I N T E R N A T I O N A L E N E R G Y A G E N C Y ENERGY POLICY REVIEW 2006 U K R A I N E Warning: Please note that this PDF is subject to specific restrictions that limit its use and distribution. The terms and conditions are available online at www.iea.org/w/bookshop/pricing.html © OECD/IEA, 2006 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to: International Energy Agency (IEA), Head of Publications Service, 9 rue de la Fédération, 75739 Paris Cedex 15, France. INTERNATIONAL ENERGY AGENCY The International Energy Agency (IEA) is an autonomous body which was established in November 1974 within the framework of the Organisation for Economic Co-operation and Development (OECD) to implement an international energy programme. It carries out a comprehensive programme of energy co-operation among twenty-six of the OECD’s thirty member countries. The basic aims of the IEA are: • To maintain and improve systems for coping with oil supply disruptions. • To promote rational energy policies in a global context through co-operative relations with non-member countries, industry and international organisations. • To operate a permanent information system on the international oil market. • To improve the world’s energy supply and demand structure by developing alternative energy sources and increasing the efficiency of energy use. • To assist in the integration of environmental and energy policies. The IEA member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, the Republic of Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the IEA. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of thirty democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD. 001-012 ukraine.indd Sec1:2001-012 ukraine.indd Sec1:2 11/09/06 16:27:1711/09/06 16:27:17 This book is dedicated to Gordon Duff us, a leader, mentor and friend. Gordon joined the IEA as Head of Division for the Offi ce of Non-member Countries in 2002. He passed away on 28 February 2006. We will miss his good humour, his wise counsel and his courage. 001-012 ukraine.indd Sec1:3001-012 ukraine.indd Sec1:3 11/09/06 16:27:1711/09/06 16:27:17 001-012 ukraine.indd Sec1:4001-012 ukraine.indd Sec1:4 11/09/06 16:27:1711/09/06 16:27:17 FOREWORD Ukraine is crucial to providing energy supplies to Europe because of its natural geographic position as a transit country: 80% of Russian gas supplies to Europe transit through Ukraine. Ukrainian energy policy is driven by the country’s strong desire to improve domestic energy security and reduce natural gas imports. Today, the majority of its energy supply comes from or through Russia. Ukraine now stands at a threshold as it confronts both dramatically higher energy prices and signifi cant changes in government. This Review highlights three key priority areas where the government could reduce its energy dependence and improve policy: energy effi ciency, cost-refl ective pricing and transparency. Ukraine has one of the most energy intensive economies in the industrialised world, thus energy effi ciency represents Ukraine’s single best opportunity to improve energy security. Improved effi ciency is essential for Ukraine’s growth and development, and for protecting its environment. Ukraine can considerably improve its energy effi ciency both through targeted policies and through market-oriented energy pricing. Today, most energy prices only cover operational costs, which has created a pressing need to invest in upgrading the infrastructure. Cost-refl ective prices are necessary to attract adequate investment and to provide incentives for needed reform across many areas of the energy sector. Ukraine could strengthen its energy policy by improving the transparency of energy data and clarifying market rules. The Review examines the energy sector from many angles, including the policy framework, environmental impact and developments in subsectors such as energy effi ciency, oil, gas, coal, electricity, district heating and renewables. The Review was an interactive process building upon a constructive dialogue between Ukraine and IEA. The Ukrainian government has worked very hard to make this Review a success; the process has enhanced cooperation between various branches of the government that address energy issues. Moreover, Ukraine has already made progress on the Review Team’s top priority recommendations. We congratulate the government on these achievements. At the same time, much remains to be done. We hope the Review and its recommendations can provide a useful input to Ukraine’s energy policy formulation and we look forward to working with the government as it continues its energy sector reforms. Claude Mandil Executive Director, International Energy Agency 001-012 ukraine.indd Sec1:5001-012 ukraine.indd Sec1:5 11/09/06 16:27:1811/09/06 16:27:18 001-012 ukraine.indd Sec1:6001-012 ukraine.indd Sec1:6 11/09/06 16:27:1811/09/06 16:27:18 7 TABLE OF CONTENTS TABLE OF CONTENTS Foreword 5 Organisation of the Review and Acknowledgements 13 Executive Summary and Recommendations 17 PART I: SETTING THE SCENE 29 1. General Energy Scene and Energy Policy 31 2. Energy Trends 61 3. Energy and Environment 93 PART II: SECTORAL ISSUES 113 4. Energy Effi ciency 115 5. Natural Gas and Oil 159 6. Energy Transit 203 7. Coal 241 8. Electricity 269 9. District Heating 307 10. Renewable Energy 333 Annexes I. Energy Balances and Key Statistical Data 349 II. International Energy Agency “Shared Goals” 355 III. Abbreviations, Units, Proper Names and Transliterated Words 357 IV. Bibliography 365 List of Tables 1.1. Main Economic Indicators in Ukraine, 1992-2005 33 1.2. Investment Needs of the Ukrainian Energy Sector 49 2.1. Forecasts for Domestic Production and Imports of Primary Fuels, 2005-30 86 3.1. Key Energy and Environment Indicators in Ukraine and Annex I Parties 98 4.1. Breakdown of Total Freight Turnover, 1990-2004 141 4.2. Breakdown of Total Passenger Turnover, 1990-2004 141 4.3. Investments in Energy Effi ciency 148 5.1. Ukraine’s Oil and Gas Industry Structure 160 5.2. Structure of Naftogaz of Ukraine by Type of Ownership 162 5.3. Independent Oil and Gas Production, 2001 and 2003 164 001-012 ukraine.indd Sec1:7001-012 ukraine.indd Sec1:7 11/09/06 16:27:1811/09/06 16:27:18 8 TABLE OF CONTENTS 5.4. Gas Production in Ukraine 173 5.5. Proven Natural Gas Reserves of Naftogaz of Ukraine, as of 31 December 2003 174 5.6. Gas of Ukraine Sales, by Consumer Category, 1999-2005 177 5.7. Regulated Final Gas Tariffs for End Users 183 5.8. Crude Oil and Natural Gas Liquids Production in Ukraine, 1992-2004 186 5.9. Proven Oil and Gas Condensate Reserves of Naftogaz of Ukraine, as of 31 December 2003 187 5.10. Oil Product Production and Use in Ukraine, 2004-05 191 6.1. Basic Features of Ukrainian Underground Storage Facilities, as of 2005 212 6.2. Projected Investments in the Gas Transportation System Reconstruction and Modernisation under the National Programme Oil and Gas of Ukraine to 2010 215 6.3. Characteristics and Utilised Capacity of Ukraine’s Oil Transport System 232 7.1. Projected Coal Sector Expenditures, 2006-2030 253 8.1. Installed Power Capacity in Ukraine, 2004 272 8.2. Comparison of Electricity Tariffs in Ukraine and Neighbouring Countries, Mid 2005 283 8.3. Energorynok’s Payment Collections, 1996-2001 284 8.4. Investment Needs in the Power Sector, 2006 to 2030 285 8.5. Electricity Exports in 2005 and Early 2006 286 8.6. Interstate Electric Power Transmission Lines of Ukraine and the Potential for Exports of Electric Power to Neighbouring Countries 289 8.7. Nuclear Power Plants in Ukraine 290 8.8. Average Wholesale Power Price by Type of Power Plant, July 2006 292 8.9. Ukrainian Uranium Production 296 9.1. Total Heat Production and District Heating Production in Ukraine, 1992-2005 309 9.2. Fuel Use at Combined Heat and Power and Heat-only Plants in Ukraine in 2005 310 9.3. Energy Losses in District Heating Systems Operated on Natural Gas 310 9.4. Projected Growth in Heat Production by Source, Reference Scenario 314 10.1. Renewable Energy Technologies in Ukraine 335 10.2. Estimates of Technically Feasible Renewable Energy Potential in Ukraine by Various Sources 339 10.3. Bioenergy Potential in Ukraine 340 10.4. Projected Use of Renewable and Non-conventional Energy Sources, Optimistic Scenario 345 List of Figures 1.1. Key Energy Policy Institutions of Ukraine 35 1.2. Ownership Structure in the Ukrainian Energy Sector, Early 2006 40 001-012 ukraine.indd Sec1:8001-012 ukraine.indd Sec1:8 11/09/06 16:27:1811/09/06 16:27:18 9 TABLE OF CONTENTS 1.3. Energy Prices and Tariffs Compared to Costs, June 2006 46 2.1a. Trend in Total Final Energy Consumption by Sector, 1993-2004 63 2.1b. Share of Total Final Energy Consumption by Sector, 1993 and 2004 63 2.2. Energy Consumption by Industry, 1993-2004 64 2.3. Energy Consumption by the Residential Sector, 1993-2004 65 2.4. Total Final Energy Consumption by Fuel, 1993 and 2004 67 2.5. Natural Gas Demand by Sector, 1993 and 2004 68 2.6. Coal Demand by Sector, 1993 and 2004 69 2.7a. Trends in Electricity Demand, 1993-2004 70 2.7b. Share of Electricity Demand by Sector, 1993 and 2004 71 2.8. Petroleum Product Demand by Sector, 1993-2004 74 2.9. Total Primary Energy Supply by Fuel, 1993-2004 76 2.10. Share of Net Imports in TPES, 1993-2004 78 2.11. Structure of Electricity Production by Fuel, 1993 and 2004 79 2.12. Forecasted TPES and Energy-saving Potential, Reference Scenario, 2005-2030 84 2.13. Forecasted Energy Consumption by Fuel, Reference Scenario, 2005-2030 85 2.14a. TPES Projections in the National Strategy of Ukraine for Joint Implementation and Emissions Trading, 2005-2020: Innovation Scenario 89 2.14b. TPES Projections in the National Strategy of Ukraine for Joint Implementation and Emissions Trading, 2005-2020: Business-as-Usual Scenario 89 2.15. Projected Primary Energy Supply in 2030, Offi cial versus Alternative Energy Strategy 90 3.1. Ukraine’s Greenhouse Gas Emissions by Sector, 2004 95 3.2. Ukraine’s Greenhouse Gas Emissions, 1990-2004 95 3.3. Distribution of Greenhouse Gas Emissions by Sector, 1990 and 2004 96 3.4. GDP, Energy Consumption and CO 2 Emission in Ukraine: Two Scenarios 99 3.5. Marginal Costs of CO 2 Abatement, Estimates as of 2003 102 3.6. Emissions of Key Pollutants from Stationary Sources, 1990-2003 105 3.7. Ukraine’s Emissions of SO 2 , Particulates and NO x from Stationary Sources, 1990-2004 106 3.8. Geographical Distribution of Emissions from Stationary Sources, 2004 108 4.1. Energy Intensity in Ukraine and Other Countries, 2004 117 4.2. Energy Intensity, GDP, Total Primary Energy Supply Trends, 1992-2004 118 4.3. GDP Structure, 2001-04 119 4.4. Fuel Consumption per Unit of Goods Produced in 2004, as Compared to the Level in 2000 120 4.5. Investment Results: Investment Cost vs. Change in Energy Balance, 2005-2030 122 4.6. Structure of Energy-effi ciency Potential 123 4.7. Industrial Energy Use and Value Added in Ukraine, 2000: Sub-sector Shares in Industrial Total 137 001-012 ukraine.indd Sec1:9001-012 ukraine.indd Sec1:9 11/09/06 16:27:1811/09/06 16:27:18 10 TABLE OF CONTENTS 5.1a. Gas Market Organisation in Ukraine until 2005 178 5.1b. Gas Market Organisation in Ukraine from 2006 179 5.2. Oil Processing Capacity by Refi nery, 2005 190 6.1. Natural Gas Transportation System of Ukraine 209 6.2. Natural Gas Transit via Ukraine, 1991-2005 211 6.3. Oil Transportation System in Ukraine 231 6.4. Oil Transportation through the Ukrainian Oil Transportation System, 1991-2005 233 7.1. Coal Production, 1992-2004 244 7.2. Projected Volumes of Raw Coal Production, Imports and Exports (Reference Scenario) 245 7.3. Ukraine’s Major Coal Basins 247 7.4. Coal Mines by Annual Output 248 7.5. Coal Mines by Age 248 7.6. Price Dynamics of Steam Coal and Selected Mining Equipment, as Compared to 2000 255 7.7. Financial Pressure and Control in the Coal Sector: Commodity and Money Flows 256 7.8. Labour Productivity 257 7.9. Coal Mining Fatalities in Ukraine 258 7.10. CO 2 Emissions from Coal Combustion, 1992-2004 261 8.1. Ukrainian Power Network 271 8.2. Electricity and Financial Flows in the Ukrainian Power Sector 277 8.3. Holdings of the Energy Company of Ukraine 278 9.1. Residential District Heating Tariffs versus Production Costs, 2005 320 9.2. Average Heat Production Cost Structure of District Heating Companies, 2005 321 9.3. State Budget Subsidies for Housing and Communal Services Payments, 2002-05 322 9.4. Households Applying for Housing Services Subsidies and Average Monthly Level of Subsidies, 2000-05 323 9.5. Outstanding Debt of Housing and Communal Services Companies as of January 2006 326 9.6. Consumer Debt to Housing and Communal Services Companies as of 1 January 2006 326 List of Boxes 1.1. Strategic Objectives of the Energy Strategy of Ukraine to 2030 51 2.1. IEA Methodology: Primary Supply and Final Consumption 62 2.2. Note on Coal Production Reporting 76 2.3. Top-Down versus Bottom-Up Modelling Paradigms 82 001-012 ukraine.indd Sec1:10001-012 ukraine.indd Sec1:10 11/09/06 16:27:1811/09/06 16:27:18 [...]... Finally, Ukraine could strengthen its energy policy by improving the transparency of its energy data and market rules Energy efficiency represents Ukraine s single best opportunity to improve energy security It will also reduce the economic burden of energy use, making Ukraine less vulnerable to rising energy prices and disruptions Moreover, efficiency is essential for Ukraine s growth and development Today, Ukraine. .. The 2006 IEA Energy Policy Review of Ukraine was undertaken by a team of energy specialists from International Energy Agency (IEA) member countries and from international organisations The team visited Kyiv from 14-22 November 2005 to hold discussions with government officials, energy companies, parliamentary committees, non-governmental organisations and other stakeholders The IEA Secretariat and review. .. Ukraine uses energy about three times less efficiently than EU countries on average; even neighbouring Russia and Belarus are less energy intensive The government’s own projections for energy efficiency and expanded domestic energy supply show that energy efficiency is less expensive and has a bigger impact on reducing imports than projected new domestic supply Ukraine put an energy- efficiency policy in place... vital to improving energy efficiency and energy security EXECUTIVE SUMMARY AND RECOMMENDATIONS 013-028 intro.indd 18 11/09/06 16:27:56 19 Greater transparency in energy data and market rules could boost investment and thereby enhance competition and service quality High-quality energy statistics and well-founded energy projections are foundations of effective policy making Ukraine has good energy- production... chapter Ukraine has major opportunities through the Kyoto Protocol to finance energy efficiency and renewable energy, and associated emission reductions To date, the government has been slow to pursue those opportunities: it approved rules for one of the Kyoto mechanisms, joint implementation, only in 2006 In conclusion, Ukraine has taken important steps in meeting key goals of energy policy related to energy. .. location Ukraine is one of the most important energy transit countries in the world: 80% of the gas and 14-17% of the oil that Europe acquires from Russia travels through Ukraine However, the transit infrastructure requires investment in modernisation in order for Ukraine to maintain its strategic role in energy transit Ukraine is highly dependent on Russia for energy supplies In 2005, more than 85% of Ukraine s... of the energy sector include several ministries and state committees (Figure 1.1) The structure of energy policy institutions in Ukraine reflects the legacy of the Soviet-style distinction between “large-scale energy (large-scale fuel production and generation) and “small-scale energy (residential energy services including district heating and distributed generation) The Ministry of Fuel and Energy. .. environment Based on this review, the government of Ukraine should take action in the following areas: Cross-Cutting Recommendations in this section cover issues such as pricing that are not unique to a single energy sub-sector, but rather cut across many types of energy or energy policies • Concentrate on improving energy efficiency • Eliminate subsidies and cross-subsidies in the energy sector and ensure... production into energy prices Energy Efficiency • Ensure that prices cover the full, long-term cost of energy supply Help ease the pain of rising energy prices by investing in energy- efficiency measures in low-income households • Make it mandatory for all buildings and other energy consumers to have heat, electricity and gas meters • Provide ample staff and funding for the new National Agency on Efficient Energy Use... independence in 1991, Ukraine has made some progress in reducing its dependence on energy imports, primarily by improving energy efficiency At present, Ukrainian energy policy remains mainly focused on energy production, thus there is much opportunity to achieve greater gains through energy efficiency However, domestic energy prices have typically been well below international levels; this limits investment . many areas of the energy sector. Ukraine could strengthen its energy policy by improving the transparency of energy data and clarifying market rules. The Review examines the energy sector from. Non-conventional Energy Sources, Optimistic Scenario 345 List of Figures 1.1. Key Energy Policy Institutions of Ukraine 35 1.2. Ownership Structure in the Ukrainian Energy Sector, Early 2006 40 001-012 ukraine. indd. Sec1:12001-012 ukraine. indd Sec1:12 11/09/06 16:27:1811/09/06 16:27:18 13 ORGANISATION OF THE REVIEW AND ACKNOWLEDGEMENTS ORGANISATION OF THE REVIEW AND ACKNOWLEDGEMENTS The 2006 IEA Energy Policy Review