63

12.2. Annex2Schemeofgaspurchasefinancingtill2015................................64

12.3. Annex3.ReferenceonHUSkeyindicators...............................................65

12.4. Annex4.ChangeintotalHUSbillforamultistorybuildingappartmentinthemonthofheatingseason.....................................................................................66

12.5. Annex5.FormulasforsharesofreceivedfundsundertheCMUNo21767

12.6. Annex6.ReferenceonreducednaturalgasconsumptionattheheatsupplyobjectsofallformsofownershipasofDecember2015...............................70

12.7. Annex7.ReferenceonthereplacementofnaturalgasconsumptionattheheatsupplyobjectsofallformsofownershipasofDecember2015................72

12.8. Annex8.Supplywithheatingand/orhotwaterusingalternativefuels.74

12.9. Annex9.Referenceonkeyenergyefficiencyinvestmentprogrammes..75

12.10. Annex10.Referenceontechnicalassistanceprogrammesinenergyefficiencyarea............................................................................................................78

12.11. Annex11.UDHEEPexpectedresultsfor2021..........................................80

12.12. Annex12.Basiclegislationregulatinghousingandutilitysector.............82

12.13. Annex13.CompositionoftheWorkingGroup.........................................85


4

1. Executivesummary

• Residential and public sector accounts for 60% of the total natural gasconsumptioninUkraine

• The dependency on natural gas imports (19.5 billion m³ in 2014 and 16.4billionm³in2015)isthebiggestchallengetoUkraine'senergysecurity

• Centralizedheating sector is oneof thebiggestnatural gas consumers - 7.2billionm³in2015)

• The sector has huge inefficiencies in terms of heat production andtransmission (outdatedDHPandTEP facilities) and in termsof consumption(largelossesinbuildings).Accordingtoourestimates,gasconsumptioncouldbereducedby5.0billionm³annually

• In terms of investment efficiency exaclty the modernization of supplies(isolation of networks and upgrading of boiler houses) has the greatestpotential, thus, having invested about USD 6.0 billion, the reduction in gasconsumptionmaybeabout2.4billionm³

• As of today the international financial institutions and donors are ready toinvestgreatelyinDHP(aboutUSD0.8billion),buttoensuretheeffectiveuseofthefundsandattractnewonesit'sneededtosolveanumberof industryproblems:

− Torestructuredebtsthroughoutthesupplychain(population/DHP/Naftogaz)

− Toreviewthepaymentsystem,whichislargelycontrolledbythestateandcreatessignificant"liquidity"gapsformarketplayers

− To review the tariff-making system that currentlydoesnotmotivatebusinessestoinvestinfacilities

− Tostreamlinethesectoral legislativeframeworkandalignitwiththeEUstandards

− To review the governmental procedures for selecting and approvingprojects, which significantly slow down the implementation ofinvestments

• The main positive industry trends are the fulfillment of GovernmentcommitmentstotheIMF,namely:

− A significant progress in installation of commercialmetering devices(about50%ofbuildingsasoftheendof2015)

− A gradual increase in tariffs for population to economically justifiedlevel based on gas import price and reduced deficit of the JSC"Naftogaz"

− Transfer to a target public subsidy system,which, on theonehand,reduces the State Budget expenditures and, from the other hand,motivatespeopletosaveenergy


5

2. ReviewofHUSmarketforhouseholds

Thepopulation is themainhousingandutilities services (HUS)consumerand targetgroupaimedbythestatepolicyinthissector.ThestateandlegalentitiesarealsoHUSconsumers,buttheirshareintotalconsumptionismuchlowerand,forexample,forcentralheatingitmakesupabout30%.

The HUS sector in Ukraine is characterized by a significant state intervention ineconomic relations, including the service price setting. This applies particularly toenergy services (heating, gas and electricity supplies) for which the final householdpricesaremuchlowerthananeconomicallyjustifiedlevel.

2.1. EstimationofHUSmarketcapacityforhouseholds

As of today, theHUSmarket capacity is far from the economic realities in termsofprices for end users. But Ukraine is actively reforming this sector and the mainobjectiveistotransfertothemarketprinciplesoftariffsetting.Thus,accordingtothecommitments to the IMF, since April 2017 the household price for natural gas andheatingshouldbebasedonnaturalgasimportprice(formoredetailsseeParts5and6).

In2015,inthefinalpricestheHUSmarketcapacityforhouseholdsmadeupUAH82.7billion,but in2017 thecapacitymay raiseup toUAH136billion (mainlydue to theincreaseinheatingandgastariffs).

Diagram2.1.ThestructureofHUScharges,billionUAH

Source:dataofStateStatisticsServiceofUkraine,Workinggroupanalysis

2.2. Paymentforutilityservicesbythepopulation

TheamountofHUSbillischaracterizedbyconsiderableseasonalitythatexplainstheneedforbuildingheating.InthewintermonthstheHUSbillsmaybetwicemorethanHUSbillsinthesummermonths.

65,0(79%)

17,6(21%)

population

budget

Sources

28%

12%

23%

17%

11%8%

1% Gasforindividualheating

Gasforotherpurposes

heating

electricity

Buildingmaintenance

Water

Waste

TotalUAH83billionin 2015

26%

11%

31%

17%

8%

6% 1%TotalUAH136billionin 2017

TheHUSsectorinUkraineischaracterizedbyasignificantstateinterventionineconomicrelationsandservicepriceformation

TheHUSmarketcapacityforhouseholdsinpriceswillraisefromUAH82.7billiontoUAH136billion(mainlyduetotheincreaseinheatingandgastariffs)


6

Diagram2.2.ThetotalHUSchargespaidbyhouseholds,UAHbillion


In2015thehouseholdspaidUAH61.9billionthatmadeup95.2%ofthechargedUAH65.0billion.Forcomparison,in2014thehouseholdspaidUAH47.0billionor93.4%ofthechargedUAH50.3billion.

TotalhouseholddebttoHUScompaniesisUAH11.5billionasoftheendof2015.

Diagram2.3.ThestructureofbudgetpaymentsforHUSbenefitsandsubsidies

Source:Naftogazdata,Workinggroupanalysis

AccordingtoNaftogazin2015thegassubsidieswerechargedaboutUAH7.8billionmorethanactualconsumption.Thus,therealneedinsubsidieswasUAH17.6billion.

Diagram2.4.Levelofservicespaidbyhouseholds,billionUAH


5,95,7

5,1

2,2 2,9 2,5 2,7 2,9 2,9

3,8

5,96,8 6,2 6,3

5,6 5,6

4,43,7 4,0 3,663,7

4,5

7,08,3

-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

3001 000 0002 000 0003 000 0004 000 0005 000 0006 000 0007 000 0008 000 0009 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(50,3bln)

2015(65,0bln)

charged temperature

19,9subsidies

5,5benefits

3,0

14,0

8,4

ChargedforHUS "Realmoney" Clearingpayments Budgetdebtasof31.12.15

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

In2015thehouseholdspaidUAH62billionthatmadeup95%ofthechargedUAH65billion


7

AsfortheHUSchargingandhouseholdpaymentsin2014-2015therearetwofactorsthatshouldbenoted:

1) asignificant increase in tariffs (mainly forenergy resources) resulted inbiggerchargedamountsandaffectedthepossibilityofhouseholdstopaythebills.

2) a significant increase in HUS subsidies, in particular, the budget for subsidiesandloansforthepopulationraisedfrom6to25billionhryvnia.Itreducedthechargedamountsandpositivelyinfluencedthelevelofpayments(asfarasthesubsidiesareprovidedtotheleastsolventhouseholds).

Approximation of economically reasonable rates and increased social support aregenerallypositivefortheHUSmarket.Thenegativepointisthatinthecurrentsystemthemost subsidies are clearing payments, which in turn is a barrier to finance theoperatingactivitiesoftheindustry(formoredetailsseePart7).

ThelevelofHUSpaymentbythepopulationlargelydependsontheregions.Theworstindexes are in Dnipropetrovsk and Donetsk regions, where the period outstandingexceeds5months.Forcomparison,asignificantnumberofregions(mostlyinWesternUkraine)havemuchbetterpaymentdiscipline.

Diagram 2.5. Population debts for HUS by regions as of 31.12.2015 (excludingelectricity)

Remark:AnegativedebtmeansthattheregionhasanoverpaymentforHUS,whichwasmainly

formeddueto"excessive"subsidies(seePart3.3).


2.3. HUSpaymentbysubsidies

Despite the fact that the beneficiaries are households, the most subsidies aretransferredtotheaccountsofenterprisesaspaymentsforservicesandarenot"real"money (used as clearing payments, see Part 7). Moreover, the Budget fulfills itspayment obligations with delay that leads to the formation of debts to HUScompanies.

Lugansk

Donetsk

Zaporizhia

KirovogradDnipropetrovsk

Kyivregion

Vinnytsia

Zhytomyr

Volyn

Lviv

Zakarpattya Ivano-Frankivsk

-217- 2370

5,2 13095,7

-174-

2452,9

7323,4

1300,6

-18-

-63-

3564,9

5512,1

Kyivcity

ChermigivSumy

Poltava Kharkiv

KhersonOdesa

Mykolvaiv

Cherkasy

Khmelnytsk

Rivne

Ternopil

Chernivtsi

9423,4

1631,6

3962,0

-282-

-77-

2162,6

-190-

19033,5

-124--368

-

15643,7

-274-

-88-

-173-

8829mln.hrn.TotaldebtforHUS

2.1 monthAveragetermofdebtforHUSin

Ukraine

In2015theStateBudgetcovered17.0billionforHUSbenefitsandsubsidies

ArealneedinsubsidiesconsideringexcessivegassubsidiesisUAH17.7billion


8

Diagram2.6.Budgetexpendituresforpublicbenefitsandsubsidies

Source:BudgetofUkraine,Workinggroupanalysis

Inaddition,according toNaftogazaboutUAH7.7billionwasexcessivelycharged forhouseholdgassuppliesasof31.12.2015.Thus,a realneed insubsidiesandbenefitsmadeupUAH17.6billion in2015.Mostoftheseexcessivechargesareexplainedbydifferentapplicationoftwo-leveltariffforbillingandsubsidycalculation:

• gas volume for preferential tariff UAH 3.600 is 1.200 m³ for the entireheatingseason,i.e.intheendoftheseasonthebillswillbemainlycalculatedunderbiggertariffUAH7.188andwillbemuchhigher

•atthesametime,themonthlysubsidyisfixedfortheentireheatingperiod

TheamountofexcessivesubsidychargesisexpectedtodecreasetoUAH6.2billionbytheendoftheheatingseason.

UndercommitmentstotheIMFinMay2016thesubsidiesandbenefitsareexpectedtomergeandmostbeneficiarieshavetobetransferredtothesubsidysystemthatwilleasetheburdenonadministrationofbothsystems.

In2016theBudgetofUkraineallocatesUAH35billion for thepaymentofsubsidiesand benefits that makes up 5.1% of budget expenditures. According to the IMFassessments in 2017 theneed inHUS subsidiesmay reachup toUAH80billion (or10%of theStateBudget). TheResolutionof theCabinetofMinistersofUkraineNo106ofMay2015greatlysimplifiedthesubsidyadoptionprocedure. Itresulted inanincreasednumberof subsidy applicants andamountof state social support forHUSservices.

5,817,0

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)

HUSsubsidiesandbenefits,UAHbillion

%ofBudget

BudgetexpendituresforHUSsubsidiesarelikelytoreach10%oftheBudgetin2017

UAH35billionisbudgetedfor2016forpublicsubsidies


9

Diagram 2.7. The number of households that receive subsidies in the respectivemonth,millionhouseholds


Thus,4.6millionhouseholdsreceivedHUSsubsidiesandabout0.7millioncitizensreceivedbenefitsinDecember2015.TheHUSsubsidiesintheamountofUAH19.9billionandbenefitsintheamountofUAH5.5billionweretotallychargedin2015.

Diagram2.8.HUSsubsidieschargedin2014-2015,millionUAH

Source:dataofStateStatisticsServiceofUkraine

Diagram2.9.AverageamountofHUSsubsidies,UAH

Source:dataofStateStatisticsServiceofUkraine

1,1 1,1 1,2 1,00,3 0,4 0,4 0,5 0,1 0,4 0,7

1,11,1 1,2 1,3 1,20,4 0,9

1,42,0

2,73,4

3,94,6

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 864197 244 386 424 455

2 800

5 390

7 521


20142015

354,2 326,4 273,9 335,2 267,6 205,2 212,8 190,9 143,8321,3

771,5

1090,9


UAH25.4billionsubsidiesandbenefitschargedtothepopulationin2015

InDecember2015theaverageamountofchargedpublicsubsidywasUAH1091

4.6millionhouseholdsreceivedsubsidiesinDecember2015


10

2.4. Reformingthegaspaymentsystem(commitmentstotheIMF)

OnJuly21,2015UkrainesignedaMemorandumthatenvisagesanumberofreforms.The Memorandum implementation is a key factor to stabilize and improve theeconomicandpoliticalsituationinthecountryaswellastoattractfundsfromtheIMFandotherIFIs.

According to the commitments, the main focus of reforms in energy sector is toreducethedeficitof"Naftogaz"andincreasetheliquidityofitscashflows.Firstofall,itwillbedoneintwoways:

• ReformofNaftogazfundingsystem;• Increaseinheatingandgastariffstothejustifiedworldmarketprices.

ReformofNaftogazfundingsystem

TheformulafordistributionofpaymentsforcentralizedheatingthatcometotheDHPaccounts shall be reviewed. Itwill enableNaftogas to collect gradually the debts ofcompanies.

Historically the Government directly supported Naftogas by replenishing theauthorized capital (in 2010 – 2015 the authorized capital was replenished to theamount of UAH 160 billion). The replenishment was financed by issuing domestictreasurybonds.

Diagram2.10.FinancingthedeficitofNaftogazin2010-2015(USD160billion)

Source:Workinggroupanalysis

Since 2017 any state support to companies shall be in the formof subsidies to thepopulation,ratherthanthroughdirectsubsidies.

Contribution ofgovernmentbondsintheauthorizedcapital

Saleofgovernmentbonds

Government Naftogaz

NBU Statebanks

Funding securedbygovernmentbonds

Naftogasdeficitin2010-15isthegovernmentdebt(DSB)


11

Diagram 2.11. Overall budget expenditures for Naftogaz funding and HUS paymentsocialsupport,USDbillion

Source:actualdataof IMF,dataofMinistryofSocialPolicy; IMFforecast (under thecurrentsubsidysystem)

As a first but important step towards the introduction of subsidies, the CMUResolutionNo 106 ofMay 1 abolished all restrictions on the right to receive publicsubsidies, other than the purchase to the amount of UAH 50 thousand during theprevious 12 months. In addition, consultants were engaged to work onrecommendationstoreducethereceivablesofNaftogaz.

Increaseinheatingandgastariffstothejustifiedworldmarketprices.

TofulfillthecommitmentstotheIMFinApril2016thetariffratesforgasandheatingshouldbe at the levels that cover 75%of the costs and100% till April 2017on thebasisofworldprices.

Diagram2.12.Ukraine'shistoricalcommitmentstobringgaspricestotheeconomicallyjustifiedlevel

Source:MemorandumwithIMF,Workinggroupanalysis

InApril2015thegasandcentralizedheatingtariffsforendconsumersraisedby285%and67%respectively.

Governmentcommitment:Marketpricefor 3yearstilltheendof2011

Governmentcommitment:Marketpricefor 2,5 yearstillMay2013

Governmentcommitment:Marketpricefor 2 yearstillMay2017

0

100

200

300

400

500

01.2007 11.2008 09.2010 03.2015 05.2017

Actualprice TheGovernmentobligationstotheIMF

IMFprogrammeworth $16,4bln

IMFprogrammeworth $15,5 bln

IMFprogrammeworth $17,5 bln

Gasp

riceforhouseholds,$perthous.m

3

In2015thepricesforgasandcentralizedheatingincreasedby285%and67%respectively

Since2017anystatesupporttoNaftogazwillbeprovidedonlythroughpublicsubsidies


12

3. Impactofheatingefficiencyonenergybalanceandmacroeconomicindicators

Excessiveenergyconsumptioncausessubstantialcostsandrisksintheareasofenergysecurity,governmentspending,tradebalance,economicandsocialactivities,andenvironmentalprotection,andthereforeithasagreatpotentialforimprovement.

3.1. Energybalanceandconsumptionefficiency

Ukraineheavilydependsonenergyimportsthatinthecurrentgeopoliticalconditionscauses high risks for energy independence. Natural gas takes the biggest share inimportsofenergyamountingto19.5billionm³(or15.7milliontonsofoilequivalent).

Diagram 3.1. Total supplies of primaryenergy in 2014 (105.7million tons of oilequivalent)

Diagram3.2.Energytradebalancein2014(netimport28.0milliontonsofoilequivalent)

Source:dataofStateStatisticsServiceofUkraine(excludingtheARofCrimeaand"ATO"zone)

Diagram3.3.Centralizedheatingfuelconsumptionin2014(12,2milliontonsofoilequivalent)

Diagram3.4.Fuelconsumptiononproductionofelectricityin2014(43,5milliontonsofoilequivalent)

Diagram3.5.Energyconsumptionbypopulationincl.transformationandtransportationlossesin2014(32,9milliontonsofoilequivalent)

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

34%

31%

22%

10% 3%

Coal GasNuclearenergy OilRenewables

-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

Naturalgasmakesupabout55%ofenergyimports

Lessdependencyongasimportsisoneofthekey

tasksofthenationalsecurityofUkraine


13

Most of the natural gas is consumed by residential and public buildings sector.Industrialsectorconsumesonly~40%ofgas.

Diagram3.6.Naturalgasconsumptionandprogresstowardmarketrelations


3.2. Heatproduction,supplyandconsumption

ThesectorofresidentialandpublicbuildingsheatinghasoneofthelargestpotentialsforimprovingenergyefficiencyinUkraine.Theannualconsumptionofnaturalgasforheatingpurposes is estimated at 18.6billionm³with the reductionpotential (whenreaching the current level of losses in the EU) of 11.4 billion m³ of gas (~58% ofUkrainianimports):

Diagram3.7.Estimationofpossiblereduceinnaturalgasconsumptionbydirections,billionm³.

Source:WorkingGroupanalysis

3.3. Economicevaluationoflosses.Costsofinaction

Excessiveenergyconsumptiontoheatresidentialandpublicbuildingshaspermanentnegativeconsequencesthatre-occureveryyear.

Table 3.1. Economic evaluation of annual losses caused by excessive energyconsumptionforheating.

~USD3.0billion(~3%GDP)

excessiveconsumptionwithoutarealeconomicstimulus

7,3

1,71,1 1,3

Buildingthermalinsulation

Individualboilerschange

Districtboilersmodernization

Insulationofnetworks

11,4 bln m³ - totalpotential

~USD3billion(or~3%GDP)isexcessively

consumedannuallywithoutthestimulusforeconomy,ofwhich~USD

2.5billionspentongasimports

Thehighestpotential

possessedbymeasuresvonthelevelofbuildings

(thermalrehabilitationandreplacementofindividualboilers)


14

~USD2.5billion

excessiveexpendituresongasimports(pressureontradebalance)

>USD1.0billion

excessiveexpendituresofstatebudgetonenergysubsidies

Source:Workinggroupanalysis,attherateofimportgaspriceUSD225perthousandm³

3.4. Assessmentofoverallinvestmentneedsandgasconsumptionreductionpotential

ThesectorofresidentialandpublicbuildingsheatinghasoneofthelargestpotentialsforimprovingenergyefficiencyinUkraine.Theannualconsumptionofnaturalgasforheatingpurposes is estimated at 18.6billionm³with the reductionpotential (whenreaching the current level of losses in the EU) of 11.4 billion m³ of gas (~58% ofUkrainianimports):

The solution of problems related to building heating requires the attraction ofsignificantinvestments:

Table3.2.Preliminaryassessmentofoverallinvestmentneeds

SectorInvestment

needsGasconsumptionreductionpotential

GasconsumptionreductionperUSD1billionofinvestments

Rehabilitationofmultistorybuildings

USD17billion 2,3billionm³ 135millionm³

Rehabilitationofindividualhouses


Replacementofindividualboilersbymoreefficientones


Rehabilitationofpublicbuildings


Modernizationofheatproductionsystemandnetworks


Total ~USD57billion 11,4billionm³


Themodernization of heat production and distribution takes only 21% of the totalcapacitytoreducegasconsumption,butitrequiressignificantlylessinvestmentsthanthe thermal rehabilitation of buildings. Therefore, the investments in DHP have thegreatestpotentialintermsofimpactonthereductionofenergyconsumptionperunitofinvestedfunds.

~57billiondollars–assessmentofoverallinvestmentneedson

energyefficiencyofheating

DHPmodernizationhasthegreatestpotentialintermsofimpactonthereductionofenergyconsumptionperunitofinvestedfunds


15

4. Individualheating

4.1. Energyresourcesforindividualheating

About50%ofhouseholdsuseindividualheating(thisfiguremayvarydependingontheregion).

Thefactorsthathouseholdscanreducegasconsumptionforindividualheatingarelikelytobeahighgaspriceandmoreprudentuseofgasbecauseofconcernsaboutitslack.

Diagram4.1.Shareoffuelsinheatgeneration Diagram4.2.Useofgasforhouseholdneeds,billionm3


Source:Naftogazdata,Workinggroupanalysis

Gasis75%ofallresourcesusedbythepopulationforindividualheating.IntheWestofthecountrypeoplemostlyuseindividualgasheatingandthecentralizedheatingprevailsintheeast.

Diagram4.3.Structureofhouseholdheatingresources


11%

9%

6%

74%

Coal FirewoodforheatingOthersolidfuels Gas

1917 18 17 18 17 17 17

15

11

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Lugansk

Donetsk

Zaporizzya

KirovohradDnipropetrovsk

Kyivregion

Vinnytsia

Zhytomyr

Volyn

Lviv

Zakarpattya

Ivano-Frankivsk

KyivcityChernigiv Sumy

PoltavaHarkiv

Herson

Odessa

Mykolaiv

Cherkasy

Chmelnytskiy

Reivne

Ternopil

Chernigiv

46%

16%

38%

Gasheating Otherresources Centralheating

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%

Resourcesusedforheating

Theuseofgashasdecreasedby43%overthelast10years


16

4.2. Centralizedgassupplysystem(Oblgazes)

The natural gas is provided to consumers, DHP and enterprises in the regions byregionalgascompanies(Oblgazes)."UkrGazEnergy"company controlsabout70%ofgassupplyterritoryinUkraine.

Diagram4.4.Groupimpactzonesbyregions

UkrGazEnergoKES-Holding

NaftogazOthers


Thegasnetworkconsistsofmainpipelinesanddistributionnetworks:

• In caseof large industrial consumers thathavedirectbrancheson themainpipeline,gasgoesdirectlytotheconsumersandOblgazisnotinvolvedatall

• Incaseofmostmediumandlargeindustrialconsumers,othercompaniesaresuppliers,theypaytoOblgazonlyfortransportation

• In case of small enterprises, households and government institutions, gas issupplied via a local network of pipelines, which is controlled by one ofOblgazesthatalsoactsasasupplier


17

Diagram4.5.SimplifiedsystemofgasflowsinUkraine


11.3billionm3ofnaturalgaswasreleasedforindividualheatingofthepopulationin2015.

Diagram4.6.Thelargestgasconsumersbyregions


Thebiggestgasconsumersarehistoricallyindustrialregions:Donetsk,Lugansk,Dnipropetrovsk,KyivregionsandKyivcity.

TodaythegaspipelineinUkraineisinapoorstateduetolackoffunding.ManypartsofpipelinehavenotbeenchangedsinceUkraine'sindependence.

MainpipelineOwnerofpipeline:StateGastransporter: UkyTransGaz

DistributionnetworkOwnersofpipeline:State,OblgazGastransporter: OblgazПостачальникгазу:Oblgaz,other suppliers

Gas

Ownersofpipeline:Subsidaries ofNaftogazUkrGazEnergoLocalmanufacturers

~65% ~35%

Population DHP

Gasconsumptionin2013,billionm3

0-1 1-2 2-3 3-4 4-5 5-6

65%ofgasisusedforpublicneedsand35%-forDHPwiththepurposeofheatproduction

Thebiggestgasconsumersarehistoricallyindustrialregions

55%ofpipelineismorethan20yearsold


18

Diagram4.7.Breakdownofofgastransportationsystempipesbyage,years


OnlysomeresidentsofUkrainecangetgasthroughthemainpipelineandthisproblemiscurrentlysolvedonlybysupplyingLNG(liquefiednaturalgas),whichismoreexpensiveandnotaseasytouseasthecentralpipeline.

Diagram4.8.ThelevelofgasificationinUkraine


AccordingtotheLawofUkraine"Onthenaturalgasmarket"withthepurposeofde-monopolizationofgas supplymarket the regionalgascompaniesarenotallowed tosupply natural gas to consumers. According to the CMU Resolution No 74 dated02.03.2015theagreementongassupplybecomesatrilateralagreement,wherethefirst partу is the supplier, the second - a gas distribution company, the third - aconsumer.

Butthischangeisratherconditional,sincethesubsidiaryenterprisestosupplynaturalgaswerecreatedonthebasisofOblgazes,thusthecontrolofnaturalgassuppliesis"inthehands"ofOblgazes.

0% 20% 40% 60% 80% 100%

270300 305 320 310 330 350

45% 47% 50% 58% 62%70%

80%

0%

20%

40%

60%

80%

100%

050100150200250300350400

2005 2006 2007 2008 2009 2010 2011thouskmofpipeline Gasificationlevel

1020253040

BasedonRGCsthesubsidiaryenterpriseswerecreatedtosupplynaturalgasthatretainsthecontrolofnaturalgassupplies"inthehands"ofRGCs.


19

Diagram4.9.Schemeofcashflowsinthegassupplysystem


4.3. Tariffsforcentralizedgassupplyandmarketcapacity

GastariffsarecontrolledbytheNEURCthathasabilateralnature.Ontheonehand,the Commission's tariff policy acts more in the interests of energy companies andsometimes at the expense of gas companies. On the other hand, the Commissioncontrols the gas sector less strictly that allows the Oblgazes to operate moreindependently.

Although,theNEURCsetsthehouseholdgastariffs,accordingtotheCMUNo758theCabinetofMinisterssetsmarginalretailpricesfornaturalgasforthepopulationandreligious institutions inthetransitionperiod(fromApril,12016tillMarch31,2017).AlsothisResolutionsetsthemaximumretailmarginfornaturalgasforsuppliers.

Atthetariffasoftheendof2015theindividualhouseof80m2,whichisheatedwithgas,pays forgasused forheatingaboutUAH2736amonththat is84%of thetotalHUSbill amount. In 2017 consideringmarketprices thepayment for gasmay reachUAH3696(80%ofthetotalHUSbillamount).AdetaileddescriptionisgiveninAnnex1.

Thetariff forgassupply iscalculatedaccordingtothemethodologystipulated inthe"Procedure for setting tariffs fornatural gas transportation viadistributionpipelinesonthebasisofalong-termincentiveregulation".


20

Diagram4.10.Themethodologyforgastariffcalculation

Source:NEURCResolutions

Diagram4.11.Thestructureofnaturalgastariffforthepopulation

Source:NEURCResolutions

AccordingtotheNEURCResolutionNo583ofApril1,2015thehouseholdgastariffis7.188UAH/m3.

Themain change in the structure of billing system is the establishment of a singletariffrate,regardlessofthegasconsumptionvolume.ButfromOctober1toApril30,2016theCMUsetsapreferentialrateof3.6UAH/m3providedtheconsumedvolumeis less than 1200 m3 in this period, which is paid by 60% of consumers. Thus, theaverageweightedtariffis5.035UAH/m3.

Diagram4.12.Averageweightedtariffforhouseholdgas,UAH/m3

Source:IMFreportonUkraine,Workinggroupanalysis

70%

3%4%

5% 1%

17%Actualcostofgas

Fee(extracharge)

Costoftransportationthroughpipeline

Costoftransportationthroughdistributionpipeline

Costofgassuppliestohouses

VAT

1,048 1,308

5,035 5,8107,746

since01.08.2010

since01.05.2014

since01.04.2015

since1.04.2016

since2017

+285%+25% +15% +33%

Gastariffisatwo-ratetariff

Theaverageweightedtariffis5.035UAH/m3


21

Diagram4.13.Calculationofgasmarkettariff,UAH/thous.m3


ThehouseholdgastariffisoneofthelowestinEurope.

Diagram4.14.Comparisonofgastariffs,Euro/m3(two-ratetariffinUkraine)

Source:Eurostatdata

TheNEURCsets tariffs for theOblgazes for transportation in theamountthatundertheir assessment will cover costs of Oblgazes and provide a revenue (5.2% -6.0%accordingtothelatesttariffupdate).

Settingtariffs forgascompaniestheNEURChastodocomplexcalculations for tariffbalancing,whichincludestransportationtaxofgascompaniesandUkrTransGastariffthatisidenticalthroughoutUkraine.

In 2014 the population used 15 billion m3 of gas, of which ~ 11 billion m³ - forindividual heating (Working group assessments). Considering the current averageweighted tariff for gas in the amount of UAH 5.035 USD per m³, the overallexpendituresofthepopulationfor individualheatingofbuildingsmadeup~UAH55bilionperyear.

If gas price changes in 2016 and 2017, the annual expenditures of population forindividualheatingwillincreaseby~53%in2017against2015.

5423,5 216,9 815,01290,9 7746,3

Gasprice($225) specialfee4% Transportation VAT Markettariff

0,525 0,478 0,4430,326 0,281

0,141

Poland Estonia Lithuania Romania Ukraine

Theexpendituresforindividualheatingwillincreaseby~53%in2017against2015

Gasmarkettariffis~7.74UAH/m3


22

Diagram4.15.Analysisofhouseholdannualcostsforindividualgasheating


Thehouseholdgascostiscalculatedintwoways:

Table4.1.Methodsofchargingforgasconsumedbyhouseholds

Withmeteringdevices

• UndermeteringdevicesAsof2015~100%ofgasforheatingisconsumedthroughmeteringdevices;

Withoutmeteringdevices

• underratesbasedonpercapitaandhomesteading

Source:CMUResolutionNo630

Diagram4.16.Comparisonofconsumptionratesforthepopulation,m3

,

Source:Report"EstimationofHUSconsumption"preparedintheframeworkofUSAIDproject

55,363,5

84,75,0

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

Annualexpendituresforgasindividualheating,billionUAHGasprice,hrn./m³

5,8

17,6

6,0

18,0

3,0

9,0

Gassupplyifhotwaterisavailable

Gassupplyifwaterheaterisavailable

RealconsumptionRateforsubsidychargingRateforservicecostcalculation

100%ofgasconsumedbypopulationforheatingismetered

Ratesusedforcalculationofgasconsumptionwithoutmeteringdevicesarelowerthanaverageconsumption


23

4.4. Thesystemofpaymentsforcentralizedgassupplies

BeforetheMemorandumadoptiontheoldsystemforgaspurchasingforNaftogaswasused(Annex2).ButtofulfillcommitmentstotheIMFthefinancingstructureforgaspurchasingforNaftogaswaschangedfromdirectbusinesssubsidiestopublicsubsidies.

So,ifinthepastallpaymentsforgaswereincash,nowtheschemealsoincludessubsidysettlements.

Diagram4.17.Asimplifiedcurrentsystemofpaymentsforcentralizedgassuppliestothepopulation

Source: CMU Resolution No217, CMU Resolution 20, Order of the Minenergy and MFU No493/688,Minregion,Workinggroupanalysis

Таблиця4.2.Explanationstopaymentscheme

Moneyflows Subsidies

1) The population pays for HUS tothespecialaccount

2) NEURC according to the CMUResolutionNo217approvesratesfor money allocation from thespecialaccount

3) Funds are transferred to othermarketparticipants

4) Naftogazimportsgas

1) Thepopulationappliesforsubsidies2) Allmarketentitiessigntheprotocol

onmutualpayments3) The Budget on the basis of MSP

data transfers subsidies to gassuppliersasclearingpayments

4) Themutualsettlementsforgasarecarriedouthierarchically

5) Naftogaz or Ukrgazvydobuvannyacarry out mutual subsidysettlements with the Budget inexchangefortaxesorrentalfee

Source: CMU Resolution No217, CMU Resolution 20, Order of the Minenergy and MFU No493/688,Minregiondata,Workinggroupanalysis

– Subsidy“liabilities”/Mutualpayments

– Gassupply

– Realmoney

Naftogaz

Transporter

Distributor

Supplier Bank(spec.account)

NERC

Population

Subsidyaccount

GasimportUkrgazvydobu-vannyaBudget

Approvesfundsdistributionrate

ThesystemofdirectsubsidiestoNaftogazwasreplacedbyitsfinancingthroughpublicsubsidies

Therearetwosourcesofpayments:

1. Paymentsofhouseholds

2. HUSsubsidies

HUSsubsidiesreceivedbyDHPandRGCsareclearingpayments


24

5. Centralizedheating

5.1. Heatenergyproduction

Centralizedheatsupplycovers40%ofthepopulation.Heatenergyisproducedontheplantsoftwotypes:centralheatingplants(CHP)andthermoelectricplants(TEP).

Diagram 5.1. Number of households bydifferenttypesofheating,million

Source:Minregiondata

Diagram5.2.BreakdownofproductionatCHPandTEP,mlntonnesofoilequivalent

Source:dataoftheStateStatisticsServiceofUkraine

Ukrainianheatenergymarket inrecentyearstendstodecrease.Giventhedynamicsof production change (decline in the crisis years), the reduction is explained bydecreaseddemandofindustrialenterprises.Duringtheperiod2005-2009themarkethasshrunkby29%.Dropin2014wasdrivenbyexclusionofARofCrimeaand"ATO"zone.

Diagram5.3.Heatenergyproduction,millionGcal*

*datafor2014excludingtheARofCrimeaand"ATO"zone


Thepopulation is the largest heat energy consumereach year. The shareof energysuppliedtothepopulationis~65%.Inaddition,theenergymarketisinefficient. Itisprovedbyheatlosses,whichareabout15%ofservedenergy.Itshouldbenotedthatdataon losses isnormative.Thereal losses,accordingtoexperts,canbeupto50%.Thus, improving the efficiency of transport and use of heat energy by populationshouldbethefirstprioritytask.

5,49

6,59

2,26 Centralizedheating

Gasheating

Other

3,8

6,1

ThermoelectricplantsCentralheatingplants

127,2 124,6

112,1104,7

98,0104,1 104,7 104,1

96,5

73,0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

For4yearstheheatproductionmarkethasdecreasedby29%.

Thepopulationisthelargestheatenergyconsumer(~65%)


25

Diagram5.4.Heatenergyreleasedbysegments(TEPandDHP),millionGcal



The main role at heat energy market is played by the biggest boiler houses thatproduceheatenergyforconsumers inbigcities.Thus,reformingtheDHPsectorthethebiggestboilerhousesshouldbeoffirstpriority.

Diagram5.5.Breakdownofheatproductionbyboilerhouseswithdifferentcapacitiesin2014(total62.6mlnGcal)


Table5.1.Numberofboilerhouseswithdifferentcapacities

Capacity Number(%)

<3Gcal/h 27772(89,6%)

3-20Gcal/h 2616(8,4%)

20-100Gcal/h 443(1,4%)

>100Gcal/h 161(0,5%)

Total 30992(100%)


UkrainianDHParedependentongas.Gastakesthelargestshareinthestructureofheatenergysources,althoughthisproportiontendstodecrease.However,gasisreplacedbylessefficientandmoreenvironmentallyharmfulsources:coalandpeat.

63%25%

13% Population

Publicandcommercialbuildings

Forproductionneed

12%

16%

18%54%

Upto3Gcal/h 3-20Gcal/h

20- 100Gcal/h >100Gcal/h

>50%ofheatenergyisproducedby161boilerhouses

Gasisreplacedbymoreenvironmentallyharmfulsources:coalandpeat


26

Diagram5.7.Structureofheatenergysourcesin2007-2014



UseofDHPgashasagreatlypronouncedseasonality, i.e.consumptioninthewintermonthsis10timeshigherthaninthesummermonths.Thus,gasusedirectlydependsonheatingseason.Inaddition,itgivesaroughideaofDHPcostsduringayear.

Diagram5.8.PlanofgasusebyDHPfor2016,millionm³(total9413millionm³)


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 2014Naturalgas Coalandpeat Biofuelsandwaste other

17741525

1313

515

175 154 159 149 175

636

1218

1603

Inwintergasconsumptionsis10timeshigher

>50%ofheatenergyisproducedby161boilerhouses

Gasisreplacedbymoreenvironmentallyharmfulsources:coalandpeat


27

Diagram5.9.Forecastofgasuseforcentralizedheatingandhotwatersupply(HWS)for2016,billionm3

Source:Minregiondata,Workinggroupanalysis

MostregionsofUkrainesignificantlydependongassupplies.Thevolumeofusedgasis driven by the number of big cities with centralized heating. The exception isZakarpattyaregion,whereindirectheatingsystemsaremostlyused.

Diagram5.10.PlanofgasusebyDHPforcentralizedheatingandHWSbyregionsfor2016,millionm3(total9.4billionm3).


7,5

1,9 Centralizedheating

HWS

Zakarpattya

ChernigivSumy

PoltavaCharkiv

Lugansk

Donetsk

Zaporizzya

Cherson

OdessaMykolaiv

KirovohradDnipropetrovks

CherkassyKyiv

Vinnytsia

Zhytomyr

Chmelnitska

Rivne

Ternopil

Volyn

Lviv

Ivano-Frankivsk

Chernivtsi

Kyivcity

3 073

2

1 028

354

334

152

76

83

62

192

134

110148

329 160

121

122

235

209 244

222957

490

480

84

DHPin5regionsconsume~65%ofallgas

DHPuse80%ofgasforheating


28

5.2. Heatenergytransportation

Todaythemajorityofresidentialbuildingsareconnectedtocentralizedheatingorthroughcentralheatstations(diagram5.11)ordirectlytoHS/TEP/boilerhouses(diagram5.12).

Diagram5.11.Schemeofconnectiontocentralizedheatingthroughcentralheatstations

Source:WorldBankreport

Diagram5.12.Schemeofdirectconnectiontocentralizedheating

Source:WorldBankreport

Thetotalnetworklengthisabout21thousandkm,andaveragelossesinthenetworksmakeup16%accordingtotheStateStatisticsServiceofUkraine.However,accordingtomarketoperators,thereal lossesinsomespotscanreachupto50%andneedanimmediaterepairorreplacement.

Diagram5.13.Assessmentofheatlossesinnetworksin2014,thousandGcal


CHP,TEPCentralHeat

Station

consumers

consumers consumers

consumers

CHP,TEP

consumers

consumers consumers

consumers


29

5.3. Heatenergyconsumption

Threelargestregionsconsumingheatenergymakeupnearly50%ofthemarket.

Diagram5.14.Analysisofheatenergyconsumptionbythepopulationintheoverallstructurefor2014,millionGcal(total62.6millionGcal,includingforthepopulation-39.4millionGcal)


HeatconsumptioninUkraineisinefficient.Theactualconsumptioninsomeregionsismorethan60%higherthantheEUstandard.

Diagram5.15.Mapofenergyefficiencyinheatandhotwaterconsumptionin2013,Gcal/m²

Source:"Newsocialandeconomicpolicy"

0,280,40,60,70,70,81,01,11,21,31,41,41,51,51,71,82,22,42,4

3,43,63,7

7,0,08,6

11,9

ZakarpattyaChernivtsiTernopil

Ivano-FrankivskKirovohrad

KhersonLuganskVolyn

VinnytsyaZhytomyr

RivneMykolaiv

KhmelnytskyChernihivCherkassy

SumyKyivLviv

OdesaDonetsk

ZaporizhiaPoltavaKharkiv

DnipropetrovskKyivcity

Total

Population

Chernigiv

Sumy

PoltavaCharkiv

Luhansk

Donetsk

Zaporizzya

ChersonOdessa Mykolaiv

Kirovohrad Dnipropetrovsk

Cherkasy

Kyiv

Vinnytsya

Zhytomyr

Chmelnitskiy

Rivne

Ternopil

Volyn

Lviv

Zakarpattya

Ivano-Frankivsk

Chernivtsi

0,13 0,10

-24%

0,160,09

-42%

0,190,08

-56%

0,180,08

-53%

0,14 0,09

-36%

0,160,09

-44%

0,170,09

-46%

0,140,09

-35%

0,22

0,09

-60%

0,12 0,09

-24%

0,21

0,08

-60%0,170,08

-51%

0,170,09

-47%

0,140,08

-41%

0,21

0,09

-54%

0,150,09

-41%0,17

0,09

-46%

0,180,09

-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%

0,150,09

-39%0,18

0,07

-63%

Kyivcity

0,170,09

Actualconsumption

PotentailaccordingtotheEU¹standard

-49%AverageinUkraine

Threelargestregionsconsume50%ofheatenergy

InsomeregionstheconsumptionofheatexceedstheEUstandardby60%


30

Oneofthereasonsof ineffectiveconsumption isanobsoletehousingstock.Mostoftheexistinghousingstock(about85%)inUkrainewasbuiltbeforetheindependenceofUkraine.Mostbuildingswerenotdesignedforefficientheatconsumption.

Diagram5.16.The breakdownofresidentialbuildingsbytheyearsofconstructionasof01.01.2015


Despite the fact that the structureofhousing stockby the yearsof construction insomeEuropeancountriesdoesn'tdiffersignificantly,inthesecountriesthebuildingswererenovated.

Table5.2.ThebreakdownofbuildingsbytheyearsofconstructioninUkraineandEuropeancountriesasof2008

Periodofconstruction

Ukraine GermanyCzech

RepublicLithuania

Till1919 5% 14% 11% 6%

1919–1945 13% 14% 14% 23%

1946–1970 51% 46% 25% 33%

1971–1980 16% 13% 22% 18%

After1981 15% 13% 28% 20%

%referstothenumberofbuildings

Source:Report"MarketAssessment“ResidentialSectorofUkraine"

The housing stock shall be modernized in both apartment buildings and privatebuildings, as far as their share in the total housing stock is almost equal. AdditionaldataonthehousingstockisprovidedinAnnex3.

4.8%

11.5%

23.5%21.6%

14.4%

9.2%

4.2%

10.8%

Till1919 1919-45 1946-60 1961-70 1971-80 1981-90 1991-2000 2001-14

About85%ofthehousingstockisolderthan25years


31

Diagram5.18.Thebreakdownofhousingstockbytype,mln.m²

Source:Report"MarketAssessment“ResidentialSectorofUkraine"

Diagram5.19.Thebreakdownofhousingstockbytype,thsbuildings


5.4. Tariffsforcentralizedheatingandhotwatersupply

To fulfill obligations to the IMF the heating and gas tariffs are to reach themarketlevelbasedonimportgaspricefromApril2017.OfthetotalpaymentforHUSheatingisabout50%,butafterthemarketpricesettingthecostcouldriseupto60%.MoredetailedinformationisgiveninAnnex4.

Centralizedheatingtariff

Tariffsforcentralizedheatingdependonandaresensitivetochangesinpricesforgas,since the fuel price constitutes nearly 3/4 of the tariff, and for district heatingprovidersexactlynaturalgasisthemainfuel.

AfterNEURCtariffsreviewthestructureoftariffforcentralizedheatingwaschangedin April 2015. The share of gas increased significantly, while other costs remainedalmostthesame.Thus,thereviewoftariffsdidnotaffecttheformationofresourcesforinvestmentsatDHP.

Diagram5.20.Thestructureoftheaverageweightedcostofthermalenergyfortheneedsofthepopulationbeforeandafter01.04.2015

Source:NEURCdata

501

565

Appartmentbuildings

Privatebuildings

240

6 500

Appartmentbuildings

Privatebuildings

61,6%75,9%

21,4%12,4%

9,1% 7,1%7,9% 4,6%

before01.04.2015 after01.04.2015

Otherexpenditures

Electricalenergy

Costsoflabour

Fuel

Thereviewoftariffsdidnotimpactontheformationatenterprisesofresourcesforinvestment


32

According to the NEURC Resolution No1171 dated May 1, 2015 the centralizedheating tariffs were increased. These tariffs are determined for each heatorganization.

ItisworthnotingthatinrecentyearsthetariffsdidnotcoverthecostofheatenergyproductionforDHP,thedifferencebetweenthecostandtariffwascoveredwithlocalorstateBudgetintheformofgrants.

Diagram5.21.Dynamicpatternofaverageweightedtariffandthecostof1Gcalofheatenergy,UAH/Gcal

Source:Minregionadata,Workinggroupanalysis

Diagram5.22.Calculationofmarketheatingtariff,UAH/Gcal

Source:BudgetofUkraine2016,NEURCResolutionNo3159,1888,Workinggroupanalysis

Thetariffissegmentedbyconsumers.Budgetaryandcommercialconsumersactuallypay the market price for heat. The tariffs for the population and religiousorganizationsare2.3timesless.

Diagram 5.23. Imbalance of tariffs for different consumers as in the case of"Kyivenergo"in2015,UAH/Gcal

Source:Kyivenergodata

Inresultoftariffsegmentationsomeconsumershavetooverpayforothers,especiallyitisrelevanttotheunderstatedheatingenergytariffforthepopulation.

358,2 389,8654,2

1134,7

1513,0

475,5 509,2708,8

2013 2014 2015 2016О 2017О

Tariff(withVAT)

1Gcalcost

657,2 709,5

1 503,4 1 503,4

Population Religious Budgetary Otherconsumers

MarketheatingtariffisaboutUAH1513

Residentialtariffislessthanforbudgetaryinstitutions2.3timesless

+8,5%+68%

+33%

+73%


33

Diagram5.24.ComparisonofDHPrevenuesandthevolumeofsuppliedheatenergybyconsumersin2014


The tariff can be calculated in twoways: for customerswithmetering devices - forconsumed hihakalori, and for consumers metering devices - per square metercalculatedattherateof0.0245Gcal/monthforKyiv.

The price of centralized heating for the population remains one of the lowest inEurope.

Diagram5.25.Comparisonoftariffsforcentralizedheating,Euro/Gcal

Source:theIMFReport#15/218(August2015)

HeatenergytariffsarenonmarketableanddonotsolvetheproblemofDHPfinancialsecurity. Despite the increase in the average weighted tariff, the level of costreimbursementbythetariffremainsataboutthesamelevel-75%.

Hotwatersupplytariff

Inmostcasestheheatproducingcompaniesprovidethepopulationwithheatandhotwatersimultaneously.For this reason,hotwater tariffsareadopted inparallel withheattariffsindividuallyforeachcompany.

80,3%54.8%

4,4%

8,9%

9,5%

22,9%

5,8% 13,3%

Heatenergysupplied Revenuefromsales

population statebudgetaryinstitutionslocalbudgetaryinstitutions otherconsumers

96.3

77.8 75.0

55.6

24.1

Lithuania Estonia Romania Poland Ukraine

Tariffcoversonly75%ofheatenergycost


34

Diagram5.26.Dynamicsoftariffsforcentralizedhotwatersupplyof"Kyivenergo"forthepopulation(average),UAH.


Diagram5.27.Calculationofmarkettariffforhotwater,UAH/m3


Theresidentialtariffisalmosttwicelessthanthetariffforbudgetaryinstitutionsandothercustomersandalmostthesamewithreligiousinstitutions.

Diagram5.28.Imbalanceintariffsfordifferentconsumersin2015,UAH.


5.5. Commercialmeteringandheatconsumptionnorms

There are a few ways of introducing heat metering on the basis of its actualconsumption.Itisworthnotingthatsomeofthem,exceptformeteringfunctions,alsoimprovethequalityofcentralizedheatingservices.

The model of connection to building meters allows consumers to pay for actuallyconsumedenergyenergy.However,themostperfectmodelistoconnectconsumersthroughindividualheatingstation(IHS)thatgivesthepossibilitytoperformmeteringandregulatethevolumeofenergysupplied.

ThroughtheprogramoftheMinregionjointlywithNEURCtheheatmeteringdevicesarebeinginstalledinhouses.Accordingtotheplanitisexpectedtoreach80%ofheatenergymeteringtilltheendof2016.Theinvestmentneedtoreach100%ofmeteringmakesupaboutUSD100million.

16.2424.24

40.92

65.85

87.80

2011 2014 2015 04.2016 04.2017

39,91 40,92

79,44 79,44

Religious Population Budgetary Otherconsumers

Markettariffforhotwaterisabout~88UAH/m3

ModelofconnectionwithIHPensuresthemeteringandincreasesthequalityofcentralizedheatingservices


35

Diagram5.29.Equipmentofbuildingswithheatmeteringdevices


Theintroductionofcommercialmeteringsolvesthefollowingproblems:

• Obtaining accurate data on service consumption that will give NEURC thepossibilitytosetreasonablerates.

• Households will pay the reasonable cost of consumed services rather thanundertheratesestablishedbythestate.

• Cash flows coming from the population to service providers will becometransparent.

• Thepopulationwillbestimulatedtoreduceenergyconsumptionandimproveenergyefficiencyinbuildingsandhomes.

Also, increasing energy efficiency by introducing heat metering is one of theconditions forgrantingUkraine the third tranche fromthe IMF.Thenationalenergyefficiencyactionplantill2020envisagestoreach100%ofheatandwatermeteringby2019.

Forbetterefficiencyof fundsuse it is reasonable to install IHPs, since inaddition toheatmeteringitsavesabout15-20%ofheat.

About64%ofhotwater is consumed throughtmeters andonly ~50%of residentialbuildings, which are connected to centralized heating, have metering devices.

38%51%

80%

2014 2015 2016F

Bytheendof2016itisplannedtoreach80%ofheatenergymetering.

IHPsallowtosaveabout15-20%ofconsumedheat


36

Diagram5.30.Equipmentofbuildingswiththedevicestometerheat(01.01.2016)andhotwaterconsumption(30.03.2015)


TheRulesforprovisionofcentralizedheatandhotwatersupplyareregulatedbytheNEURC Resolution No 630. Thus, if the building is equipped with heat meteringdevices,itsdwellerspayonthebasisofmeterreadings.Incasethemeteringdevicesarenotavailablethepaymentforconsumedservicesischarged:

• from centralized heating – under rates (norms) per 1 square meter andconsideringtheactualoutdoortemperatureandactualnumberofdaysoftheserviceprovision;

• fromcentralizedwatersupply–underrates(norms)basedonpercapitaandhomesteading.

The norms for utilities are unreasonably high, consequently, themajority of peoplewithoutmeteringdeviceshavetopaymorethantheyconsume.

Diagram5.31.AverageheatsupplynormsinUkraine,Gcal/m2

Source:KTM204Ukraine244-94.Reportontheresearchwork"Developmentofscientific-basedproposalsonsettingofsocialconsumptionrates"

Lugansk

Donetsk

Zaporizzya


Kyivregion

Vinnytsya

Zhytomyr

Volyn

Lviv

Zakarpattya

Ivano-Frankivsk

Kyivcity Chernigiv Summy

PoltavaCharkiv

Cherson

Odessa

Mykolaiv

Cherkassy

Khmelnytsk

Rivne

Ternopil

Chernivtsi

51%64%

Heatsupply Hotwater

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 ofmeteringdevices

-

0.140

0.129

Consumptionnorm Evaluationofrealconsumption

Heatsupplyrateshavenotbeenchangedsince1993

Apersonthatlivesinthebuildingwithoutheatmeteroverpaysabout10%

Peoplewithoutmeteringdeviceshavetopayunderunreasonablyhighratesofconsumption


37

Diagram5.32.AveragenormsofhotwaterconsumptioninUkraine,m3/monthpercapita

Source:KMSAResolutionNo579.Reportontheresearchwork"Developmentofscientific-based

proposalsonsettingsocialconsumptionrates"

Diagram5.33.Comparisonofwater(hot+cold)consumptionwithothercountries,m3/monthpercapita

Source: Report on the research work "Development of scientific-based proposals on settingsocialconsumptionrates"

Theratesofheatenergyandhotwaterconsumptionareoutdatedandexaggerated.In addition, the consumption rate concept leads to the fact that the people do nothaveany incentivesforenergyefficiency.Thus,theensuringof100%ofheatenergymeteringisaprerequisiteforfurtherreformofcentralizedheatingsector.

5.6Thecapacityofcentralizedheatingmarket

The capacity of centralized heating market in consumer prices grows, despite thedecrease in heat energy supply. It should benoted that having applied themarkettariffs,thecapacityofcentralizedheatingmarketmayincreasemorethan2times.

Diagram5.34.OverallcapacityofcentralizedheatingmarketinUkraine,billionUAH

Source:Minregiondata,Workinggroupanalysis

1,652,8

3,6

RealaverageconsumptioninUkraine

NormofconsumptioninKyiv AveragenormofUkraine

1.7 1.8 2.4 2.51.8

3.6

Netherlands Spain Belarus England AveragevalueinWesternEurope

Ukraine(norm)

29.6

69.5

2015 2017


38

6. Analysisoftheschemeofpaymentsforcentralizedheatingforthepopulation

Thesystemofmutualsettlementsforheatconsumedbythepopulationandrelevantgas supplies has significant "gaps" in liquidity due to fail of the state to fulfill itscommitmentsonHUSsubsidypaymentanddifferenceintariffs.Bythis,theburdenofliquidity"gaps"fallsonDHP:

•Asof01.01.2016thestatedebtonHUSsubsidyisUAH7.7billion,includingUAH1.1billiondebttoDHP.

•Asof01.01.2016 the statedebt fordifference in tariffs isUAH4.7billion,including UAH 1.8 billion debt to DHP. The Budget 2016 does not envisagesubsidiesforthedifferenceintariffs,sothedebtwillgrow.

•According toNaftogaz theDHPandTEP debt for gas in2015 isUAH4.0billion, thus it can be paid by 73% (UAH 2.9 billion) due to the debts forsubsidiesanddifferenceintariffs.

The existing regulations additionally "punish" DHP for debts caused by the state'sfailuretofulfillitscommitmentsinteralia.

• Newprocedure under reviewed CMUResolutionNo 217,which comes intoforce from February 2016, introduces corrective coefficients depending onDHP debts for gas that arise due to the state debts for HUS subsidies anddifference in tariffs. These coefficients reduce the share of "real" moneyreceivedbyDHP.Thesecorrectioncoefficientsactually leaveDHPwithout funds foroperatingactivities-insomecasesDHPreceiveonlyaminimalshare(Sm)inpaymentsfortaxesandwages.

• The reviewed CMU Resolution No 217 envisages the mechanism to"transform" the share of subsidies to "real" cash flow for DHP. But themechanismhassignificant implementationrisks, so it isunknownwhether itwillfunctioneffectively.

6.1. AnalysisofdeadlinetopayforcentralizedheatconsumedbythepopulationandNaftogazgassuppliestoDHP

• DHPhavetopayforgasbefore(tillthe14thday)theyreceivepaymentsfromcustomers(mostlyonthe15th-25thday)andmutualsettlementforgaswithsubsidies(beforethe24thday)ismadethat"washesout"thecurrentassetsofDHP.

• There is an imbalance in charging penalties for non-payment, i.e. Naftogazcharges a penalty for the delay in payments for gas, but the penalty is notchargedtothepopulationforfailuretopayforconsumedheat.

MutualsettlementsforHUSsubsidiesonthebasisofCommonDecisionProtocol(CDP)(CMUResolution20,OrderoftheMinenergyandMinfinNo493/688)

• Frequencyandtimeframeworkformutualsettlementsarenotregulated.Anyof the parties (Treasury, Naftogaz or business) can not sign CDP, then themutualpaymentswillnotbemade.

Theexistingsystemofpaymentsforheatleadstodecreaseinsystemliquidity

DHPhavetopayforgasbeforegettingpaymentsfromcustomersandmutualsettlementforgaswithsubsidiesismadethat"washesout"thecurrentassetsofDHP

Mutualsettlementsforsubsidiesarecarriedoutwith1monthdelay


39

• Providedthatallthepartiesareinterestedinamutualsettlement,itismadewith1monthdelayfollowingthemonthwhentheserviceswereprovided.

• CertainDHPinacertainmonthmayhaveseveralsettlementsandsignedCDP(afewmutualsettlement"chains" orone"chain"settlementcanbedividedintoseveralCPD)

Diagram6.1.TermsofmutualsettlementsforsubsidieschargedforJanuary2016(comparedtothepaymentsforconsumedgas)

Source:MinregionandKyivenergodata

Householdpaymentsforconsumedheat(CMUResolutionsNo217andNo630)

• AccordingtotheCMUResolutionNo630incaseoffailuretopayforheattillthe20thday,"consumershallpayapenaltyintheamountenvisagedbytheLawandagreement".ButneithertheLawnoragreementprovidesthepenaltyamount,forthisreasonitisnotchargedinpractice.

Diagram6.2.TermsofhouseholdpaymentforheatinJanuary2016(comparedtothepaymentsforconsumedgas)

Sourc:MinregionandKyivenergodata

NaftogazchargesapenaltytoDHPforgasdebtsbutthepenaltyisnotchargedtothepopulationforfailuretopayforconsumedheat


40

6.2. Schemeofpaymentsforcentralizedheatingforhouseholds

Therearetwosourcesofpaymentsforcentralizedheatingandgasforhouseholds:

• HouseholdpaymentscometospecialaccountsinOschadbank,andthentheyaredistributedbetweenDHP,RGCandNaftogaz(CMUResolutionNo217)

• HUS subsidies, which are, actually, the mutual settlements between thesupplychainandStateBudget(CMUResolutionNo20andjointOrderoftheMinenergyandMinfinNo493/688)

In2015therewasamechanismtopaythedifferenceintariffs,butin2016itdoesnotwork,becausetheBudgetfor2016doesnotprovidetheappropriatefunds(seePart7.4).

Diagram6.3.Simplifiedschemeofcentralheatingsettlements

Source:CMUResolutionNo217,CMUResolutionNo20,OrderoftheMinenergyandMinfinNo493/688,Minregiondata,Workinggroupanalysis

• DHPmaycarryoutmutualsettlementsonHUSsubsidieswithexpendituresforgasorelectricity.

• TheStateBudgetcarriesoutmutualsettlementsonHUSsubsidieswithtaxesfromNaftogazandUkrgazvydobuvannya.

• Since February 2016 (after the introductioin of amendments to the CMUResolution No 217 in December 2015) the mutual settlements for HUSsubsidies also influence the share of "real"money received byDHP from aspecial account - themoreBudget debt for subsidies to theDHP, the lessshareof"real"moneyreceivedbyDHPfromconsumers(seeAnnex5).

• Thechainofmutualsettlementsmayhavemoreparties,butitstartswithDHPandendswithNaftogazorUkrgazvydobuvannya.

• TheschemeofmutualsettlementsforhouseholdgassuppliesdifferswiththeabsenceofDHP-theBudgetcarriesoutamutualsettlementwithOblgaz(gassupplier).

Mutualsettlementsoccuronlyifthereareliabilities


41

6.3. AlgorithmformutualpaymentswithHUSsubsidies

• AllthepartiesareobligedtohaveopenaccountsattheStateTreasuryofUkraineformutualsettlements.

• If at any stage of the chain there are no corresponding liabilities, the mutualsettlementsdonottakeplacethatcausesthedelaysinHUSsubsidypayment

• BeforetheTreasury"issues"fundsforsubsidiesitreceivescommitmentsfromallthe parties to carry out mutual settlements in the form of Common ProtocolDecision.

• Maximumtermof"transfer"fromonepartytoanotheris1businessday.

Diagram 6.4. Algorithm of mutual payments (on the example of DHP settlementpaymentsforgas)

Source: CMUResolutionNo 20, Order of theMinenergy andMinfinNo 493/688,Minregiondata,Workinggroupanalysis

6.4. DebttoDHCforcompensationinthedifferenceoftariffs

Tariffsforheatandotherutilityservicesaregenerallylowerthanrealexpendituresofutilityenterprises:

• NEURCishappentoreviewtariffswithadelayaftertheincreaseinthecostofelectricity,wagesandothercomponents.Moreover,thereviewproceduremaylastupto2months;

• Thevolumeofheatgenerationmaybelessthanitisplannedintariffthatentailstheincreaseinheatunitcost;

Therefore,accordingtotheLU"OnHUS"andtheLU"OnHeatSupply"thestatehastocompensate the difference in tariffs. In 2015 there was a mechanism (CMUResolution No 375) that envisaged subventions from the State Budget for thesepurposes and a relevantmutual settlement of subventions with DHP taxes and/ orsettlement for gas with Naftogaz. For 2015 the State Budget allocated UAH 5600million for subventions (theMinregion is an administrator of these subventions), infactthemutualpaymentsweremadetotheamountofUAH4800million.

Budget

DHC

Gassupplier

Naftogaz

Ukrgazvydobu-vannya

ThesubsidytotheaccountintheTreasury

Treasury

SignedbyeachpartyCommonprotocoldecisionwiththe

obligationtoperformacertainamountof

settlement

12

Theordertotransfersubsidies

3

4

5

6

7Taxes

“Payment”forgasintheTreasuryaccount



TheBudgetfor2016doesnotenvisagesfundstoreimbursedifferenceintariffstoDHP

ThestatedebtforreimbursementofdifferenceintariffstoDHPasof01.01.2016isaboutUAH1.8billion

MutualpaymentsaremadethroughtheTreasuryaccounts


42

Asof01.01.2016thestatedebtforreimbursementofdifferenceintariffsamountedtoUAH4762million,includingUAH1760milliondebttoDHP.

The budget for 2016 does not envisage subventions to pay debts for difference intariffs, thus for2016 there isnoanymechanismtopay thedebts thatwill continuegrowinginthefuture.

6.5. Analysisofaccumulateddebtsinthesector

The result of non-market regulated relations in the sector was a significantaccumulationofdebtsforheatandgasforitsproduction:

Diagram6.5.Debtsinthesectofasof01.02.2016

Source:dataofNaftogas,Minregiondata,StateStatisticsServiceofUkraine

6.6. Suggestedapproachtodebtrestructuring

Restructuringofexistingdebtisoneofthenecessarystepstofinancialrecoveryofthesector, which is a prerequisite for industry modernization. But to avoid theaccumulation of new debts in the future, the system to regulate relations in thesectorhastobeadaptedtomarketrealities:

Diagram6.6.Suggestedapproachtofinancialrecoveryofthesector


Acomprehensiveapproachwillallowtoavoidtheaccomulationofdebtsinthefuture


43

7. DHCinvestmentneedsandexpectedeffect

7.1. Assessmentofoverallinvestmentneeds

The possible reduction of natural gas consumption provided the rehabilitation ofbuildingsandmodernizationofDHCis5billionm³peryear.

Firstofall,itisnecessarytocarryoutthemeasuresthatwillhavethegreatesteffectandhelptoavoidthebiggestexpendituresinthenetwork.

Table7.1.Preliminaryassessmentofoverallinvestmentneeds

SectorInvestment

needs

Gasconsumptionreductionpotential

ReductioningasconsumptionbyUSD1billion

Rehabilitationofmultistorybuildings

USD17billion 2.3billionm³ 135mlnm³



Modernizationofheatproductionsystemandnetworks


Modernizationandreplacementofheatnetworks


Total ~USD25billion 5.0billionm³ 200mlnm³


Themost efficient use of funds can be achievedwith the help ofmodernized heatproductionsystemsandheatnetworks.Therefore,DHPmodernizationshallbeoffirstprioritytoimprovetheefficiencyofgasconsumption.

7.2. Assessmentofminimalinvestmentneedstomodernizeheatnetworks

Accordingtopreliminaryassessmentsthetotalnumberofheatnetworksinneedofrepairorreplacementis60%.TheminimuminvestmentamountforthesepurposesisuptoUSD1billion,theeffectofwhichcouldreachannualgassavingsofmorethan500millionm³.

TheminimuminvestmentamountformodernizationofheatnetworksisaboutUSD1billion

OverallinvestmentneedisaboutEUR25billion


44

Diagram7.1.AssessmentoffirstpriorityneedsfordifferenttypesofrepairandreplacementofheatsystemsinUkraine


7.3. Assessmentoffirstprioirityinvestmentsinthereplacementofboilers

ThemonitoringresultsshowedthatthetotalnumberofNIISTU-5boilersis4332.Thistype of boilers is the least effective, for this reason it shall be replaced in the firstpriority.Theestimatedcost isUSD86million.Reduction ingasconsumptioncanbeover160millionm³/year.

Diagram7.2.NumberofNIISTU-5boilersandthecostoftheirreplacement


Lugansk

Donetsk

Zaporizzya


Kyivregion

Vinnytska

Zhytomyr

Volyn

Lviv

Zakerpattya

Ivano-Frankivsk

379

29441%

13%6%

3153

10%

30%20%

1628

11%

30%19%

37633%

17%11%

6337%

14% 9%

1366

24%30%

6%

320

23%30%

7%

101438%

21%

1%

60526% 30%

4%

835

19%30%

11%

387

12%

30%

11%

2676

11%

30%

11%

Kyivcity

Chernigiv Sumy

Poltava

Charkiv

ChersonOdessa

Mykolaiv

Cherkassy

Chmelnytskiy

Rivne

Ternopil

Chernivtsi

1083

51%

6% 3%

416

8%

30%22%

63627% 30%

3%

429

10%

30%20%

71441%

16%3%

31936%

17%7%

207330%

16% 14%

305

14%

30%

16%

58324%

30%

6%

550

21%30%

19%

286

11%

30%19%

60730%

14% 17%

50%

30%20%

23% 25%

12%

Worn-outandunsafe

Needreplacementby

previouslyisolated

Engineeringcommissioningofresidentialbuildings

21096kmtotallengthofheatingnetworks

ForecastedinvestmentamountforNIISTU-5boilersreplacementisaboutUSD86million

Consumptionreduceisover160mlnm³/year


45

8. ThecurrentstateofDHPinvestmentprojectsandbarrierstotheirimplementation

8.1. Analysisofcompletedinvestmentworksatheatproductionin2015

Completedworksareaimedatreplacingnaturalgasconsumptionin2015

Diagram8.1.Sourcesforfundingworksonthereplacementofnaturalgasconsumption(totalUSD286million)


Diagram8.2.Numberofboilerhousesandnewboilersredirectedtoalternativefuels(total801)


MoredetailedinformationonthereductionandreplacementofgasconsumptionisgiveninAnnex6and7.InformationonfacilitiesthatusealternativefuelsisgiveninAnnex8.

Diagram8.3.Numberofboilersredirectedtoalternativefuelsin2015andexpectedvolumeofnaturalgassubstitution


17%

16%

18%12%

37%

StatebudgetRegionalbudgetLocalbudgetDHPfundsOther(grants,privateinvestments,etc.)

72%

13%

3%7% 5%

Wood/pellet/woodchipsCoalBiomassOilfuel

UAH286millionwasinvestedinredirectionofboilersandboilerhousestoalternativefuels

Hencetheconsumptionofgaswasreducedby52mlnm³/yeartotheamountofaboutUAH290million(atgasimportpriceofUSD225)


46

Worksaimedatreducingnaturalgasconsumptionin2015

Diagram8.4.Numberofmodernizedboilerhousesandboilers


Diagram8.5.Sourcesforfundingmeasurestoreducenaturalgasconsumption(totalUAH183mln)


Diagram8.6.Completedworksonreducingnaturalgasconsumptionin2015


483

901

numberofboilerhouses

Numberofboilers

5% 4%

16%

53%

18%

StatebudgetRegionalbudgetLocalbudgetDHPfundsOther(grants,privateinvestments,etc.)

Themostcurrentprogrammesare

aimedatDHPmodernizationand

rehabilitationofpublicbuildings

UAH183millioninvestedinmodernizationofboilersandboilerhouses

Hencetheconsumptionofgaswasreducedby28mln.m³/yeartotheamountofaboutUAH150mln.(atgasimportpriceofUSD225)


47

8.2. Analysisofprogrammesonenergyefficiencyofheatproduction,distributionandconsumption

A few national, donor and IMF programmes on funding the energy efficiencymeasuresarebeingimplementedordevelopedinUkraine.Thekeyinstitutionsthatmanagetheseprogrammesarethefollowing:

• SAEEandNEURCfromthesideofstate• EBRD,IBRD,EIB,KfW,NEFKO,Е5Р,SIDAfromthesideofIMFanddonors

Despite the fact that the greatest investment need is in the residential sector, themostprogrammesarefocusedonupgradingofdistrictheatingproviders.

Diagram 8.7. Assessment of investment potential of existing programmes, millionUSD

Source:officialinformation,Workinggroupanalysis

In practice from the existing USD 1 billion for the projects aimed at DHCmodernization or rehabilitation of public buildings in the active phase there is notmorethan30%ofthisamount(seeParts9.2and9.3).

ThelistofinvestmentprogrammesisgiveninAnnex9.ThelistoftechnicalassistanceprogrammesisgiveninAnnex10.

ProgrammesforDHCmoderniationandrehabilitationofpublicbuildings

Theoverallfinancialpotentialforupgradingdistrictheatingprovidersandrenovationof public buildings in the framework of current programmes is USD 1 billion that isabout12.5%oftotalinvestmentneedsinthissector.

TheseprogrammesaremanagedbyIFIanddonors(EBRD,IBRD,EIB,KfW,NEFKO,Е5Р,SIDA)andareusuallystructuredinoneoftwoways:

1. Financingprogrammesagainstthestateguaranteesandwiththeinvolvementof central executive authorities (Minfin,Minregion, CMU, etc.). Examples ofsuchprogrammesare"Improvingenergyefficiencyinthesectorofcentralizedheatsupply" (IBRD)and"Municipal InfrastructureDevelopmentProgramme"(EIB).

2. Financingtheprojectsagainstmunicipalguaranteeswithouttheinvolvementofcentralexecutiveauthorities.Forexample,EBRDprojectsonfinancingtheupgradingofdistrictheatingproviders.

75250

750

Rehabilitationofresidentialbuildings


ModernizationofDHCs

ProgrammesforDHPmodernizationandrehabilitationofpublicbuildingsarefinancedagainstthestateormunicipalguarantees

PotentionalfundingofexistingprogrammesisUSD1billion

Theprojectsarefinancedagainstthestateand/ormunicipalguarantees

Mostprogrammesarefocusedonmodernization

ofdistrictheatingcompaniesorrehabilitationofpublic

buildings


48

Diagram8.8.Schemetoprovidestateguarantees


Financing against the state guarantees requires complicated and long-termproceduresdeterminedbybothUkrainianlegislationandIFIrules:

Diagram8.9.Theprocessofprojectselection(usingtheexampleofIBRDfinancingprogramme)


Minregion asresponsibleministryannounces

theselectionofprojects

Utilitycompany(UC)developsprojectjustificationfollowing theIBRDelements,which

isapprovedbythemunicipal councilsession

Minfin providestheconclusionon

UCfinancialstatus(onthebasisof

creditterms)

ExpertWorkinggroup(Minregion, Minfin,MEDT,

NERC,publiccouncil)considersprojects

CMUapprovesthelistofprojectsandauthorizestosigntheLoanAgreement

Minfin,Minregion and IBRD signtheLoanAgreement

UC,Minfin,Minregion and NERC signsub-loanagreements

1

2 3

4

5

6

7

Potentialofexistinginvestmentprogrammesisusedby~30%

Theprocessofprojectselectiontakesmorethan1year


49

Theprojectselectionprocessmaytakemorethanoneyear,dependingonthequalityof existing DHP covered by the projects. Also, if it is necessary to undergo theprocedureundertheCMUResolutionNo1027(itisoptionalprovidedtheVerkhovnaRadaofUkraineratifiedtheagreementwiththeIMF),theprocedureperiodisabout1yearmore.

Diagram 8.10. Project initiation (selection and approval) according to the CMUResolutionNo1027


Moreover, theprocessof tendersandpreparation forpayments to contractorsmaytakeabout1.5year.

ImplementationoftheprocedureundertheCMUResolutionNo1027complicatestheprocessandincreasestheperiodofprojectselectionandapprovalforabout1year

Theprocessoftendersandpreparationforpaymentstocontractorsmaytakeabout1.5year


50

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


AlsoaccordingtotheCMUResolutionNo560theapprovalperioddependsontheprojectcostanditis2monthsmore,ifthecostexceedsUAH100million:

Diagram8.12.ProjectjustificationapprovalundertheCMUResolutionNo560


The efficiency of project implementation depends on the teamwork of all partiesinvolved to the process. The important role is played by the Central ProjectManagementGroup (CPMG) and theRegional ProjectManagementGroups (RPMG)buttheactivitiesofCPMGarefinancedbytheprogram(itis1-2%ofthetotalprogramamount),andtheRPMG-byownfundsofutilitycompanies(UC).Therefore,asarule,theRPMGcompetenceismuchlowercomparedtoCPMG.


51

Diagram8.13.Operationalstructureofprojectimplementation


TheMinistryofFinanceofUkraineplaysanimportantroleintheprocessofprojectfunding.

Diagram8.14.Schemeofprojectfunding


CPMGandRPMGplayanimportantroleinprojectimplementation,butCPMGisfinancedbytheprogramme,andRPMG-byownfundsofutilitycompanies

TheMinfinplaysanimportantroleintheprocessofprojectfunding


52

8.3. IBRDprogrammeeffeciency

TheProgramme"Enhancingenergyefficiencyinthesectorofcentralizedheatsupply"(UDHEEP)hascovered8citiesofUkrainethatwillgivethepossibilityto reducefueluseby108millionm3/year.Totalfinancingforimplemenationofapprovedprojectsis USD 290.9 million. More detailed information on the work performed and theexpectedresultsisprovidedinAnnex11.

Diagram8.15.GeographyofUDHEEPfinancingandresults

Source:CPMGdata

Table8.1.KefeaturesofUDHEEPProgramme

DateofprojectapprovalbytheIBRD 22.05.2014

Currentfunding,including USD315.5million

IBRDloan USD265.5million

CleanTechnologiesFundloan USD50million

Expectedinternalrateofreturn(IRR) 17.2%Source:ProjectjustificationandCPMGdata

ProgrammefundingisprovidedbytheEBRDandtheCTFatlowrates-1%.However,theloanisgivenindollars,whichincreasestheriskofnon-paymentincaseofhryvniadevaluation.Thisisoneofthemainrisksintheprovisionoffundingbydonors.

Kharkiv

107,3

Dnipropetrovsk

22,2

Kherson

21,6Mykolaiv

21,7

Vinnytsia

43,3

Kamenets-Podilskiy

15,3

Chernigiv

34,9

Ternopil

24,6

Totallyselectedprojects

290,9 USDmln

108mln m³/yearFuelsaving(ingas

equivalent)

60,8%Reduceinpowerconsumption

11,9%ReduceinСО2

emissions

UDHEEPProgrammewillgivethepossibilitytoreducefueluseby108millionm3/year(gasequivalent)

Partofthefundsremainsunallocated


53

Diagram8.16.DistributionoffundsinUDHEEPProgramme

Source:CPMGdataasof15.01.16

Diagram8.17.TermsofUDHEEPProgrammefinancing

Source:CPMGdataasof15.01.16

8.4. TheintroductionofprocurementsforprojectimplemenationontheexampleofSweden

ToensureatransparentfundingofDHPmodernizationandupgradefromthesideofthe stateandMFIs theProcurementAgenciesexist andareestablished in countriessuchasSwedenandtheUK.TheAgencyisanon-profitinstitutionthatconnectsutilityorganizationsandsuppliersofequipmentorservices.

Along-termgoalistoincreasetheproductqualityandenhancestandardizationlevelthatwillmakeservicescompetitiveandmoreefficient.

Table8.2.TheAgencybenefitsforvariousmarketplayers

Benefitsforutilitycompanies: Benefitsforsuppliers: Benefitsforthestate:

• Easier attraction ofinternational and publicfunding

• Access to the bestcorrelation of price andequipment/ serviceeffectiveness

• Better guarantee of contactexecution

• The current procurementmethodology of the Agencycanimplementinnovations

• Use the establishedconnections

• Reducing operatingcosts

• Reducing berries tothemarket

• Access to the "widemarket"

• Single entry point tothemarket

• Simplified attraction ofinternationalinvestors

• Transparant purchasesystem

• Simplified controlprocedure

• Corruptionprevention• Facilitating the orverall

energy sectormodernization


Agencyacceleratesthemarketingofnewenergyefficiencytechnologiesthathelpstosolvetheenergydependenceproblem.Inturn,theDHPhavetherighttopurchasewithoutAgency.

290,9

5,51,1

18

Subprojects CPMGbudget

Up-frontcommission Unallocatedamount

0,25%

0,79% 0,75%

0,45%

IBRDcreditingterms СТFcreditingterms

Initialup-frontcommission Interestratecommissionformanagement


54

Diagram8.18.GeneraldataoftheSwedishProcurementAgency“Värmek”

Source:Värmekdata

TheprocessofsuchAgencylaunchinginUkrainemaytakeabout1year.

8.5. BarrierstotheimplementationofDHPmodernizationprojects

Thekeybarrierstoprojectfundingand implementationofafullpotentialofexistingprogrammesofIFOanddonorsare:

LackofexpertiseatthelocalleveltodraftprojectdocumentsandimplementprojectsfollowingtheIFOrequirements.

The IFOs require organizaional and technical specifications to the project andborrower, including the project registration. Unfortunately, only a few DHP haveappropriate competence and experience of coopeation with internationalorganizations.Thiscausesdelays inproject implementationandsignificantly reducesthenumberofDHPparticipatinginsuchprogrammes.

DebtsofutilitycompaniesandnewlegislationonDHCaccountblockingbyNaftogaz

ThenewLawNo423-VIIIwasadoptedonMay14,2015tostabilizethefinancialstateofNaftogaz.UnderthisLawNaftogazcanautomaticallycollectpaymentsfromcentralheatprovidersandblocktheiraccountsiftheyhaveoverdueliabilities.Consequently,Naftogaz has blocked the bank accounts of some central heat provides (includingZhytomyr,LutskandLviv).Thisnewlegislationwillaffectmoreorlessallthecentralheat providers inUkraine and significantly limit their running costs. In addition, thenewLawallowsNaftogaz to sell theDHPdebtsandassets to thirdparties thatmayleadtotheDHPshadowprivatization.

OnetheconsequencesofthisLawisthatIFOsordonorswillnotprovideloansand/orgrants to DHP if there is a risk that these fundswill be used to repay old debts toNaftogaz.The CMU Resolution "On amending the Resoluton of the Cabinet ofMinisters of Ukraine No 217" dated December 29, 2015 significantly increases theliquidityofNaftogazandreducesthelevelofcurrentassetsremainingatthedisposalofheatgenerating/heatsupplycompanies,usingthemechanismofconsideratoinof"calculaiton level" rate when calculating the ratio of funds transferring from theaccountswithaspecialusemodeofheatgenerating/heatsupplycompanies.

ThebasisforapprovalofanyinvestmentprogrammeistheprocedureforaprovingbyjointOrderoftheMinregionNo630andregulatorResolutonNo381.Thereareafewproblemswiththecurrentprocedure:

• The procedure directly contradicts the IFO procurement rules because itrequires a detailed project documentation and prices (even the names ofspecificmanufacturers)beforeatenderisannounced.

• The procedure requires to provide detailed calculations and projectdocuments for each object, such as a boiler house, pipeline section orindividualheatingunit(IHU)thattakesalotoftime.

Draftdocumentsshallcomplywiththeinternationalstandards

TheblockingsofDHPaccountsbyNaftogazdoesnotallowtofinanceprojects

Theintroductionofaccountswith“special”usemodeandcertainprioritiesincalculationsdecreasestheDHPliquidity


55

• Despite themergerof two regulatorsover a year ago, theDHP still have toprovideandprotecttwoseparate investmentprojects:oneproject is forgasboilerhouses,pipelines,etc.,andanotheroneisforcogenerationplantsandalternativesourcesofheat supply, suchasboilerhousesusingbiomass. It isnot convenient and demotivates DHP to develop the alternative sources ofheatsupply.

• Applyingproceduralprovisions, theregulatoralsoobjects to the inclusionofindividualheatingunits(IHU)totheDHPinvestmentprojectssayingthatthismeasuredoesnotprovidedirectfinancialbenefits.ItmeansthatDHPdonotwant to co-finance the IHU, since they can not recover the costs throughtariffs.

• To approve investments the Minregon is still using the outdated buildingstandards.Moreover, the Internationalagreementsshallbealignedwith theEuropean standards (for instance, FIDIC) to facilitate the implementation ofprojects.

AdoptionofcentralheattariffsbytheregulatorandhryvniadevaluationagainstUSDandEUR

Timely and reasonable tariff amendments remain a key regulatory risks for all DHPimplementingtheprojectsattheexpenseofIFOloanfunds.TheNEURCrarelyadoptstariffsintimethatwouldallowtoservicetheDHPdebts.Thisproblemisexacerbatedintheconditionsofnationalcurrencydevaluation,asfarastheIFOloansareinUSDoreuro.

VATandcustomsexemptionsforthegrantfinancialcomponent

Exemption from taxes and customs duties on grants and loans has been officiallyenacted,butseveralobstaclesstillremain.Article3.2oftheTaxCodeofUkraineandthe relevant international treaties ratified by the Ukrainian parliament allow theexemption from taxes and duties on the purchase of goods, materials, works andserviceswith the use of grant funds.However, this exception is only at the level ofgeneralcontractoranddoesnotpenetratetothelevelofsubcontractors.Thereisnomechanism to reclaim VAT paid by Ukrainian subcontractors. Thus, the currentlegislation discriminates Ukrainian subcontractors and provides a competitiveadvantagetointernationalcontractorsorserviceproviders.

Approvalofmunicipalguarantees

Theprocessofapprovingmunicipalguaranteeshasbeengreatly improvedthankstocooperationwith theMinistry of Finance. However, it should bemore rational. Forexample,theMinistryofFinancehasrecentlybeguntorequiretheutilitycompaniesto provide: (I) mortgages in municipalities and (II) meetings of the special tendercommittees, which preliminary selected the investment projects following theprocedureapprovedbytheCMUbeforethemunicipalguaranteesareprovided.

In fact, both requirements areunnecessary.As to the first requirement,utilities areowned by respective municipalities and in most cases they only manage municipalproperty, so utilities can not pledge the property of their owner, in addition, thisrequirement is beyond thebindingnormsof theBudgetCodeofUkraine.As to thesecond requirement, it was initially intended for investment projects supported by

Hryvniadevaluationcreatesadditionalrisks

CurrentlegislationdiscriminatesUkrainiansubcontractors

Theprocedureforapprovingmunicipalguaranteescontainsextrarequirements

Theinvestmentprogrammeapprovalprocedureneedssomeimprovals

SometimesMFIloanfundsareblockedintheaccountsoftheTreasury


56

sovereign guarantees. However, because of outdated definition of state support inArticle 12-1 of the Law on investment ativities, this requirement is automaticallyconnected to the localprojects supportedbymunicipal guarantees, although it fullycontradictsthedecentralizationreform,whichisimplementedbytheGovernmentofUkraine.

DelaysinpaymentsforStateTreasurydebtservicing

ThisproblemisrelatedtocrisisresponseforprioritypaymentsbytheResolutoinNo65 of the Cabinet of Ministers of Ukraine (CMU) and Resolution No 160 of theNational Bank ofUkraine (NBU). These Laws affect cash flows, since sometimes theIFOloanfundsareblockedintheaccountsoftheTreasuryandmunicipalclientscannotaccessresourcestouseandservicetheloans.

Theexistingschemeofpaymentsforcentralheatingforthepopulation(theCMUNo217) and late mutual payments for HUS subsidies and difference in tariffs causesignificant risks to DHP operation financing and central heat sector functioning ingeneral.


57

9. LegalregulationofHUSmarket

9.1. Legislativeframework

Themarketofhousingandutilitiesservicesisregulatedbythestate,butabignumberofnormativeandlegalactsmakestheregulationsystemcomplexanddisordered(>50NLA). Themain regulators are theCabinetofMinistersofUkraine and independentNationalEnergyandUtilitiesRegulatoryCommission(NEURC).

Table9.1.Authoritypowersinhousingandutilitiessector

CMU NEURC Minregion

Sets:

• a tariff formationprocedure

• rules for serviceprovisonanduse

• the generalprocedure forserviceprovisionandpaymentforit

• resourceconsumptionrates

• responsibilities ofvarious marketplayers

• the overall actionstrategy of thegovernment

Sets:

• thelicenseconditionsandlicensestheactivitiesofheatcompanies

• tariff formation methods andtariffs

• rules and framework agreementson the use of heat and watersupplynetworks

• procedure of payment forconnection

• calculates ratios of funds transferfrom special accounts on amonthlybasis

Developslegalframeworkon:

• HUS price/ tariff formation(excludingHUSwhere tariffs aresetbytheNEURC)

• standards, ratios, norms,proceduresandrulesinHUSarea

• upkeep, current and capitalrepairs, reconstruction ofhousingfacilities


TheNEURCdecisionsthatarenormativeandlegalactsdonotneedapprovalofotherpublicauthorities.

ThemainNLArelatingtotheprovisionofhouseholdgasandheatsupplyservicesarelistedinAnnex12,butthebasisofthelegalframeworkinthefieldofheatandgassupplyconsistsoftheLawsandResolutionsasfollows:

LawsofUkraine:

• “Onheatsupply”• “Onnaturalgasmarket”• “Oncommercialmeteringofnaturalgas”• “Onhousingandutilitiesservices”• “Onstateregulationinthesectorofutilitiesservices”

TheHUSmarketisdirectlyregulatedbytheNEURC

ThemainNLAregulatingHUSsectorare:

• LU“OnHUS”

• CMURNo869

• CMURNo630


58

ResoltuionsoftheCabinetofMinistersofUkraine

• No869“Onensuringaunifiedapproachtosettingtariffsforhousingandutilityservices”

• No630“Onapprovingtherulesforprovisionofcentralheating,coldandhotwateranddrainageandamodelcontractforprovisionofcentralheating,coldandhotwateranddrainage”

• No1198“OnapprovaloftheRulesofheatenergyuse"• No2246«OnapprovaloftheRulesofhouseholdgassupply"

TheseLawsestablishthegenerallegalprinciplesandrelationshipsintheHUSmarket,andtheResolutionsservethebasisfortariffsettingandconsumptionpayments.Theuseofheatenergyisallowedonlyonthebasisofacontractconcludedinaccordancewith standard forms. In turn, the fees for utility services are charged monthlyaccordingtothecontract.

Thenormativeandlegalactsstillhavesomeproblemstobesolved.Forexample,theCMURNo630statesthatifthehouseadministratorfailestocarryoutsomeheatingmeasures,theconsumerdoesnotpayforheatingforonemonthofcommonbuldinguse. This reduces the incentive for building dwellers to take energy efficiencymeasures.

9.2. Licensingandcontrolofcompanies(NEURC)

TheDHParelicensedaccordingtotheResolutionoftheCabinetofMinistersNo278.DespitethefactthatthenumberofNEURClicenseesismuchless,exacltytheNEURClicensees produce ~ 95% of the heat energy. Therefore, the sector reform isimpossiblewithouttheinterventionofthenationalregulator.

Table9.2.DHPlicensingscheme

NEURCLicensesDHPthathave

LocalauthoritiesLicensesDHPthathave

• >1activityarea

• >18thousandGcal/year

179Licensee

~95%totalheatenergy

• only1activityarea

• <18thousandGcal/year

828Licensee

~5%totalheatenergy

Source:CMUResolutionNo278

The licensee (serviceprovider) calculates tariffs for theplannedperiodaccording tothe requirementsof theProcedureof setting tariffs for heat energy, its production,transportation and supply, central heating and hot water supply, approved by theResolutionoftheCabinetofMinistersofUkraineonJune1,2011No869.

Conditionsfortariffchange(itcalculatedonthebasisofannualproductionplans):

• changesinthevolumeofservicesprovidedbymorethan15%• changesinthestructureoftheheatingfundbymorethan15%

Tariffreviewfrequencyisnotlegallyregulated

DHPactivitiesarelicensedbyNEURCorlocalauthorities

About95%ofheatenergyisproducedbyNEURClicensees


59

• changes in the investment programme if it leads to tariff change bymorethan2%

• changes in tax rates and fees, minimum wage, rent and depreciation,changes in prices and tariffs for fuel and energy and other materialresourcesifaccumulativelyit leadstotariffchangebymorethan2%oftheprescribedlevel.


60

10. Glossary

Acronyms/abbreviations Definition

"Warmloans"Stateprogrammeofpartialreimbursementforthecostofloansforenergyefficiency

GIZ Deutschegesellschaftfürinternationalezusammenarbeit

KfW NationalDevelopmentBankofGermany

UREEF UkrainianRevolvingEnergyEfficiencyFund

GDP GrossDomesticProduct

HWS Hotwatersupply

Gcal Gigacalorie

SАЕЕ StateAgencyforEnergyEfficiencyandEnergySavingofUkraine

HH Household(s)

StateStatistics StateStatisticsServiceofUkraine

ЕЕ Energyefficiency

ЕЕloan Loanforenergyefficiencyproject

ЕЕproject Projectonresidentialenergyefficiencyimprovements

Energyaudit

SystematicprocedureperformedbyanindependentEnergyAuditorwiththepurposeofobtainingaccurateinformationonthelevelofheatconsumptioninbuildingsandidentifyingtheimpactandcostofenergyefficiencymeasuresandreportingresultsintheapprovedform

ESC Energyservicecontract

EBRD EuropeanBankforReconstructionandDevelopment

EIB EuropeanInvestmentBank

HUS Housingandutilitiesservices

LU LawofUkraine

IHU Individualheatingunit

CMU CabinetofMinistersofUkraine

IMF InternationalMonetaryFund

MemorandumDiplomaticdocumentoutliningfactual,documentaryorlegalsideofanyissue.Usuallyitisattachedtoanoteordeliveredbyhandtotherepresentativeofanothercountry

MEDT MinistryofEconomicDevelopmentandTradeofUkraine

Minenergy MinistryofEnergyandCoalIndustryofUkraine

MinregionMinistryofRegionalDevelopment,Construction,HousingandCommunalServicesofUkraine


61

MSP MinistryofSocialPolicyofUkraine

MFU MInistryofFinanceofUkraine

IFI InternationalFinancialOrganization(s)

NEURC NationalEnergyandUtilitiesRegulatoryCommission

ISSNU InstituteforStrategicStudies"NewUkraine"

NLA Normativeandlegalact(s)

SB Sovereignbonds

LA Localauthorities

HA HomeownersAssociation(s)

WorkingGroup WorkingGroupcompositionisgiveninAnnex13

TPP Thermalpowerplant

TEP Thermoelectricplant(cogeneration)

DHC/DHP Districtheatingcompany/provider


62

11. Sources

1. GaryStuggins,AlexanderSharabaroff,andYadvigaSemikolenova.2013.EnergyEfficiency:LessonsLearnedfromSuccessStories.Washington,DC:WorldBank.

2. NationalEcologicalCentreofUkraine,FriedrichEbertFoundationinUkraineandKyivInternationalInstituteofSociology.AttitudesofUkrainianstowardenergysaving.ResultsofAll-UkrainianSocialSurvey:SummaryandRecommendations.Kyiv,2015.

3. YadvigaSemikolenova,LaurenPierce,DenzelHankinson"ModernizationofthecentralheatsupplysysteminUkraine:heatmeteringandpaymentsbasedonitsactualconsumption",theInternationalBankforReconstructionandDevelopment,2012

4. WorleyParsons;InstituteforLocalDevelopment;EnergySavingsInternational;IB,Slovenia.Finalreport.MarketResearchresidentialsectorinUkraine:legal,regulatory,institutional,technicalandfinancialaspects.InAugust2011.

5. ProjectappraisaldocumenttoUkraineforadistrictheatingenergyefficiencyproject,IBRD,2014

6. EuropeanComission,EIB"Renovationloanprogramme"

7. Danfoss,IFC"Thermalmodernizationofresidentialbuilding"

8. Project“EnergyEfficiencyinBuildings”,DeutscheGesellschaftfürInternationaleZusammenarbeit(GIZ)GmbHincooperationwiththeMinistryofRegionalDevelopment,Construction,HousingandCommunalServicesofUkraine,orderedbytheFederalMinistryofEconomicCooperationandDevelopment(BMZ),Kyiv,2013.

9. BerndKalkum,"FinancingEnergyEfficiencyMeasuresforResidentialBuildingStock",WorldBankGroup,May2014

10. UnitedNationsEconomicCommissionforEurope"Goodpracticesforenergy-efficienthousingintheUNECEregion",2013

11. IFC,WorldBank"EnergyEfficiencyinRussia:UntappedReserves"

12. IMF"Ukraine:LetterofIntent,MemorandumofEconomicandFinancialPolicies,andTechnicalMemorandumofUnderstanding"July2015

13. GraysonHeffner,NinaCampbell"Evaluatingtheco-benefitsoflow-incomeenergy-efficiencyprogrammes",InternationalEnergyAgency,2011

14. OlenaBorysova"EBRD’sactivitiesandfinancialsupportforenergyefficiencyinbuildingsinUkraine"EBRD

15. FrankLee,EuropeanInvestmentBank"FinancingInstruments2014-2020underEuropeanStructuralandInvestmentFunds(ESIF)

16. ValiusSerbenta,Agencyforenergysupplyinthehousingsector,"ImplementationoftheProgrammeonrenovationofomultistorybuildings-institutsionalarrangement"2015

17. IMF"Energysubsidyreform:lessonsandimplications",2013

18. EnergyCharterSecretariat,2013"In-DepthReviewoftheEnergyEfficiencyPolicyofUkraine"


63

12. Annexes

12.1. Annex1.HUSbillforanindividualhouseheatedbygas

Individualhouseheatesbygas80m2,householdof3persons

2015 2017

80 consumption/rate tariff amount tariff(UAH) amount

Gasforcooking(m3/person)

withmetering 3.9 7.2 84.24 7.7 90.09

withoutmetering 3.0 7.2 64.80 7.7 69.30

Gasforheating(m3/m2)

100%ofmetering 6

3.6(upto200m3)2736.00

7.73696.00

7.2(>200m3) 7.7

CWS(m3/person)

withmetering 4.2 10.24 129.02

12.85161.85

withoutmetering 9.0 10.24 276.48 346.82

HWS(m3/person)

withmetering 1.65 40.92 202.55

85.35422.48

withoutmetering 3.6 40.92 441.94 921.78

Electricity(kV*g/person)

100%ofmetering 65.6

0.456(upto100kV*g)

121.98

0.9(upto100kV*g)

255.980.789(>100kV*g) 1.68(>100kV

*g)

Totalamountwithmeteringdevices 3273.79

4626.40

Totalamountwithoutmetering

devices3641.19

5292.20



64

12.2. Annex2Schemeofgaspurchasefinancingtill2015



65

12.3. Annex3.ReferenceonHUSkeyindicators



66

12.4. Annex4.ChangeintotalHUSbillforamultistorybuildingappartmentinthemonthofheating

season

Appartment50m2,householdof3persons

2015 2017

50 consumption/rate tariff(UAH) amount tariff(UAH) amount

Gasforcooking

(m3/person)

withmetering 3.9 7.2 84.24 7.7 90.09


Centralheating

(Gcal/m2)

withmetering 0.0215 14.06 703.00 31.73 1586.50


CWS(m3/person)

withmetering 4.2 10.24 129.02 11.47 144.51


HWS(m3/person)

withmetering 1.65 40.92 202.55 85.35 422.48


Electricity

(kV*g/perpson)

100%ofmetering 65.6

0.456(upto100kV*g)

121,98

0.9(до100kV*г)

255.98

0.789(>100kV*g 1.68(>100kV*g)

Rent(m2/person) - 50 2.25 112.50 2.25 112.50

Totalamountwith

meteringdevices1353.29

2612.06

Totalamount

withoutmetering

devices

1779.69

3388.72


67

12.5. Annex5.FormulasforsharesofreceivedfundsundertheCMUNo217

DHC-districtheatingcompany(HGSand/orDSC) HGS–heatgeneratingstation DH–districtheating

DSC–districtsupplycompany HWS–hotwatersupply


68


69



70

12.6. Annex6.ReferenceonreducednaturalgasconsumptionattheheatsupplyobjectsofallformsofownershipasofDecember2015

Region

BoilerhouseswheretheworksonreducednaturalgasconsumptioniarecompletedIndicativevolumeofplannedreductionof

naturalgasconsumptionaftertheworks,thous.

m³/year

Numberofboilerhouses

Numberofboilers

Costofworkdone,UAHthous.

Total,including:

StatebudgetRegionalbudget

Localbudget DHPfunds

other(grants,privateinvestment,

etc.)

Vinnytsya 14 19 2105.8 0.0 0.0 845.8 0.0 1260.0 223.4

Volyn 45 70 13496.8 201.0 837.0 3872.4 3885.4 4701.0 817.0

Dnipropetrovsk 43 104 2329.8 0.0 0.0 19.8 2084.0 226.0 6128.8

Donetsk 18 18 782.3 0.0 0.0 311.6 273.2 197.5 1387.1

Zhytomyr 14 29 15688.0 0.0 0.0 358.0 5645.6 9684.4 1888.5Zakarpattya 9 15 1805.5 - 1012.0 749.5 44.0 - 89.3

Zaporizhia 52 125 3445.1 482.8 14.5 900.6 1710.2 337.0 617.7

Ivano-Frankivsk 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Kyiv 30 63 21566.3 0.0 0.0 4629.9 16935.5 0.0 1782.5

Kirovograd 13 81 16154.3

335.6 1351.0 8217.6 6250.1 1952.8

Lugansk 13 21 4056.4 3072.4 0.0 165.8 0.0 918.2 498.4

Lviv 12 21 870.0 0.0 0.0 352.0 0.0 518.0 94.0

Mykolaiv 14 14 3629.0 - - - 3629.0 - 980.0

Odesa 9 12 8767.0 0.0 0.0 259.3 8507.7 0.0 392.5

Poltava 25 41 19849.5 0.0 1942.0 1246.4 14818.7 1842.5 1415.6

Rivne 44 77 12015.6 3562.6 468.0 2147.0 5638.7 200.0 2058.4

Sumy 4 6 1302.5 849.4 453.1 118.5

Ternopil 0.0 - - - - - -

Kharkiv 6 8 2335.0 0.0 0.0 0.0 2335.0 0.0 162.8Kherson 16 25 9801.5 1267.4 0.0 5326.1 3207.0 1.0 724.4Khmelnytsky 56 85 13735.8 527.3 2704.1 4111.3 4349.6 2043.5 3425.3

Cherkasy 7 12 5298.0 0.0 0.0 1000.0 4298.0 0.0 450.0


71

Chernivtsi 2 4 292.5 0.0 0.0 0.0 292.5 0.0 28.3

Chernigiv 18 32 22450.0 - - 1370.0 15600.0 5480.0 2600.0

Kyivcity 19 19 950.0 - -

950.0

237.5

Total 483 901 182826.4 9113.5 7313.1 29865.8 102874.8 33659.2 28072.7



72

12.7. Annex7.ReferenceonthereplacementofnaturalgasconsumptionattheheatsupplyobjectsofallformsofownershipasofDecember2015

Region

Numberofboilerhousesthatstarted

usingalternative

fuelsandnewboilers,pcs.,including:

Woo

d/pe

llet/woo

dchips

Coal

Biom

ass

Oilfuel

Other(spe

cifywhichtype

offue

lisused)

Costofworkdone,UAHthous.

Indicativevolumeofplannedreplacementofnaturalgasconsumptionaftertheworks,thous.

m³/yearTotal,including:Statebudget

Regionalbudget

Localbudget

DHPfunds

other(grants,privateinvestment,

etc.)

Vinnytsya 75 57 16 0 0 2 29699.0 0.0 29186.0 0.0 512.8 8232.5

Volyn 71 91 35

54

28794.0 1176.0 1672.5 6997.6 4669.5 13738.0 5735.0

Dnipropetrovsk 3 2 1 0 0 0 428.7 0.0 329.1 99.6 0.0 0.0 114.7

Donetsk 0 0 0 0 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Zhytomyr 56 44 10 1 2 3 28808.9 9548.9 0.0 15134.0 25.4 4100.6 2806.0

Zakarpattya 19 16 2 1 7198.3 4496.4 2701.9 334.7

Zaporizhia 14 4 8 0 0 2 4766.1 2716.0 1197.8 446.9 250.0 200.0 408.0

Ivano-Frankivsk 16 16 0 0 0 0 8549.0 8332.0 0.0 0.0 217.3 0.0 2648.0

Kyiv 66 49 3 5 0 9 24789.3 5875.6 0.0 1217.2 1849.5 15879.0 6890.1

Kirovograd 35 35 2 35333.1 14170.4 546.4 3742.9 8235.0 8638.3 906.0

Lugansk 10 3 7 1 0 2 831.6 464.4 0.0 60.0 49.0 258.2 895.1

Lviv 42 68 0 0 0 0 11908.9 0.0 1410.0 3118.4 1133.5 6247.0 1409.9

Mykolaiv 14 29 20300.0 20300.0 5150.0

Odesa 1 1 0 0 0 0 15.0 0.0 0.0 0.0 0.0 15.0 3.0

Poltava 10 10 6 1 0 0 18492.2 273.0 0.0 1065.0 5154.2 12000.0 1318.0

Rivne 25 19 2 2 0 14 6334.7 417.0 1933.3 1914.2 798.0 1331.8 1268.0

Sumy 9 9 0 0 0 0 2956.0 0.0 0.0 1805.0 411.0 740.0 812.6

Ternopil 23 19 2 6 10554.9 4283.1 407.3 2627.2 0.0 3237.3 1363.0

Kharkiv 31 29 0 0 0 2 9926.7 2150.0 0.0 158.0 1400.0 6218.7 1795.2

Kherson 9 5 3 0 0 1 2369.4 235.4 0.0 1454.0 0.0 680.0 407.1


73

Khmelnytsky 42 33 8 1 16568.2 3473.7 5066.7 6027.5 2000.3 5746.0

Cherkasy 10 7 3 0 0 0 6500.0 0.0 0.0 1000.0 5000.0 500.0 1000.0

Chernivtsi 10 10 0 0 0 0 1130.2 0.0 378.0 752.2 0.0 0.0 616.0

Chernigiv 28 19 9 9800.0 1100.0 350.0 8350.0 3250.0

Kyivcity 0 0

0.0

0.0 0.0

Total 619 575 108 20 56 42 290652.8 55559.5 43514.1 50479.9 36686.0 104413.2 53172.6Source:Minregiondata


74

12.8. Annex8.Supplywithheatingand/orhotwaterusingalternativefuels

Region

Reside

ntial

stock

%ofnatural

gas

Educational

institu

tions

%ofnatural

gas

Pre-scho

ol

institu

tions

%ofnatural

gas

Health

care

facilities

%ofnatural

gas

Other

%ofnatural

gas

Vinnytsya 54.0 0.1 433.0 0.5 70.0 0.1 93.0 0.7 25.0 0.6

Volyn 20.0 0.0 22.0 0.0

7.0 0.0 25.0 0.0

Dnipropetrovsk 885.0 6.0 126.0 12.0 107.0 13.0 13.0 6.0 0.0 0.0

Donetsk 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Zhytomyr

5.0

1.0

3.0

3.0Zakarpattya

12.0 100.0 4.0 100.0 2.0 100.0 1.0 100.0

Zaporizhia 0.0 0.0 10.0 0.0 4.0 0.0 2.0 0.0 3.0 0.0

Ivano-Frankivsk 10.0 100.0 8.0 100.0 0.0 0.0 4.0 100.0 0.0 0.0

Kyiv 30.0

55.0

19.0

26.0

101.0

Kirovograd

17.0 5.7 10.0 4.3 6.0 13.0 2.0

Lugansk 0.0 0.0 8.0 41.3 1.0 20.0 3.0 25.5 3.0 50.0

Lviv 0.0 0.0 24.0 50.6 0.0 0.0 8.0 49.1 5.0 26.0

Mykolaiv 3.0 4.0 1.0 0.5 10.0 11.0

Odesa 0.0 0.0 67.0 4.4 0.0 0.0 1.0 0.0 0.0 0.0

Poltava 46.0 70.0 8.0 100.0 3.0 100.0 1.0 100.0 11.0 28.0

Rivne 0.0 0.0 13.0 1140.0 4.0 400.0 5.0 340.0 7.0 490.0

Sumy 22.0

5.0

4.0

2.0

29.0

Ternopil 10.0 50.0 19.0 70.5 6.0 58.3 4.0 50.0 6.0 75.0

Kharkiv 0.0

17.0

4.0

4.0

7.0

Kherson 11.0 100.0 7.0 100.0 4.0 100.0 6.0 71.8 35.0 85.0

Khmelnytsky 117.0 2.5 74.0 9.4 12.0 1.6 17.0 23.9 58.0 14.0

Cherkasy 715.0 20.0 148.0 22.0 85.0 20.0 168.0 22.0 0.0 0.0

Chernivtsi 0.0 0.0 5.0 18.0 3.0 10.0 1.0 20.0 1.0 1.0

Chernigiv

100.0 12.0 44.0 4.0 57.0 3.0 86.0 7.0 59.0

Kyivcity

0.0 0.0

Total 1920.0

1085.0

1482.0

784.0

662.0



75

12.9. Annex9.Referenceonkeyenergyefficiencyinvestmentprogrammes

Institution Programme Termsoffinancing RealEEprojects EEfinancingpotential

EBRD

LoanstoDHP• LoanamountisfromEUR5mln,rate

~10%,periodis10-15years

• ApprovedDHPprojectsintheamountofEUR130million

• EUR180mln–DHP(2morepotentialprojects)

USELF(loanstoprivatecompanies) • LoanamountisEUR1.5-15mln• Focusontheprojectswithrenewables

-• EUR100mln–

privatesector

UKEEP(loanstoprivateandESCcompanies) • LoanamountisEUR3-10mln -

• EUR100mln–privatesector

loanstoprivatecompaniesthroughUkreximbanl • LoanamountisuptoEUR3mln -

• EUR50mln–privatesector

UREEF(ЕЕinresidentialsector)

(onthestageofdevelopment)

• LoanstoЕЕprojectinresidentialsectorthroughcommercialbanks,namely,OTP,Raiffeisen,etc

-• EUR100mln–

residentialbuildings

FundE5P

MultilateraldonorfundwiththeamountofEUR93mln

(fundadministratoristheEBRD)

• GrantuptoEUR5mlnisprovidedasadditionalsupportoftheprojectsfinancedbyEBRD,EIB,NEFCO,etc.

• ~EUR10mln

• EUR50mln–DHP• EUR30mln–public

buildings

• EUR20mln-residentialbuildings

EIB

Directfinancingofprojects • LoanamountisfromEUR25mln - -

ProgrammefortherecoveryofeasternUkraine(loans)

• ProgrammebudgetisEUR200mln(partoffundsforЕЕprojects)

• ~EUR10mlnProjectsonЕЕinpublicbuildings

• EUR20mln-publicbuildings


76

Municipalinfrastructuredevelopmentprogramme

• ProgrammebudgetisEUR400mln

• Interestonloanis2.4-4%• PartoffundscanbeusedforEEprojects

-• EUR100mln–DHP• EUR100mln-public

buildings

IBRD

UDHEEP(Enhancingenergyefficiencyinthesectorofcentralizedheatsupply)

• Interestonloanis<1.0%

• 8DHPprojectsareselectedtothetotalamountUSD291mln

• USD309mln–DHP

LoanprovisionthroughUkreximbank - -

• USD150mln–publicsector

• USD50mln–DHP

KfW

InvestmentprojectsontherecoveryofeasternUkraine

• Interestonloanis4.5%• PartoffundscanbeusedforEEprojects

• EUR39mln–preliminarilyselectedprojects

• EUR39mln-DHP

ProgrammeofGerman-UkrainianFund(GUF) • LoanamountisEUR100-200ths - -

IFCEnergyefficientprojectsandsupportofHomeownersAssociation • Loanamountdependsonproject - -

SIDA Supportprogrammes • Provisionofadditionalgrantstosupportloanprojects

- -

NEFKO

Programme"Demo–Ukraine"• LoanamountisuptoEUR3mln

• Interestonloanis3%

• EUR10mln–DHP(Demo-1)

• EUR20mln–DHP(togetherwithDemo-

2)

"Green"production

(loanstoenterprises)

• LoanamountisuptoEUR350thous

• Interestonloanis6%- -

SAEEProgrammeonreimbursementofprincipleamountoftheЕЕloan

• Reimbursementof20%-70%ofprincipleamountoftheЕЕloansgrantedbythestatebanks,namely,Ukrgasbank,SavingsBank,Ukreximbank

• UAH1246mlnloansattractedin2015

• UAH3bln–potentialofattractionin2016(~UAH800mlnofbudgetfundsfor2016)


77

NEURC Installationofheatmeters • Installationofheatmetersinbuildingsduetoinvestmentcomponentinthetariff

- -

NaftogasReplacementofindividualgasboilers(onthestageofdevelopment)

• ESCmodelonthebasisofNaftogaz

• Itisexpectedtoreplace3.5mlngas -boilerswithmoreefficientones

-

• USD1.5billion–Replacementofindividualgasboilers(loanfromChinaDevelopmentBank)

Source:informationonthewebsitesoftheinstitutions,press-releases,Workinggroupanalysis


78

12.10. Annex10.Referenceontechnicalassistanceprogrammesinenergyefficiencyarea

Project(programme)nameAmount,USD

millionExecutor Donor Implementationperiod

EnergyefficiencyprojectVinnytsyacity 21,4

FirstClimate(Switzerland)AG,Zurich;FelaPlanungsAG,Energoresource-invest,LLC“KSKAutomatyzatsia”,Viesmann(Schweiz)AG,LLC“Komenenergoservice"

Switzerland 01.01.2012–30.06.2017

INOGATEprogrammes"INOGATETechnicalSecretariatandIntegratedProgrammeinsupportoftheBakuInitiativeandtheEasternPartnershipenergyobjectives"

16,6 AconsortiumledbyRambollDanmarkA/S EU 02.2012–01.2016

ProjectonenergyefficiencyinZhytomyrcity 15,7 - Switzerland 07.05.2015–31.07.2019

MunicipalenergyreforminUkraine 14,5

InternationalResourcesGroup;

All-UkrainianCharityOrganization“InstituteforLocalDevelopment”(additionalexecutorisdefined)

USA 27.09.2013–29.09.2017

Grantoftheprogramme"Demo-Ukraine" 8,3LLC“EnergyEquipmentPlant“ДАН”,JSC“AxisIndustries”(LithuanianRepublic),LLC“Brunata”(RepublicofBulgaria)

Sweden 2012−2016

“Improvingenergyefficiencyandpromotingrenewableenergysourcesintheagri-foodandothersmallandmedium-sizedenterprises(SMEs)inUkraine"

5,2MissionoftheUnitedNationsIndustrialDevelopmentOrganization(UNIDO)

GEF 01.2012–04.2016

Programmeforenergyefficientconstruction 5,2 GermanInternationalCooperation(GIZ)Gmbh Germany 15.03.2009–31.07.2016

DevelopmentandcommercializationofbioenergytechnologiesinthemunicipalsectorinUkraine

4,7UnitedNationsDevelopmentProgrammeinUkraine(UNDP)

GEF 01.06.2014–31.03.2018


79

Energyefficiencyincommunities 4,5 GermanInternationalCooperation(GIZ)Gmbh Germany 01.09.2013-31.08.2016

NordicenergyefficiencyandhumanitariansupportinitiativeinUkraine

3,7 - Norway 2014–2015

CreationofenergyagenciesinUkraine 3,4 GermanInternationalCooperation(GIZ)Gmbh Germany 01.01.2014–31.12.2017

Modernizationofpartnershipenergyefficiencyinhospitals 3,2 - Germany 2016–2019

LocalinitiativesforsustainabledevelopmentofUkraine 3,0 - Norway 04.2015–03.2018

CreationofBioenergyKnowledgeandLearningCenterandlocalenergymanagement

2,9 - Norway 2015–2017

Ukrainian-DanishEnergyCenter 2,1 - Denmark 2015–2018

Total 114.4

Source:dataofMEDTandMinregion


80

12.11. Annex11.UDHEEPexpectedresultsfor2021

City

ReconstructionHeatnetworkreconstruction

(km)

Constructionofcogenerationplants

IHUinstallation(additationally

meters)MW(el.) MW(heat)TEP Boilerhouses

Centralheatsupply

Vinnytsy 2 - - 38.0 3.0 3.3 220

Kharkiv 1 79 - 29.9 5.0 5.4 250(1000)

Mykolaiv - 32 4 33.1 - - 93

Kamyanets-Podilskiy - - - 3.2 1.2 1.3 67

Kherson - 6 1 13.3 - - 13(140)

Dnipropetrovsk - 27 - 19.5 - - 34

Ternopil - 9 - 2.8 1.6 1.74 311

Chernigiv - - 46 26.0 - - 127(46)

Total 3 153 51 165.8 10.8 11.7 1115(1186)


81

City

Fuelsaving(ingasequivalent)

Reducingelectricityconsumptionattheexpenseofdomesticproductionandeconomy

Overall

СО2reduction

thous.m³/year % MW*g/year % thous.tonn/year %

Vinnytsya 5625.0 16.0% 5283.1 64.1% 33.2 13.9%

Kharkiv 47535.1 14.4% 7681.1 12.2% 215.2 27.5%

Mykolaiv 7279.5 3.9% 4459.1 13.1% 18.7 11.1%

Kamyanets-Podilskiy 8943.0 92.1% 8726.8 219.9% 8.9 12.5%

Kherson 2716.4 2.8% 1353.2 6.5% 6.2 7.1%

Dnipropetrovsk 2755.9 16.4% 798.2 14.4% 7.8 10.1%

Ternopil 5906.5 7.6% 14548.5 69.6% 16.5 10.9%

Chernigiv 27742.7 6.6% 109119.5 86.1% 28.6 2.4%

Total 108504 20.0% 151969 60.8% 335.1 11.9%

Source:ProjecttechnicaljustificationandCPMGdata


82

12.12. Annex12.Basiclegislationregulatinghousingandutilitysector

LawsofUkraine

Onheatsupply Generalfunctioningofheatmarket

Onnaturalgasmarket Legalbasisforgasmarketfunctioning

Onesuringcommercialmeteringofnaturalgas Introductionof100%naturalgasmetering

OnhousingandutilityservicesRelationshipsonthehousingandutility

market

OnstateregulationintheutilityareaLegalbasisforhousingandutilitiesmarket

regulation

ResolutionsoftheCabinetofMinistersofUkraine

Dated1.06.2011No869"OnEnsuringUnifiedApproachestothe

FormationofTariffsforHousingandUtilityServices"

Methodoftheformationoftariffsfor

housingandutilityservices

Dated21.07.2005No630"Onapprovingtherulesforprovisionof

centralheating,coldandhotwateranddrainageandamodel

contractforprovisionofcentralheating,coldandhotwaterand

drainage"

Relationshipsbetweenconsumerand

supplierofheat,rulesforservicespayment

Verionof09.03.15No2246"OnapprovaloftheRulesforhousehold

gassupply"

Rulesforservicesprovisionandpayment,

therelationshipbetweengassuppliers,

distributorsandpopulation

Dated03.10.2007No1198"OnapprovaloftheRulesforheatenergy

use"

Rulesforservicesprovisionandpayment,

therelationshipbetweencompaniesand

heatenergyconsumers

Dated06.08.2014No409"Ontheestablishmentofsocialstandardsin

theareaofhousingandutilityservices"

Setssocialratesforthepeoplewhoreceive

subsidies

Versiondated06.05.2015No619"Onapprovaloftheratesofnatural

gasconsumptionbythepopulationintheabsenceofgasmeters"

Setsthegasconsumptioniratesfortariff

calculationintheabsenceofmeters


83

Dated01.10.2015No758"Provisiononimposingspecificobligations

totheentitiesofnaturalgasmarkettoensuregeneralsocialinterests

intheprocessofnaturalgasmarketfunctionining(relationsinthe

transitionperiod)"

Settingtherulesfordeterminationofretail

gasprices,settingretailgasprices(3.6UAH/

m3)intransitionperiod

Dated29.12.15No217“OnapprovaloftheProcedureforallocating

fundsreceivedoncurrentaccountswithspecialmodeofusefor

payingtothenaturalgassupplier,whoischargedwithspecialduties"

ReallocationoffundsreceivedtotheDHP

accountswiththespecialmodeofuse

Dated15.11.2010No1132“OnapprovaloftheProcedurefor

transferingintergovernmentaltransfers"Transferofintergovernmentaltransfers

Dated11.01.2005No20"OnapprovingtheProcedureofthetransfer

ofcertainsubventionsfromthestatebudgettolocalbudgetsfor

provisionofbenefits,subsidiesandcompensation"

Subsidytransferscheme

DatedOctober21,1995No848"OnsimplifiedProcedureofsubsidies

toreimbursetheexpensesincurredduetopaymentforhousingand

utilityservices,purchaseofliquidgas,solidandliquidstovefuel"

Proceduresforgrantingsubsidiesto

population

Dated09.10.2013No750"OnapprovingtheProcedureforcrediting

fundstothecurrentaccountswithspecialuseforpaymentsunder

investmentprogrammes,useoffundsandcontrolovertheirspending

intheareas"

Transferofmoneyfromthecurrentaccount

tothespecialaccounttoimplement

investmentprogrammes

Dated1.10.2014No552"Someissuesonimplementationof

investmentprogrammesintheareasofheating,centralizedwater

supplyanddrainageareas"

Controloverinvestmentprogramme

implementation

Dated25.11.2015No1228“OntheNationalActionPlanforEnergy

EfficiencyforthePeriodtill2020"

MainactivitiesoftheMinregionandSАЕЕtill

2020

Versiondated27.08.2015No1056“Someissuesonfundsuseinthe

areaofenergyefficiencyandenergysaving”

Mechanismforusingstatefundsreceived

fromtheEUforenergyefficiency

NEURCRESOLUTIONS

Dated20.06.2014No766“OnapprovingthePprocedureforsetting

tariffsforcentralheatingandcentralhotwatersupply"

Definesthegroundsfortariffchangeand

procedurefortariffsetting

Dated31.03.2015No1171"Onsettingtariffsforcentralheatingand

hotwatersuppliedtothepopulationbyeconomicentitiesthatare

executorsoftheseservices"

Approvestariffsforhouseholdheatandhot

waterforeachDHP

Dated26.02.2015No220"Onsettingtariffsforelectricitysuppliedto

households"

Approvestariffsforhouseholdelectricity

tillMarch2017

Dated31.03.15“Onsettingtariffsforheatenergyfortheneedsof

budgetaryinstitutions,religiousorganizationsandotherconsumers

(excludingpopulation)”

Resolutionsapprovingtariffandstructure

forheatenergyforeachDHP(forexample,

tariffforKyivenergo–ResoltuionNo613"


84

Dated30.09.2015No2496“OnapprovingtheRulesfornaturalgas

supply”

Relationshipsbetweenthegassupplierand

consumer,connectionconditions,gas

supplyprocedure

Dated17.02.2011No244"OnapprovingtheProceduresforsetting

tariffsforheatenergy,Itsproduction,transportationandsupply”

Mechanismforsettingtariffsforheat

energy,Itsproduction,transportationand

supply

Dated03.03.2015No583“Onsettingretailpricesfornaturalgas

usedforhouseholdneeds”Settinggastariff

Dated10.08.2012No278"Onapprovingthetermsoflicencingthe

actcivitiesonheatenergysupply”

Determinationoflicensorsandtermsfor

licensingactivitiesonheatenergysupply

Othernormativeandlegalacts

KTM204Ukraine244-94

Settingheatconsumptionrates(usedfor

paymentcalculationintheabsenceof

meteringdevices)

StatebuilingcodeDBNВ.2.2-15-2005"Residentialbuildings.Main

provisionswithamendments"1,2,3

RulesandconditionsforIHUplacement

paragraph6.24–requirementsforIHU

placementunderlivingquarters

StatebuilingcodeDBNВ.2.5-67:2013"Heating,ventilationandair

conditioning"

Onconnectiontoheatsupplysurces.

Onenergyconsumptionmetering.

Typesofheatingsystemsandtheir

characteristics–AnnexA

RequirementsforIHUwhenitisplaced

underlivingquarters

Directive2014/32/EU Onstandardsandratesofmeters



85

12.13. Annex13.CompositionoftheWorkingGroup

The reportwaspreparedbyadvisers to theVicePrimeMinister,MinisterofRegional

Development, Construction and Housing and Communal Services of Ukraine and in

closecooperationwith:

• CoordinationCenterforInteractionwiththeCMUatthePresidentofUkraine

• theGovernmentofGermany

• theEUDelegationtoUkraine

• theEUSupportGrouptoUkraine

• NationalReformsCouncil

• BerlinEconomics

• theStateAgencyforEnergyEfficiencyandEnergySavingofUkraine

• expertsoftheWorldBankGroupinUkraine

heating in housing and utilities sector

Government & Nonprofit