Ukraine energy policy outlook Ildar GAZIZULLIN International Centre for Policy Studies May 25, 2012, KSE Alumni congress

Summary Energy is important for sustaining macroeconomic fundamentals in Ukraine: it affects trade balance, prices and industrial output Over 2012–2015 Ukraine can do very little to change energy supply and demand, but, it can do much more in terms of policy design If Ukraine succeeds with a right policy mix it will implement the ambitious objectives of the Energy Strategy to 2030

The revised Strategy, which is to be launched this year, sets objectives, which are broadly in line with the EU energy policy aims: – Having less negative impact of energy on environment – Becoming less vulnerable from imported energy – Achieving affordable energy for consumers Ukraine’s Energy Strategy to 2030 However, to meet the Strategy’s targets Ukraine will have to invest annually times more than it does today

Current supply-side energy projects face risks Supply-side energy projects are most popular in Ukraine: – Building LNG terminal at the Black Sea – Welcoming majors to explore shale gas – Stimulating renewables through green tariffs – Substituting gas with coal (and nuclear) These are considered to be less effective than demand side measures, like increasing energy efficiency

Energy policy has to change Despite greater openness to FDI in the energy sector, the business climate has not improved: – Policy making is not consistent which increases uncertainty – Favoritism distorts competition Energy prices for most of the consumers are below cost recovery, while energy prices for most producers have reached the EU levels Ukraine already faces a risk of power deficit due to generation capacity constraints

European Energy Community framework Ukraine’s membership in the Energy Community of South East Europe (ECT) is a key factor of reforming Ukraine’s energy markets Originally designed for the Balkan countries, ECT ultimate goal is to create a common energy market by connecting energy networks but also through regulatory convergence Given a delay with the signing the EU-Ukraine Association Agreement, ECT is currently the No 1 framework agreement with the EU in the sector

Energy reforms=Implementing the Energy Community Treaty Ukraine has to implement about 12 EU Directives and Regulations by 2018 Most of Ukraine’s commitments deal with competition (liberalizing gas and power markets) and environmental protection (reducing emissions, making environmental impact assessment, increasing fuel quality)

Reform outlook Ukraine’s Action Plan to implement the President’s Economic Reform Program for 2012 has taken into account most of the requirements of the Energy Community. Still, the timeframes in the Plan are not being adhered to Unless five key conditions are met, any reform will be impossible: – public support – reform advocacy groups – two-way communication with voters – administrative and regulatory capacity to turn all political objectives into administrative procedures and policies – monitoring and oversight