The USAID Energy Security Project has passed its halfway point – three years have been successfully completed and an additional two years of work are ahead. USAID Energy Security Project’s Chief of Party Dean White outlines how the Project will continue contributing to energy resilience and thus Ukraine’s overall security. He explains how the Project proactively cooperates with the Ukrainian government, other diverse stakeholders as well as non-governmental organizations advance the role that Ukraine’s energy sector plays in furthering independence and expanding access to regional markets.
The USAID Energy Security Project has passed its halfway point – three years have been completed and an additional two years of work are ahead. Time to summarize interim results.
We have managed to do quite a lot in these first 3 years, but much remains to be done due to the large scale of Ukraine’s energy sector challenges. This is a large and complex energy system, so it is not surprising that the challenges are also complex. Fortunately, the USAID ESP is the largest USAID technical assistance project underway in Ukraine and it is multisectoral – we are involved with the electricity sector, including renewable energy, the gas sector, district heating, as well as working on environmental and social issues. We are also focused on professional training of young people and efforts to work with various institutions and ministries on gender equality.
What exact achievements or activities would you describe as key?
Concerning the power sector: it would be the competitive wholesale electricity market that was finally launched in 2019, including the design of a ‘safe mode’ to prevent abnormal profits at the early stages of the new market, and to give support to the development of key market actors, such as the Market Operator and Ukrenergo, among others, as well as supporting the NEURC on the various regulatory challenges that must be addressed during the transition from fully regulated to increasingly competitive markets. Additionally, we were able to support the establishment of the ancillary service market in 2020, to promote a modern and competitive approach towards securing the types of technical/operational support needed to ensure system reliability. We supported Ukrenergo in the move towards integration with the European energy system (commonly referred to as ENTSO-E integration) and are on track for synchronization with the European ENTSO-E system in 2023. On the regulatory front, we helped introduce the regulatory asset base (RAB) approach to DSO tariff setting to promote modernization through investment, thus helping to overcome a long legacy of inadequate investment in the utility networks.
I am also quite pleased with our success, in collaboration with Ukrhydroenergo and the World Bank on a unique energy storage project that will help to improve the technical operation not just of Ukrhydroenergo but through the deployment of large-scale battery storage. This innovative project, to be financed in large part through the World Bank, employs batteries in parallel with hydropower generation to optimize hydropower unit operation and provide the ancillary services to buttress the reliability of the energy system and ability to absorb effectively renewable energy resources.
In the gas sector: we have supported draft laws on the harmonization of the Ukrainian and EU gas markets. This included the adoption of the EU key functional standards on metering and quality. We supported the investment appraisal and preparation of a detailed ten-year Investment Need Assessment Program for the gas transmission system operator (GTSOU). Additionally, we analyzed the prospects of integration of the Ukrainian and Polish gas markets, supported gas quality issues, as well as a panoply of factors affecting the wholesale and retail gas markets.
In the district heating sector: the effort is both at the national level and in a dozen municipalities, in all cases focused on securing and stabilizing the heating sector. This includes recommendation on policy, a comprehensive package of regulatory recommendations and various supporting technical studies, especially around heat supply plans and defined investment projects. An important achievement of the Project is supporting CU Kyivteploenergo (KTE) since the start of the Project to help define an investment program for KTE to be financed at 140 million Euro by the EBRD. Additionally, we are supporting of the utilities with whom we partner to strengthen the company’s technical and management capacities.
Additionally, there remains our ongoing efforts with civil society, youth, and various education institutions across a range of areas. In the past three years, ESP issued 24 grants to non-governmental organizations and media that are involved in a variety of awareness and educational activities. For instance, we strongly support the initiatives of our partners to encourage young people, and women to choose a professional career in the energy sector. The Project, in cooperation with the trade unions in the industry, developed the Code of Ethics and Gender Principles in the energy sector, conducted a series of training events for women working at NPC Ukrenergo and NEURC, and contributed to the establishment of Gender Committees at SC Market Operator and KTE. This effort is expected to expand to several ministries as well.
What are the ESP’s priorities for the next period?
There are many but to focus on a few key ones, I would highlight – we are supporting aggressively the development of the competitive markets for electricity and natural gas through development of the energy trading platforms and market design. Additionally, we are promoting development of a first-time clearing and settlement system in Ukraine that is critical not just for the energy sector but can be used in the future to help to promote trading of various other commodities, such as agriculture.
Second, we have the effort on further integration of Ukraine with EU markets and institutions. This includes our support for ENTSO-E integration, as well as regulatory alignment, perhaps best demonstrated through our support for the introduction of the EU Regulation on Energy Market Integrity and Transparency (REMIT).
Third, we will keep our focus on the financial performance of the energy sector and the changes needed to market design, regulation, and government policy to ensure that the energy sector is able to be financially self-sustaining. I would note that in those market segments, say in electricity, in which progress has been made with new market design and regulation, we see the better financial performance. But in those legacy areas, such as non-payment by water utilities as one example, we see the financial debt still growing and becoming a drag on the overall system performance.
Fourth, we will continue to strive to attract financing to the sector. Our success so far has been to support almost $400 million in new investment through the World Bank and EBRD loan programs mentioned above. In all our work, we are pushing hard to design investment projects that can secure financing as it is the realization of the projects that achieve the results targeted.
Fifth, we will also continue to devote attention to the considerable challenges seen in the east of the country. We are working in the east to support the energy security for the east, whether that is designing a heating plan for the Luhansk region or supporting a local utility will badly needed equipment. The complicated issues in the east deserve a lot of focused attention.
Overall, ESP will keep doing its best to support the resilience of the Ukrainian energy sector and promoting at every stage the country’s energy security.
The final decisions are up to the Ukrainian authorities, and evidence suggests that they are not always willing to follow advice from international consultants… Not all our recommendations are accepted by the executive bodies or the Cabinet of Ministers. For instance, we believed the cessation of the PSO mechanism for gas purchased by district heating companies was a premature measure. In general, we are in good, productive relations with the Ukrainian authorities. Indeed, the National Energy and Utilities Regulatory Commission, the government Regulator in the energy and utility sectors, is one of our major partners and we are in contact with them frequently. Our other key partners are the Ministry of Energy and the Ministry for Communities and Territories Development. It should be noted that our partners are not only the state authorities, though they are our main beneficiaries, of course.
The Project contributes to energy education as well. A few examples: with the Project’s methodological and material support (we provided laboratory equipment), the Ivano-Frankivsk National Technical University of Oil and Gas launched a ‘Renewable Energy Engineering’ Bachelor’s Course. The Pre-Azov State Technical University developed a training course on energy security and energy independence. The Institute of Energetics, Automation and Energy Efficiency at the National University of Life and Environmental Sciences launched a modern testing and measuring laboratory. We understand that young people will shape the future of the Ukrainian energy sector and the country’s energy security.