White Book of Reforms 2025. Chapter 7. Energy sector reforms in Ukraine

First, the lack of transparency and the monopolization of the sector made it a convenient source of rent for corrupt officials and oligarchs and, consequently, an instrument of Russian political influence. For example, in 1999, Ukraine handed over its strategic bombers to Russia for imaginary or real gas debts, and in 2010, in exchange for a “discount” on gas (i.e. somewhat lower price than initially set by Gazprom), it extended the stay of the Russian Black Sea Fleet in Crimea until 2042.

Second, high energy use due to outdated technologies and universally low prices for households at the expense of the industry (cross-subsidization). Although Ukraine now consumes significantly less energy than in the 1990s, this reduction is mainly the result of restructuring the economy (a decline of the heavy industry share) rather than introduction of energy-saving technologies. Today, Ukraine’s energy consumption per unit of GDP remains approximately twice higher than the European average. 

The non-market structure of the sector makes it not only vulnerable to foreign influence but also highly politicized inside the country. Such issues as low tariffs or support for coal mines have always been rallying points for various populists. As a result, reforms aimed at introducing market prices and rules and containing corruption rents, have always been hard to implement.

Nevertheless, over the past 10 years, Ukraine’s energy sector has seen revolutionary changes. Due to the war, economic hardship and the need to secure IMF financing, the government had to agree to significant energy market reforms in line with EU regulations. These reforms included unbundling energy suppliers from transportation and distribution companies, introducing competition into the market, increasing the regulator’s independence, partially implementing market-based pricing, and establishing proper corporate governance in state-owned energy companies. 

Ukraine’s integration into the European electricity grid is the most significant change in recent years. Ukraine’s grid was disconnected from the Russian-Belarusian network just a few hours before the full-scale Russian invasion. On March 16, 2022, Ukraine had successfully joined the European grid. Of course, this transition was prepared by several years of intense work. Without this integration, Ukraine would have faced a complete blackout already in February 2022.

Despite significant progress, the reforms are far from complete (e.g., households still don’t pay market price for energy). Moreover, there are occasional attempts to roll back some of the reforms, e.g. to bring the management of state-owned companies under political control. Therefore, Ukraine’s partner countries and civil society must pay as much positive attention to this sector as Russia does with negative intent (as of May 2024, Russian attacks had incurred USD 60 billion worth of damages to the Ukrainian energy sector). 

2014-2019

Energy sector reforms are closely intertwined. For example, the introduction of market-based tariffs is a necessary condition for more energy-efficient behavior. However, consumers will not be motivated to save energy if they are billed based on standardized consumption norms rather than actual consumption. Also, it will be more challenging for them to save if they cannot switch suppliers because of the monopolized market. Therefore, although the reforms in this section are grouped into several thematic categories, they work well only when implemented together.

Introducing market prices for energy

During the initial stage of energy sector reforms, the government focused on eliminating various privileges, as the introduction of market-based pricing was a necessary condition for further reforms. In January 2015, the government canceled subsidized electricity exports to several Eastern European countries (Belarus, Moldova, Slovakia, Hungary, Romania, and Poland): they paid less than Ukrainian consumers on the wholesale market. At the same time, the preferential electricity transmission tariff for coal mines was lifted (between 2007 and 2009, the Cabinet of Ministers compiled a list of mines that paid for electricity distribution as first-class consumers, whose tariffs are several times lower than those for second-class consumers. Since 2015, coal mines pay according to their actual consumption).

In February 2015, the independent regulator, the National Energy and Utilities Regulatory Commission (NEURC), decided to gradually increase household electricity tariffs by 3.5 times by 2017 (Table 7.1). According to the Commission’s estimates, the economic impact of this increase was expected to reach UAH 5.4 billion per year. The following month, the NEURC raised household gas tariffs by 3.3 times and tariffs for district heating companies (DHCs) by 2.2 times. It also increased the price paid to Ukrgasvydobuvannya (the state-owned gas extraction company) for domestically produced gas. 

In July 2015, Verkhovna Rada passed a law from the “IMF package” on formation of utility tariffs for households. This law prohibited setting utility prices below their economically justified costs, and heating tariffs had to include profits of district heating companies (DHCs). However, in the following years, the government often set a tariff cap, due to which DHCs accumulated debts to Naftogaz and other suppliers, which we discuss below.

In April 2016, the government equalized gas prices for households and DHCs with prices for gas imported from Europe, and the NEURC increased heating tariffs by 75-90%. According to Naftogaz, implicit subsidies (i.e., selling gas to households at prices lower than the cost of imported gas) cost the company USD 60 billion between 2005 and 2015. Following the tariff increases, household gas consumption decreased, partly due to switching to other energy sources. 

During 2015-2016, Ukrainian society intensely discussed different gas tariffs for households and industry. Supporters of low tariffs for everyone argued that households and DHCs received domestically produced gas, which should be cheaper than imported gas. However, in reality, different tariffs allowed some companies to profit from arbitrage: they purchased gas at the “household” price and sold it to industrial enterprises at market price. As long as Ukraine imports gas, the “fair” price is the European market price. Thus, in February 2017, the Cabinet of Ministers approved a procedure for adjusting natural gas prices: the price cap for households and DHCs was to be revised twice a year — in October and April, with retail price cap linked to the average monthly price at the German gas hub plus transportation costs.

To protect low-income households, along with tariff increases, the government introduced a broad energy subsidy program (see Chapter 12), which in 2014-2015, was open to almost anyone. Over time, the government reduced spending on energy subsidies by narrowing the eligibility criteria, e.g. owners of large houses were not eligible for subsidies. 

Initially, subsidies (i.e. the difference between market price and subsidized price) were paid directly to gas or heating suppliers, who were interested in maintaining high consumption norms. They received payments based on “normative” consumption and, since actual consumption was lower, could reap additional profits. To cut costs, in April 2015, the government halved the gas consumption norm for households without meters from 6-18 to 3-9 cubic meters per person per month (depending on whether a household has a gas stove and central heating). In 2018, the government initiated the monetization of energy subsidies. 

However, since market pricing for households was never fully introduced, the government continued to avoid raising tariffs under different pretenses when gas prices in Europe increased. For instance, the planned introduction of market tariffs in 2020 was initially postponed due to the pandemic and later due to the full-scale war. As a result, Naftogaz continues to be the supplier of last resort (SLR), providing gas to households and some other organizations at regulated tariffs. In the fall of 2023, Naftogaz’s SLR role was extended until the end of martial law plus six months, despite the law requiring a competitive selection of SLR.

Due to regulated tariffs, the government and Parliament periodically have to address the issue of debt of district heating companies to Naftogaz. For example, in February 2014, the debt amounted to UAH 27 billion. To tackle the problem, in 2014, the government introduced special accounts: payments made by consumers to DHCs were credited to these special accounts and could only be used to pay for gas supplied by Naftogaz. By the end of 2015, similar accounts were introduced for water supply companies. Until March 2015, 100% of the funds were automatically deducted from the special accounts. Later, DHCs were allowed to allocate a portion of the funds for their operational needs. 

In May 2015, Naftogaz was authorized to sell debts and disconnect DHCs from the gas supply if they failed to meet payment deadlines. This equipped Naftogaz with higher leverage over debtors. However, Naftogaz did not always exercise this right as cutting off entire city districts from heating would have been socially unacceptable.

In April 2016, Parliament prohibited Naftogaz from stopping gas supply to DHCs that use it for water heating, provided a DHC had no outstanding debt or was making current payments and had submitted a debt repayment schedule to Naftogaz. In November 2018, this restriction was lifted.

In 2017, the government and Parliament restructured and partially wrote off DHCs debt. In 2021, another restructuring was conducted for nearly UAH 60 billion, with accrued penalties written off. In October 2021, the government abolished the special accounts while obliging DHCs to purchase gas at market prices. However, by the fall of 2023, the debt of DHCs to Naftogaz had reached UAH 95 billion. Thus, the current IMF program requires that this debt does not exceed UAH 60 billion (currently USD 1.5 billion).

Even the partial increase of tariffs became one of the key factors to help Naftogaz emerge from a persistent crisis (Figure 7.2) and become one of the country’s largest taxpayers. Other significant factors include the introduction of proper corporate governance in the company and the regulation of the gas market in accordance with European principles discussed below. 

Alongside tariff increases, the government also worked to enhance tariff transparency. Since December 2015, state authorities and local governments have been required to provide citizens with access to information about electricity, gas, heating, and water tariffs on their official websites.

In March 2016, the NEURC approved a formula for calculating the wholesale electricity tariff to increase tariff transparency. The formula included the cost of coal on Dutch exchanges (the so-called Rotterdam+ formula), even though Ukraine primarily imported coal from South Africa, and the share of imported coal at thermal power plants (TPPs) was only about 5% (the rest was domestic coal). The formula was scrapped in 2019 after the adoption of the law on the electricity market. However, since 2017, court hearings have been ongoing on whether NEURC could have introduced this formula and whether it resulted in unjustifiably high prices for consumers. The situation is complicated by the fact that when the formula was introduced, 70% of coal generation was owned by the DTEK company (today its assets are significantly damaged by Russians), thus some politicians and NGOs suspected that the formula was implemented in the interests of this company. The case is currently under consideration of the High Anti-Corruption Court.

Demonopolization of energy markets and regulation of natural monopolies

In January 2015, the Cabinet of Ministers canceled a 15% discount on oil auctions for Privat Group, thereby depriving the group of the opportunity to profit at the state’s expense. The scheme worked as follows: oil-extracting company Ukrnafta, which was 60% state-owned and 40% controlled by Privat Group, sold domestically produced oil at a discount to Privat’s oil refineries. This allowed Privat to generate higher profits from fuel sales. After the discount was canceled, Privat started paying the market price for oil. The government also amended legislation on quorum in joint-stock companies to regain control over Ukrnafta (see Chapter 11).

At the same time, the government split regional gas distribution companies (“oblgazes”) into supply and distribution entities, thereby demonopolizing the retail gas market. This measure aligned with European practices and was later incorporated into the Law on the Natural Gas Market, adopted in 2015 under the IMF program. 

The law aligned Ukraine’s gas market with EU Directive 2009/73/EC and Regulation 715/2009 on the conditions of access to gas networks. As a result, the rules for using state-owned gas networks were standardized for all operators, whereas previously some operators were able to use the networks free of charge. After the adoption of the law, industrial consumers, state-owned enterprises, and institutions began purchasing gas on the open market. Since gas is a homogeneous good, its market quickly became one of the most competitive. District heating companies and households still purchase gas at regulated tariffs but from August 2020, households can freely choose their gas suppliers.

In October 2015, the government returned state-owned distribution networks, which had been managed by “oblgazes” controlled mainly by fugitive oligarch Dmytro Firtash, to Naftogaz ownership. Thus the natural monopoly of gas distribution networks remained under state control, providing equal access to the infrastructure for both state-owned and private gas suppliers. 

Additionally, the law provided for the unbundling of Naftogaz, separating it into extraction and transportation companies. The government approved the resolution on unbundling in July 2016, and the restructuring was completed by a new government in 2020. These changes enabled Ukraine to join the European Energy Union. In October 2016, the law was amended to introduce mandatory gas reserve stock of up to 10% of the next month’s consumption, ensuring energy security and stability of supply.

In December 2015, the Ministry of Energy aligned Ukraine’s gas supply regulations with European standards by introducing a local version of the Prevention Action Plan and the Emergency Action Plan. These plans outline potential gas supply risks, risk mitigation measures, and crisis response actions. 

One of the major objectives of energy sector reforms was reducing Ukraine’s dependence on Russia that uses energy as a weapon. In 2014, Ukraine began negotiations to purchase gas from European countries. From January 1, 2015, Ukraine completely halted gas purchases from the aggressor state. Gas from Europe turned out to be cheaper than from Russia (e.g., in 2013, Ukraine imported gas at USD 414 per 1,000 cubic meters, whereas in 2014, the price dropped to USD 292 — see Figure 7.3). This shift deprived Russia of one of its leverages over Ukraine. In 2019, Naftogaz won a court case against Gazprom, thus the latter has to pay USD 5 billion compensation to the Ukrainian company.

Until 2020, gas was physically transported from Ukraine to Europe and then back to Ukraine, even though the Ukrainian Parliament had approved virtual reverse back in 2016 (whereas Ukraine retains part of the gas during transit and pays the European supplier for it). However, Gazprom blocked this arrangement for four years. It was finally included in the new contract for transit of Russian gas signed at the end of 2019, which expired on December 31, 2024. From January 1st, 2025 onwards, Ukraine stopped the transit of Russian gas. 

Additionally, to encourage domestic hydrocarbon production, the government simplified the process of renting land for oil and gas extraction. However, domestic gas production has so far remained approximately at the same level (see Figure 7.4).

In September 2016, Parliament passed a law that significantly increased the NEURC independence, particularly financial independence. The law introduced funding for the Commission’s operations through a portion of tariffs allocated to a special budget fund. It also established a competitive selection process for Commission members. The selection committee includes representatives appointed by the President, Parliament, and Cabinet of Ministers, a stark contrast to the previous procedure under which Commission members were appointed solely by the President.

In June 2017, Parliament passed the Electricity Market Law. This law introduced market-based electricity tariffs for enterprises (household tariffs are still regulated by the NEURC) and allowed consumers to freely choose their electricity supplier. The wholesale electricity market operator publishes electricity prices in real time.

For some time, there were discussions on whether Ukraine should introduce RAB tariffs to provide distribution companies with resources for infrastructure investments, as energy losses in the network were significant (e.g. in 2020 Ukraine lost about 10% of electricity during transportation). However, the government and market players could not reach an agreement on how exactly these tariffs should be calculated. Today this issue is irrelevant at least until the end of the war, as Ukraine is likely to focus on developing decentralized energy generation.

In December 2017, Parliament demonopolized the housing and utilities market, allowing both homeowner associations and individual consumers to sign contracts directly with service providers, including energy suppliers. This change enabled consumers to choose the best conditions for themselves. 

Energy efficiency and accounting

In April 2015, Parliament allowed budgetary institutions, e.g. schools or hospitals, to sign contracts with energy service companies (ESCOs), which implement energy modernization of buildings and are paid for their services out of savings on electricity and heating bills. This law was developed in collaboration with the EBRD. Later, the government approved an energy service contract template (as of the mid-2022, 578 ESCO contracts for UAH 1.34 billion were signed).

In December 2015, Ukraine adopted the National Energy Efficiency Action Plan until 2020. The action plan was a commitment within the European Energy Union, which Ukraine joined in 2011. The plan aimed to reduce domestic energy consumption by 9% compared to the 2005-2009 levels by 2020. In 2021, the government approved a similar action plan until 2030. This new plan envisions that by 2030, Ukraine’s final energy consumption will be approximately in line with the average level of 2015-2019 while incorporating several energy-saving measures. In line with Ukraine’s European integration, the country is likely to adopt stricter commitments than those outlined in the current strategy, which aims to limit emissions to 35% of 1991 level by 2030. 

In mid-2017, the government introduced energy efficiency certificates for buildings that are issued based on the results of energy audits. At the same time, the Energy Efficiency Fund was established to provide loans or grants for the thermal modernization of buildings based on energy audit results. These initiatives partially implemented Directive 2010/31/EU. According to the Fund’s report, by early 2024, it helped implement more than 300 thermal modernization projects, with an additional 340 projects in progress.

Resource metering is a key prerequisite for energy savings. Therefore, between 2014 and 2019, the government focused on installing meters where they were lacking — primarily gas and heat meters. 

In 2014, only 20% of buildings were equipped with heat meters; by 2018, this share increased to 77%, and by early 2024, it had reached 85%. In 2017, the installation of heat meters became mandatory, but progress had been slower than expected due to technical challenges. To address these challenges, in October 2018, the government developed guidelines for determining the technical feasibility and economic viability of installing individual meters in buildings with so-called vertical heating distribution systems, which are the most common type in Ukraine. Thus, for some houses only building-level meters will be installed, and payment will be distributed among households according to the area of their flats.

The situation with gas meters is better. At the beginning of 2015, 71% of household consumers had meters, covering 95% of total gas consumption. By 2020, only 800,000 households (5% of the total) did not have individual or building-level gas meters. In 2024, the number of households without meters remained roughly the same — around 700,000. However, it is hard to calculate the share of apartments equipped with meters, since many homes have been destroyed. For some time, gas distribution companies attempted to install building meters instead of individual ones to reduce costs. To stop this practice, in January 2018, the government prohibited such installations without residents’ consent. Additionally, residents were allowed to independently install individual gas meters in their apartments. The deadlines for achieving 100% gas meters coverage have been postponed several times — from the end of 2018 to 2021 and later to the end of 2023. However, full coverage has not yet been achieved. 

In August 2016, the Cabinet of Ministers canceled the monopoly of regional power distribution companies (“oblenergos”) on the sale of multi-zone electricity meters to households (that is, meters that allow for tracking the time of energy consumption. These meters help save money, as the price of electricity varies at different times of the day). Additionally, the NEURC set a maximum period of 3-5 days for oblenergos to connect these meters to their databases.

Green energy

Ukraine introduced the green tariff in 2008. In 2015, households were allowed to sell electricity generated from renewable sources (mainly solar panels) to the grid at green tariff rates. The state-owned enterprise “Guaranteed Buyer” is responsible for purchasing this energy, meaning that the government effectively subsidizes expensive green energy, partly with cheaper electricity from nuclear and hydroelectric power plants. This approach is common in many EU countries.

Government subsidies stimulated significant investments in renewable energy: between 2014 and 2020, over EUR 8 billion was invested in green energy generation. In 2015, the capacity of renewable energy power plants was 1 GW, and by the end of 2019, it increased to nearly 5 GW. This rapid growth in green energy generation required substantial government spending to cover the green tariff payments. Thus, the “Guaranteed Buyer” accumulated debt to renewable energy producers. Since most investments were financed through loans, these financial difficulties also affected banks that had a large share of “green” loans in their portfolios.

To mitigate this problem, in May 2019, the system of renewable energy support was revised. Instead of administratively set green tariffs, Parliament introduced green auctions. Under this system, the right to build solar or wind power plants is awarded to the investor who offers the lowest tariff, which remains fixed for 20 years. Green tariffs for existing power plants were slightly reduced (Table 7.2 illustrates the reduction in tariffs for small power plants). Owners of small private solar power plants (SPPs) located on land (rather than on rooftops, facades, etc.) were banned from selling energy to the system under the green tariff. This ban was lifted in July 2019.

Despite the gradual reduction of green tariffs, the debt crisis in the energy sector remains. In 2021, the debt to renewable energy producers amounted to nearly UAH 18 billion; by 2024, it had grown to approximately UAH 36 billion.

From 2019, Parliament increased the carbon dioxide tax rate from UAH 0.41 to UAH 10 per ton. However, if Ukraine aims to align with the EU Green Deal, this tax will need to increase significantly.

2019-2024

Developing markets and introducing EU market regulations

The new government and Parliament, which started working in the fall of 2019, continued the previously initiated gas market reforms. They passed a law to establish an independent gas transmission system operator (TSO) separate from Naftogaz and to ensure the independence of the electricity transmission system operator. This law aligns with the previously adopted laws on the Natural Gas Market and on the Electricity Market, as well as with the EU Third Energy Package. At the end of 2019, the Gas Transmission System Operator of Ukraine (GTSOU) was certified for compliance with the EU Third Energy Package requirements and became an observer in the European Network of Transmission System Operators for Gas (ENTSO-G). 

As of January 1, 2020, GTSOU was fully separated from Naftogaz, but the Ministry of Finance still managed it via the state-owned enterprise “Main Gas Pipelines of Ukraine” (MGU). MGU was dissolved only in the fall of 2023, and GTSOU was transferred to the management of the Ministry of Energy. At the same time, the Cabinet of Ministers established a supervisory board for GTSOU and approved its new charter, which was a structural benchmark of the IMF program. 

In the fall of 2019, market gas prices significantly decreased, providing the new government with an opportunity to introduce market-based pricing for households. It even introduced a key prerequisite for this — separate payments for gas and for its transportation for households. However, due to political speculation by populist politicians, the government refrained from taking the final step toward fully market-based tariffs. In early 2020, the government introduced a price cap for gas sold under public service obligations, setting it at the price level of the Dutch TTF gas hub. With the onset of the full-scale invasion, the government returned to manual regulation of price of gas sold to households. This decision resulted in significant financial losses for Naftogaz in 2022 (see Figure 7.2), as the state-owned company had to cover the difference between market and regulated prices. 

In April 2021, Parliament continued the implementation of the EU Third Energy Package, in particular, by creating the legal framework for the certification of the electricity transmission system operator (SOE Ukrenergo), under the Independent System Operator (ISO) unbundling model. Under this model, the operator manages assets that ensure the integrity of Ukraine’s unified energy system while the assets remain state-owned. The transmission system operator must be separate from electricity producers or traders. 

In May 2022, Ukraine switched to the European system of gas measurement — in energy units (kWh) instead of the Soviet-era cubic meters. This change reflects the fact that the true value of gas lies in the amount of energy it can produce.

In December 2022, the government implemented EU Regulations 715/2009 and 2017/1938 in Ukraine. These regulations are related to certification of gas storage facilities, their filling schedules, and the regulation of storage operators’ activities. The NEURC is responsible for ensuring compliance with these new rules.

In July 2020, the government somewhat lowered “green” tariffs, and in June 2021, the “Guaranteed Buyer” was allowed to sell the renewable energy it had purchased through auctions. The SOE was granted the right to sign long-term contracts (up to 12 months) and independently determine the starting auction price. In the spring of 2022, Parliament passed a framework law enabling the creation of energy storage operators as independent market participants. Energy storage is a crucial component for the development of renewable energy, since its production cannot be easily increased or decreased in response to changes in demand. 

In August 2022, Ukraine introduced bilateral contracts in the electricity market. This allows market participants — producers, suppliers, Ukrenergo, consumers, etc. — to freely choose their counterparties and sign contracts with them. Market participants can sell electricity through bilateral contracts above the quantities (set by the NEURC) which they are required to sell on the day-ahead market. Until April 2023, energy under bilateral contracts was sold only through electronic auctions (previously, only state-owned generating companies had to sell energy via auctions). This transitional phase was necessary for market development. Now, energy can be sold both through auctions and direct contracts. 

In 2020, Parliament restored the independence and regulatory powers of the State Nuclear Regulatory Inspectorate, which had been deprived of many functions in 2016 as part of deregulation efforts. The inspectorate regained its powers to 1) conduct annual inspections of nuclear power plants (NPPs) and unplanned inspections of facilities that use nuclear energy; 2) licence activities in the sphere of nuclear energy use; and 3) apply sanctions to entities that violate radiation and nuclear safety regulations and suspend related operations. With these measures Ukraine aligns with EU Directive 2014/87/Euratom and the IAEA safety recommendations.

In February 2023, Parliament passed a law on the corporatization of Energoatom, a state-owned operator of nuclear power plants. By the end of the year, the company was transformed into a joint-stock company with 100% state ownership. The reorganization of Energoatom is a condition of the loan agreement between the company and the European Bank for Reconstruction and Development (EBRD). Reorganization is also foreseen by the Comprehensive Program for Safety Upgrade of Power Units of Nuclear Power Plants, approved in 2011 and financed by the EBRD.

Independence of the regulator

In December 2019, Parliament addressed loopholes of the 2016 law on NEURC. However, the new law received an overall negative assessment from Reform Index experts, as it created risks to the regulator’s independence by allowing the Cabinet of Ministers to dismiss Commission members. Additionally, the law granted the NEURC the right to conduct unjustified inspections of energy market participants. 

In mid-2023, Ukraine implemented the provisions of the EU Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). This law expanded the NEURC’s authority to monitor potential market manipulations, such as price-fixing collusion, and obligated market participants to disclose the necessary information for such oversight. The NEURC still needs to adopt secondary legislation to implement the law in full. The same law reduced tariffs for renewable energy power plants that started operations after July 1, 2023 (prior to this, green tariffs were already reduced in July 2020).

In 2024, to increase the independence of the NEURC, the Cabinet of Ministers canceled the requirement for it to approve its resolutions with the Ministry of Justice.

Energy efficiency and development of renewables

At the end of 2021, Parliament introduced a biomethane registry, which allows for the verification and issuance of certificates of origin to producers selling biomethane into the gas transmission system. This registry is an important prerequisite for both the domestic use of biomethane and its export to the EU. Ukraine has the potential to produce up to 22 billion cubic meters of biomethane annually, which is approximately equal to the country’s current gas consumption. 

In 2023, Parliament passed a comprehensive law on developing green energy, introducing a registry of certificates of origin for renewable energy producers. This system enables Ukrainian renewable energy power plants to sell electricity independently on both domestic and international markets. When selling on the domestic market, producers will receive additional payments from the “Guaranteed Buyer” if the market price is lower than the green tariff, in accordance with the EU Directive 2018/2021. Companies that use green energy in their production processes will benefit from reduced tariffs when exporting their products to the EU (under the EU Green Deal, additional duties are applied to goods produced using energy from “traditional” sources).

The framework law on energy efficiency came into force in November 2021. Among other provisions, it mandated annual expenditures on energy efficiency programs to be at least 1% of the state budget expenditures. Currently this provision is not being implemented due to the war.

In August 2022, Parliament approved regulations for the comprehensive thermal modernization of buildings. It prohibited partial facade insulation, defined the process and responsible parties for implementing energy certification of buildings, and simplified the process of getting funds from the Energy Efficiency Fund for insulation of buildings.

In March 2023, Parliament established legislative conditions for the introduction of cogeneration plants that simultaneously produce heat and electricity. This law implements the provisions of the Directive 2012/27/EU on energy efficiency.

At the same time, Parliament introduced incentives for the development of charging infrastructure for electric vehicles, including simplified procedures for acquiring land plots and connecting to the grid, the possibility of installing charging stations by homeowner associations, and a ban on the use of internal combustion engine buses (except for hydrogen and methane-powered ones) in public transportation starting from 2036.

In September 2024, the State Energy Efficiency Agency established the “Decarbonization Fund” Joint Stock Company. The fund will be financed by the environmental tax on carbon emissions and public borrowings. The fund will provide subsidized loans at 9% per year to local authorities, as well as municipal and private enterprises, for the purchase of equipment for energy modernization, installation of solar panels, heat pumps, cogeneration units etc. To receive funding, projects must reduce energy intensity by at least 15%, fossil fuel consumption by at least 20%, or thermally modernize buildings to at least class C. In the first four months of 2024, the fund issued UAH 181 million to 17 projects.

Starting from May 2025, fuel consumed in Ukraine must include at least 5% biofuel (excluding gasoline with an octane number 98 or higher, as well as fuel supplied for the Ministry of Defense and the state reserve). The State Agency on Energy Efficiency will monitor implementation of this policy.

Energy security

The most significant development enabling Ukraine to maintain its electricity supply today is its connection to the European energy network, ENTSO-E. Ukraine joined the network on March 16, 2022, after five years of preparation (in the night of February 23, 2022, a few hours before the full-scale invasion, Ukraine’s energy system was disconnected from the Russian-Belarusian grid to test its autonomous operation). Joining ENTSO-E allows Ukraine to both import electricity from the EU and export surplus energy when it is available. Further expansion of cross-border transmission capacity is still needed but the EU Commission plans to completely integrate energy markets of EU, Ukraine, and Moldova by the end of 2026.

In accordance with the EU Directive 2009/119, the government has established a strategic reserve of oil and petroleum products to enhance energy security. The reserve must cover at least 90 days of imports or 61 days of consumption, whichever is greater. However, oil reserves will only be fully formed six months after the end of martial law, while fuel reserves are expected to be established by approximately 2032-2033.

In the spring of 2024, the government approved regulations for using natural gas extracted under production sharing agreements (PSAs). Under these regulations, investors will transfer the state’s share of gas to the state-owned enterprise “Gas of Ukraine,” which will sell it at the exchange. The Ministry of Energy website provides a list of seven production sharing agreements which were signed back in 2020-2021. At the end of 2023, Ukrnafta was expected to sign additional PSAs, but they have not yet materialized.

What next?

The Ukraine Facility and the IMF program outline further harmonization of Ukrainian legislation with European standards, integration of Ukraine’s energy markets with the EU, climate change mitigation measures, and improvements in energy efficiency. These include:

• enhancing the independence of the National Energy and Utilities Regulatory Commission (NEURC); 
• lifting the moratorium on tariff increases for heating and hot water, followed by the gradual liberalization of the gas market after the end of martial law;
• decentralizing heating systems, including approving rules for the connection and disconnection of individual heating plants; 
• implementation of the strategy for thermal modernization of buildings, establishing minimum energy efficiency standards for buildings and approving a modernization program for district heating companies;
• developing an energy and climate plan to reduce greenhouse gas emissions, approving a new national commitment under the Paris Agreement, and establishing an independent Scientific Council on Climate Change; 
• passing a new electricity market law to implement EU directives in Ukraine, appointing an electricity market operator, and introducing the EU directive on cross-border electricity trade; 
• regulating state support for green investments by introducing stable and predictable rules that the government must comply with; 
• increasing emission taxes and introducing emission trading mechanisms. 

Despite Russia’s persistent attempts to destroy Ukraine’s energy system, since 2022, Ukrainian businesses and households have not remained without electricity for more than a couple of days. Many of them are adopting decentralized solutions, such as generators. The share of decentralized generation is likely to increase, particularly through “green” solutions such as solar panels. On the other hand, there is a pressing need to enhance energy efficiency, both in industrial enterprises and buildings. A significant effort is required to harmonize current regulations with European laws and to define the conditions for Ukraine’s integration into the Green Deal (Ukrainian enterprises will need financial support for this). On the other hand, Ukraine can play a significant role in providing Europe with “green” hydrogen and biomethane.