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With an energy intensity that is more than double that of the EU, Ukraine is one of the most energy-intensive economies in the world. In 2015, energy subsidies cost 7-8% of GDP, creating a significant financial burden.

About 60 percent of Ukraine’s population lives in urban areas. Ukrainian cities inherited aging, energy-inefficient heating infrastructure from the Soviet times. Energy inefficiency translates into fiscal burdens on central and local budgets due to heavily subsidized energy consumption, low operational efficiency, and poor quality municipal infrastructure.

Only when severe gas supply bottlenecks forced the government to take drastic energy conservation measures in the winter of 2014, resulting in heat and electricity tariff increases, was energy efficiency recognized as the solution to reduce energy spending and increase comfort levels.

To help cities become more energy efficient, the World Bank’s Energy Sector Management Assistance Program (ESMAP) helped the cities of Kiev, Ternopil, Kamenets-Podolsky, and Zaporizhia to perform urban energy diagnostics using ESMAP’s Tool for Rapid Assessment of City Energy (TRACE). As signatories of Covenant of Mayors for Climate and Energy, these cities have committed to increasing energy efficiency and reducing carbon emissions by 20% by 2020.

The TRACE tool helped to identify energy efficiency potential across municipal sectors resulting in the development of an investment pipeline and pre-feasibility studies for the thermal retrofit of public buildings. In addition, the project increased awareness and capacity of decision-makers at the municipal level to develop and implement energy efficiency measures in services and infrastructure.

As a follow up, ESMAP collaborated with the Association of Energy Efficient Cities of Ukraine to organize two workshops that focused on strengthening the capacity of 84 representatives across 43 municipalities on the deployment and use of the updated TRACE tool. To target a broader base of stakeholders, TRACE was also translated into Russian for dissemination across Europe and Central Asia to help decision makers quickly identify potential energy efficiency improvements, target underperforming sectors, and prioritize interventions.

Building on an earlier study funded by ESMAP in 2014, the activity explored impediments to energy efficiency financing in Ukraine and developed a policy note that called for specific measures to be undertaken by the government in creating a national financing mechanism for investments. The recommendations included the establishment of an energy efficiency revolving fund—one that is replenished as withdrawals are made—or a national energy service company (ESCO) as important elements of central support.

The policy note served as an entry point to kick start the dialogue with the central government and municipalities on financing options. As a result, the city of Ternopil requested the World Bank’s assistance in the development of a business plan for setting up a municipal ESCO and revolving energy efficiency fund.

The European Investment Bank has also shortlisted 66 projects from cities across Ukraine that can potentially benefit from a €400 million municipal energy efficiency loan. The list includes three out of the four cities that received assistance from ESMAP, which successfully submitted their cross-sectoral projects that were partly developed under TRACE. A decision will be made later this year.

“The participatory TRACE diagnostics process helped us prioritize potential investments across municipal sectors and provided specific recommendations on both investment and institutional measures,” said Vladyslav Stemkovski, deputy mayor of Ternopil. “In particular, development of the investment pipeline by the World Bank was important for our subsequent proposal submission for a €38 million European Investment Bank loan to Ukrainian municipalities for which we are currently shortlisted to perform thermal-retrofit in our municipal buildings.”

ADDITIONAL ESMAP SUPPORT TO UKRAINE

Facilitating Gas Market Reforms

ESMAP and the European Commission jointly financed technical assistance to facilitate gas market reform in Ukraine. An analysis of restructuring options for production, transmission, and storage business lines of the national gas company, Naftogaz, was conducted. The analysis was based on a multi-criteria assessment framework that aimed to boost competition and integration with the European Union’s gas market. Heeding the recommendations of the analysis, the Government of Ukraine approved the ownership unbundling model for transmission and storage operations on July 1, 2015 and has embarked on its implementation.

Supporting Energy Tariffs and Subsidy Reforms

ESMAP and the World Bank have been supporting the Government of Ukraine in its efforts to advance energy tariff and subsidy reforms since 2014. The first phase of ESMAP assistance yielded an in-depth analysis and provided hands-on support to enable a strong policy response to wasteful energy subsidies. As a result, the government increased tariffs in 2015 and 2016 for a combined increase of 470 percent for residential gas and 193 percent for district heating. This helped to improve the financial viability of the gas sector, which made a profit for the first time in 2016. To shelter the poor and socially vulnerable from price increases, the government drastically increased the number of poor beneficiaries under the Housing and Utilities Subsidy program from 1 million to 5 million households in 2015.

The ongoing, second phase of ESMAP assistance to Ukraine includes training for journalists to ensure informed coverage of the policy decisions and support to the government in strengthening its social assistance mechanisms. The World Bank is now exploring the option of providing monetary subsidies (actual funds instead of price or tax rebates) and refining the Housing and Utilities Subsidy program to better target the poor.

Establishing an Energy Efficiency Fund

With the support from ESMAP, just-in-time advice has been provided to the Government of Ukraine for the design of an energy efficiency, to be formally established in April 2017. Building on this ESMAP-funded work, the World Bank—in cooperation with the Danish Government—is discussing a complementary follow-up activity.  This activity will support a pilot for converting fossil fuel subsidies into energy efficiency and a suite of international case studies and knowledge sharing based on the findings and lessons learned from the pilot.

Sustainable Urban Transport for Kyiv

In 2014, ESMAP and the Korea Green Growth Trust Fund jointly financed an assessment of Ukraine’s public transportation network. The analysis focused on the condition and performance of Kyiv's urban transport systems and proposed a plan to improve its network accessibility, operational efficiency, and environmental sustainability. An evidence-based optimization approach was developed that directly addressed the City Administration’s goals for improvement, including minimizing costs for operators and maximizing the connectivity of different modes of urban transit, such as metro, trams, buses, and trolleys. The proposed short- and medium-term optimization changes were expected to rebalance public transport passenger loads across all modes of urban transit available in Kyiv, particularly cleaner tram, bus and trolleybus vehicles, while reducing public reliance on informal mini bus operators, which will increase road safety and reduce overall greenhouse gas emissions of 20% or 38,700 tons annually of CO2. The reorganization of Kyiv’s public transport mobility patterns also takes into account the long-term land use plans for a fiscally and environmentally sustainable city. Based on a phased implementation plan, city administration has already adopted some of the solutions to improve accessibility.

Sustainable Urban Mobility for Odessa

Based on the successful experience in Kyiv, the Odessa City Administration has requested ESMAP’s support towards the preparation of a strategy and action plan to improve the efficiency and sustainability of its urban public transport system. The City Administration has already upgraded the urban electrical transport system and its rolling stocks, which proves its commitment to developing a well-integrated, energy efficient, and sustainable city. The proposed activity will serve to spearhead the preparation of a new Bank project for investment in sustainable mobility in Odessa.

Learn more about the ESMAP Energy Efficient Cities Program