MUNICIPAL ENERGY REFORM PROJECT (MERP) EIGHTEENTH QUARTERLY REPORT JANUARY 1 – MARCH 31, 2018

April 2018 This document was produced for review by the United States Agency for International Development (USAID). It was prepared by the USAID Municipal Energy Reform Project in Ukraine. USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT Key to cover photos:

MUNICIPAL ENERGY REFORM PROJECT (MERP)

EIGHTEENTH QUARTERLY REPORT JANUARY 1 – MARCH 31, 2018 CLEAN ENERGY IDIQ: AID-OAA-I-13-00015 Contract: AID-121-TO-13-00006

April 2018

DISCLAIMER The authors’ views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government. This document is intended to comply with Section 508 Standard of the Federal Acquisition Regulation. If you have any difficulties accessing this document, please contact [email protected].

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT This page is intentionally left blank. TABLE OF CONTENTS

BACKGROUND ...... 1 A. SUMMARY OF PROGRESS AND ACCOMPLISHMENTS ...... 3 B. DETAILED DESCRIPTION OF PROGRESS/ ACCOMPLISHMENTS DURING THE REPORTING PERIOD ...... 11 B.1 Project Team and Procurement Actions ...... 11 B.1.1 Consulting Agreements ...... 11 B.1.2 Subcontracts ...... 12 B.1.3 Grants ...... 13 B.2 Costs ...... 13 B.3 Environmental Compliance ...... 14 B.3.1 Project Activities ...... 14 B.4 Progress and Accomplishments By Activity ...... 15 B.4.1 Activity 1: Improve CE Regulatory and Legislative Enabling Environment ...... 15 B.4.2 Activity 2: Promote Investment in CE Technologies and Applications ...... 25 B.4.3 Activity 3: Capacity Building and Dissemination ...... 28 B.4.4 Activity 4: Enhance Capacity for the GOU in LEDS ...... 28 C. DELIVERABLES ...... 31 D. MILESTONES ...... 33 E. PROBLEMS ...... 35 F. PLANS ...... 37 F.1 Activity 1: DRAFT LIST of Planned Activities in Quarter 19 ...... 37 F.2 Activity 2: DRAFT LIST of Planned Activities in Quarter 19 ...... 37 G. PERFORMANCE INDICATORS ...... 39

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT III LIST OF TABLES

Table 1. Consulting Agreements in Place during the Reporting Period ...... 11 Table 2. Fixed-price Subcontracts (Purchase Orders) Signed during the Reporting Period ...... 12 Table 3. Summary of Project Expenditures (USD) ...... 13 Table 4. Most Important Documents and Materials Produced under MERP during Q18 of the Project ...... 31 Table 5. Q18 Milestones for Activity 1: Improve CE Regulatory and Legislative Enabling Environment ...... 33 Table 6. Q18 Milestones for Activity 2: Promote Investment in CE Technologies and Applications ...... 33 Table 7. Q18 Milestones for Activity 4: Enhance Capacity for the GOU in LEDS ...... 34 Table 8. Q19 Milestones for Activity 1: Improve CE Regulatory and Legislative Enabling Environment ...... 38 Table 9. Q19 Milestones for Activity 2: Promote Investment in CE Technologies and Applications ...... 38

IV USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT ACRONYMS

ADCS Automated dispatch and control systems AE Alternative energy ARVI Aggregated Recovery Value Indicator BEE Business Environment for Energy CBP Capacity-building plan CCS Center for Climate Strategies CE Clean energy CEAC Clean Energy Advisory Center CE RC Clean Energy Resource Center CFR U.S. Code of Federal Regulations CHP Combined heat and power plant CIESIN Center for International Earth Science Information Network CMU Cabinet of Ministers of Ukraine

CO2 Carbon dioxide CoM Covenant of Mayors COP Chief of Party COR Contracting Officer Representative CPFF Cost plus fixed fee CSO Civil society organization CTF Clean Technology Fund DCA Development Credit Authority DCOP Deputy Chief of Party DH District heating E5P Eastern Europe Energy Efficiency and Environmental Partnership EA Energy audit EBRD European Bank for Reconstruction and Development EC-LEDS Enhanced Capacity for Low Emission Development Strategies EE Energy efficiency

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT V EECU Association of Energy Efficient Cities of Ukraine EFOM Energy Flow Optimization Model EIA Environmental impact assessment EIB European Investment Bank EM Energy management EnPC Energy performance contracts ENU Eastern Ukrainian National University EPC Energy performance contract ERC Environmental review checklist ESCO Energy service company EU European Union EUR Euro (currency) Gcal/h Gigacalories per hour GCC Global climate change GDA Global Development Alliance GDP Gross domestic product GHG Greenhouse gas(es) GOU Government of Ukraine HE Heat energy HOA Homeowners association HORECA Hotel, Restaurant, Cafe / Catering IEA International Energy Agency IEE Initial environmental examination IEEC Institute for Environment and Energy Conservation IEF Institute for Economics and Forecasting IFC International Finance Corporation IFI International financial institution IHS Individual heating substation IPCC Intergovernmental Panel on Climate Change KfW Kreditanstalt für Wiederaufbau KPI Key performance indicator

VI USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT kWh Kilowatt hour(s) LEDS Low Emission Development Strategies M2 Square meters M3 Cubic meters MARKAL MARKet and Allocation Model MDI Municipal Development Institute M&E Monitoring and evaluation MEIS Municipal Energy Information System MERP Municipal Energy Reform Project MinEcology Ministry of Ecology and Natural Resources MinEconomy Ministry of Economy MinEnergy Ministry of Energy MinJustice Ministry of Justice MinRegion Ministry of Regional Development, Construction, Housing and Communal Services MinSocPolicy Ministry of Social Policy MMP Mitigation measures plan MRV Monitoring, reporting, and verification MS EU Member States MTO MERP Task Order MWh Megawatt hours MW Megawatts NECSRC National Energy and Communal Services Regulatory Commission NEURC National Energy and Utility Regulatory Commission NEFCO Nordic Environment Finance Corporation NGO Nongovernmental organization Odesa TGO Odesa Heat Supply Company OPORA All Ukrainian Public Organization “Civic Network OPORA” PEST Political, economic, social, technological [analysis] PIU Project Implementation Unit PPP Public-private partnership PSA Public service advertisement/announcement

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT VII Q Quarter RC Resource Center RE Renewable energy REDS Resource Efficiency Development Strategies REP Regional Energy Plan RFP Recordkeeping of fare payment RSEP Regional Sustainable Energy Plan SAEE State Agency on Energy Efficiency and Energy Saving of Ukraine SECAP Sustainable Energy and Climate Action Plan SEAP Sustainable Energy Action Plan SIDA Swedish International Development Cooperation Agency SME Small and medium enterprises SMM Social media marketing SoW Scope of work SSF Shareholder Special Fund [of the EBRD] SWOT Strengths, Weaknesses, Opportunities, Threats [analysis] TA Technical assistance TIMES The Integrated MARKAL-EFOM System T&M Time and materials TO Task Order TPA Third Party Access UAH Ukrainian hryvna (currency) UMIDP Ukrainian Municipal Infrastructure Development Program UNFCCC United Nations Framework Convention for Climate Change USAID United States Agency for International Development USD United States dollar (currency) VR Verkhovna Rada, Supreme Council of Ukraine WB World Bank WSS Water Supply and Sewage YCELP Yale Center for Environmental Law and Policy

VIII USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT BACKGROUND

The United States Agency for International Development (USAID) Mission for Ukraine, Moldova, and Belarus and the Office of Economic Growth supports the implementation of the Municipal Energy Reform Project (MERP, or the Project) in Ukraine as described in the scope of work (SoW) and further detailed in the RTI International Technical Proposal and subsequent modifications. The primary purpose of the USAID MERP is to enhance Ukraine’s energy security. Increased end-use energy efficiency (EE) combined with increased production of clean energy (CE) in large towns and cities will reduce the consumption of conventionally produced energy in Ukraine while cutting greenhouse gas (GHG) emissions, energy expenditures, and imports. The Project has four main activities: 1. Improve the CE Regulatory and Legislative Enabling Environment 2. Promote Investment in CE Technologies and Applications 3. Capacity Building and Dissemination 4. Enhance the Capacity of the Government of Ukraine (GOU) in Low Emission Development Strategies (LEDS) The GOU is engaged in reforming the municipal energy sector and addressing the challenges identified in the GOU Program of Economic Reforms for 2020, with an emphasis on CE/EE, through price signals and improving the competitiveness and reliability of municipal services. Ukraine’s energy policies are shifting toward domestic resources and strengthening the energy market framework to meet European Union (EU) standards. The adoption and full implementation of Energy Community Treaty and Global Climate Change (GCC) Convention provisions could provide Ukraine with a competitive, transparent, and predictable market framework to attract investment and to underpin CE/EE improvements in the energy sector. The Project focuses on introducing CE/EE in cities by assisting municipalities with:  Planning, preparing, and financing CE projects  Introducing energy management (EM) systems  Supporting the implementation of Development Credit Authority (DCA) loan guarantees  Supporting mechanisms that mobilize private sector investment, performance contracts by energy services companies (ESCOs)  Preparing sustainable energy public awareness plans This Quarterly Report is submitted in accordance with the contract requirements, and covers the project period from January 1, 2018, through March 31, 2018. It serves as a tool for evaluating the Project’s progress and achievements and provides a summary of Project activities, accomplishments, issues, and problems encountered in implementing the activities set by the Project Work Plan. It also weighs the accomplishments in the context of the indicators set by the monitoring and evaluation (M&E) plan.

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 1

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2 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT A. SUMMARY OF PROGRESS AND ACCOMPLISHMENTS

The overall objective of MERP is to enhance Ukraine’s energy security. Increased end-use EE combined with the increased production of CE in large towns and cities should reduce the consumption of conventionally produced energy while cutting GHG emissions, energy expenditures, and overall energy imports (i.e., natural gas from Russia). ACTIVITY 1: IMPROVE CE REGULATORY AND LEGISLATIVE ENABLING ENVIRONMENT Task 1.1: Developing an Enabling Legislative and Policy Environment During the reporting period, MERP continued supporting the GOU in developing CE policies, legislation, and regulations. Law on Housing and Communal Services During the reporting period and in response to the request of the Ministry of Regional Development, Construction, Housing and Communal Services (MinRegion), the USAID Project experts developed and provided to MinRegion a package of secondary draft legal acts to support implementation of the law. These included draft model agreements for supply of thermal energy (heat) and a draft GOU resolution on adoption of these. Municipal Energy Sector Reform GOU approved an amendment to the Resolution of the Cabinet of Ministers of Ukraine dated June 18, 2014 № 217, and changed the Procedure for Distribution of Funds Accrued to Current Accounts with a Special Use Regime for Settlements with the Natural Gas Supplier.1 Under amended procedure, payments for thermal energy produced from biofuels will be subject to “secured expenses.” This amendment will end direct discrimination against bio-heat and biofuel use as opposed to gas-heat and natural gas itself. The discrimination worked as a market entry barrier for entities using alternative fuels and prevented the fuel conversion process in the heating sector. Biomass Market Development During the reporting period, the Project disseminated information about the concept of biomass sector organization in Ukraine. In March, the article “What Bioenergy Can Do to Overcome Gas Crises” 2 was published in the popular Ukrainian media outlet Ekonomichna Pravda. The publication analyzes the current situation with bioenergy and its potential in Ukraine, international regulatory practices, and what Ukraine should do to achieve significant replacement of natural gas with biofuels.

1 https://www.kmu.gov.ua/ua/news/uryad-vregulyuvav-proceduru-rozrahunku-za-teplo-viroblene-ne-z-gazu 2 https://www.epravda.com.ua/publications/2018/03/27/635394/

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 3 In March, the MERP Chief of Party (COP) presented "Renewable Energy Sources in District Heating: in Search for a Tailored Model" at the Ukraine Renewable Energy & Power Infrastructure Investors Conference, organized by the European Business Association. District Heating During the reporting period, the Project developed a framework for third-party access to existing District heating (DH) infrastructure. MERP submitted to the State Agency on Energy Efficiency and Energy Saving of Ukraine (SAEE) the report Model of Third Party Access (TPA) to Existing Infrastructure in District Heating. The technical part of the report provides analysis of the current situation for potential TPA in selected cities (Zaporizhzhia and Vinnytsia) with 11 economically assessed scenarios. The report includes an economic market model for TPA. The report also provides analysis of the administrative barriers to TPA functioning in the current DH system. In support of the proposed economic model, the Project also prepared draft amendments to Ukrainian laws. The Project presented network integration and optimization modelling scenarios to high-level municipal representatives and the DH utility in Zaporizhzhia.3 As a result of the meeting, the Project developed two specific scenarios at a more detailed level and submitted an updated report to the municipality in February 2018. Task 1.2: Assistance to NEURC Support Changes to the Asset Valuation Methodology for Natural Monopolies in the DH and Water and Wastewater Sectors Valuation of Assets: Heating Sector During the reporting period, the State Property Fund posted the draft order “On Approval of Changes to Methodology for Valuation of Assets of Natural Monopolies and Subjects Operating in Adjacent Markets in the Area of Combined Heat and Power Production” on its website for public consultation.4 The proposed changes are based on results of a pilot valuation of the assets of the Kyivenergo and Chernihiv Heating Company Oblteplokomunenergo and on Aggregated Recovery Value Indicators (ARVIs) developed. As of March 31, 2018, the adoption of the Asset Valuation Methodology by the State Property Fund is pending. Improvement of Regulatory Reporting Forms During the reporting period, the National Energy and Utility Regulatory Commission (NEURC) considered, at the open meeting, the draft resolution “On approval of Reporting Rules for reports submitted to NEURC by subjects of economic activities who apply incentive-based tariffs for heat energy (HE) transportation by main and local (distribution) networks”5 and placed it on the website for public consultation. In March 2018, NEURC completed the procedure of collecting comments on the draft resolution. The adoption of the resolution was planned for March 23, 2018; however, due to a lack of quorum, the resolution is pending.

3 http://zp.gov.ua/uk/articles/item/1956/u-zaporizhzhi-obgovorili-pitannya-integracii-sistemi-centralizovanogo- teplopostachannya 4 http://www.spfu.gov.ua/ua/documents/press-list/fund-regulations-publication/12299.html 5 http://www.nerc.gov.ua/?news=7233

4 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT The draft reporting forms and instructions for licensees in the centralized water supply and sewage sectors, which will apply incentive-based tariffs, are undergoing internal processing at NEURC. NEURC stated that the draft resolutions developed by the Project shall be used in NEURC practice. Assist NEURC in the Gradual Introduction of Incentive Tariff Regulation for Heating and Water Utilities In Q16, the Project assisted NEURC in developing eight draft NEURC resolutions to implement incentive-based tariff regulation in the DH transportation and water supply and wastewater treatment sectors.6 On January 10, 2018, the resolutions were published in the Government newspaper Uryadovyi Kurier, and on January 11, 2018, they went into effect. Heating Sector In December 2017, the Project submitted test calculations of incentive-based transportation tariffs for DH entities to NEURC. In the official letter received in January 2018, NEURC highly appreciated the work done by the Project. Centralized Water Supply and Wastewater Treatment Sector In January 2018, the Project submitted to NEURC test calculations and analytical note on incentive-based tariffs for water and wastewater entities. In Q17, the Project submitted to NEURC the draft manual Methodological Recommendations for Licensees on Development of Long-Term Investment Programs in Water Supply and Sewage Sector under Incentive-Based Tariff Regulation. In the letter dated February 2, 2018, NEURC stated that the recommendations can be practically applied by NEURC. Development of a Mechanism to Use Benchmarking Indicators Based on an Analysis of Best International Practice Heating Sector In December 2017, the Project submitted to NEURC a revised list of key performance indicators (KPIs) for the heating sector. The revised list was brought in line with the new reporting forms approved by NEURC Resolution #717. In the official letter received in January 2018, NEURC stated great appreciation of the results of the work done and that KРІs and the proposed calculation algorithm will help the Regulator to establish efficient benchmarking system for DH sector. On December 21, 2017, the Report on Benchmarking of Utility Companies Operating in the Heating Sector was submitted to NEURC. In the official letter received in January 2018, NEURC stated great appreciation of the results of the work done regarding development of the methodology for clustering heating companies and implementing benchmarking based on KРІs. Develop Methodological Recommendations on Accounting for Licensed Types of Activities Heating Sector During the reporting period, NEURC considered the draft resolution “On approval of Accounting Separation Rules/Procedure for DH under incentive based regulation” at a public proceeding, and posted the draft on its website. In March, NEURC approved the resolution "On approval of

6 Four resolutions for the heating sector and four resolutions for the water supply and wastewater treatment sector.

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 5 Procedure/Rules on separated accounting by type of licensed activity in heating sector (incentive based regulation).”7 Centralized Water Supply and Sewage The resolution “On Approval of the Procedure (Rules) for Separated Accounting by Type of Licensed Activity by Business Entities Operating in the Centralized Water Supply and Sewage Sector (cost+)” was approved by NEURC on December 27, 2017. The publication of the resolution is pending. The draft resolution “On approval of Accounting Separation Rules/Procedure for Water and Wastewater under incentive based regulation” prepared with Project support is undergoing internal NEURC processing. Task 1.5: Public Information and Awareness Campaign EE Campaign in the Most Popular Ukrainian Online Media The Project team and Internet media outlet Obozrevatel continued a joint social project—a series of publications on energy saving, energy efficiency, and management of Homeowner Association (HOA) buildings. As part of this joint campaign, 15 articles have been published in the column “Consumer’s Basket” and viewed by about 210,000 Internet users. Video PSAs MERP, in cooperation with SAEE, distributed its new video public service announcements (PSAs) to regional and national TV channels in Ukraine. The four PSAs are being shown daily on 46 TV channels to approximately 10 million people. The PSAs are also shown on the screens of the speed trains to more than 200,000 passengers each month. The video PSAs also appear on the websites and Facebook pages of Project partners, including the Cabinet of Ministers portal (teplo.gov.ua) and SAEE. Outdoor Campaign During the reporting period, advertisements were placed on 227 billboards and 284 city lights for free in the Project partner cities as part of the outreach campaign dedicated to the issues of HOA establishment, implementation of energy efficient technologies, and defending rights of communal services consumers. Your Home TV Program On March 30, 2018, the UA-ONE National TV Channel broadcasted the last episode of the third season of the Project Your Home program. The potential audience of the program viewers on UA-ONE and 35 regional channels is about 4.7 million. Your Home is also seen through online social networks, such as YouTube and Facebook, where it was viewed by more than 2.1 million users. Hotline on EE/AE and “Warm Loans” Program On March 2, 2018, the MERP Hotline stopped providing services due to the graduation of the Project. During its operations, which started in 2016, the hotline served 10,206 clients including 468 during January and February 2018.

7 http://www.nerc.gov.ua/?news=7479

6 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT Educating Journalists on EE/AE The Project team, in cooperation with SAEE, conducted information marathons with its partner cities, Khmelnytskyi (west Ukraine) and Zaporizhzhia (east Ukraine). The marathon—conducted under the slogan “Energy Efficiency and Renewal Energy for the Benefit of Communities: Best Practices”—attracted more than 130 participants including journalists from national and regional media outlets and representatives of the communal utilities and city councils. Each event was opened by a press briefing, followed by press tours of energy efficient or renewable energy (RE) projects that were implemented through the joint efforts of MERP, SAEE, and partner cities within the implementation of the Sustainable Energy Action Plan (SEAP). Outreach Materials and Events to Support Energy Sector Reform As of the end of March 2018, the Project team disseminated 400,000 brochures and posters to raise awareness about EE/alternative energy (AE), tariff regulation, HOA creation and management, and new legislation in the communal sector. The printed materials were delivered to 18 HOA/CE RCs and distributed via targeted events, including conferences, workshops, and Sustainable Energy Weeks and EE Days in MERP partner cities. Legacy Booklet and Video To describe the Project path, its challenges, reforms, and accomplishments in Ukraine, the Project team created a publication8 and video9 that were presented during the On the Path to Energy Efficiency: Challenges, Reforms, Accomplishments summarizing conference on March 15, 2018. MERP Summarizing Conference More than 260 guests gathered at the On the Path to Energy Efficiency: Challenges, Reforms, Accomplishments conference that summarized the Project's, partners’, and beneficiaries', results. These results were achieved in the four years of the Project activities in Ukraine. Among conference guests and speakers were Ukrainian government officials, members of the Ukrainian Parliament, USAID representatives, members of international financial organizations, international donors, representatives of national state agencies, nongovernmental organizations (NGOs), professional associations and academia, top management officials of MERP partner- cities, community leaders, and others. The conference included two sections (panels) that highlighted the Project achievements at the national and municipal levels, respectively. ACTIVITY 2: PROMOTE INVESTMENT IN CE TECHNOLOGIES AND APPLICATIONS Task 2.2: Assisting Municipalities with Planning, Preparing, and Financing for CE Projects Energy Planning As of March 31, 2018, 15 new SEAPs have been prepared (first and second groups of cities), and 14 of them have been approved by the city councils. It is expected that the SEAP for Kyiv will be considered by the city council in Q19 of the Project.

8 http://www.merp.org.ua/images/Docs/MERP_Legacy_2018-03-29_ENG.pdf 9 http://www.merp.org.ua/index.php?option=com_content&view=article&id=1030:usaid-project- conference&catid=80&Itemid=973&lang=us

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 7 Project Implementation Support In January 2018, MERP conducted seminar for partner cities participating (included in the preliminary list for financing) in the European Investment Bank (EIB) programs and projects. The primary focus of the training was on the EIB Municipal Infrastructure Program. Task 2.3: Introduction of Energy Management Systems Municipal Level In January 2018, TMS (a company - official representative of TÜV SÜD in Ukraine) issued an audit report on the certification of the Sumy City Council in accordance with the ISO 50001 Energy Management Standard. The audit concluded that the city is eligible to receive ISO 50001 certification. Sumy is the first large city in Ukraine to receive this certification. Task 2.5: Support Mechanisms that Mobilize Private Sector Investment Support to Odesa Region Localities The Project provided support for introducing energy service in the public buildings of the Odesa Oblast localities. Because of MERP efforts, the Odesa Oblast Council and Odesa and Bilhorod- Dnistrovskyi city councils announced 40 tenders for procurement of energy modernization services in general educational institutions on the prozorro.gov.ua web portal. Through Project support, 15 contracts concluded with private ESCOs. Generating Responsible Home Ownership through Support of HOA/CE RCs To date, MERP RCs have conducted more than 6,600 public outreach events on the local level (including trainings and meetings on HOAs establishing) and more than 15,000 initiative groups and individuals have received consultations on legal, administrative, and technical issues. Some new 4,198 HOAs were created (between the beginning of 2015 and March 31, 2018), which is about 34 percent of all new HOAs established in Ukraine during the same period (12,254). Task 2.7: Implementing Sub-Activity 2 Tasks in Odesa Oblast and Ukrainian Territories Affected by the Conflict with Russia Energy Audits and Specific Project Support In January 2018, MERP experts presented results of an in-depth energy audit of the DH system of Mariupol. The overall value of proposed measures is estimated at UAH790 million (approx. USD30 million). Their implementation will reduce annual CO2 emissions by about 88,000 tons. Odesa Oblast Regional Energy Plan (REP) On February 8, the final draft of the Odesa REP was presented in Odesa. The event was attended by 25 participants, including Odesa Oblast State Administration, oblast council deputies, members of the Working Group on REP Development, representatives of eight cities (signatories of the Covenant of Mayors: Balta, Bilhorod-Dnistrovskyi, Bolhrad, Izmail, Odesa, Reni, Chornomorsk, Yuzhne), members of the Public Council attached to Odesa Oblast State Administration, and the USAID Contracting Officer Representative (COR). Demonstration Projects During the reporting period, the Project finalized procurement, delivery, and verification of materials and equipment for several demonstration projects in the Odesa and Donetsk oblasts. The variety of materials included mineral wool insulation, plastic windows with double glazing, electric kitchen equipment, circulation pumps, individual heat substations, individual ventilation units with heat recuperation, solar collectors for hot water production, condensing gas-fired boilers, and LED lamps and panels.

8 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT ACTIVITY 4: ENHANCE CAPACITY FOR THE GOU IN LEDS Task 4.1: Strengthening Institutional Capacity in Planning LEDS-Resource Efficiency Development Strategies (REDS) Paris Agreement Implementation: LEDS Policy Document In February 2018, Ostap Semyrak, the Minister of Ecology and Natural Resources of Ukraine, presented the final draft of the Low Emission Development Strategy of Ukraine until 2050 at the Ukrainian Energy Forum in Kyiv. This was the first time the final draft was presented publicly. In his presentation Minister Semyrak acknowledged support received from the USAID Municipal Energy Reform Project in developing of the strategy.10 Implementation of Paris Agreement Provisions: National GHG Inventory Enhancement The Project finalized support to SAEE on the implementation of EU Directive 2009/28/EC. The Project finalized the text (final draft version) of the national standard on liquid biofuels and bio liquids based on the comments and suggestions from the stakeholders.

10 https://menr.gov.ua/news/32111.html

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10 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT B. DETAILED DESCRIPTION OF PROGRESS/ ACCOMPLISHMENTS DURING THE REPORTING PERIOD

B.1 PROJECT TEAM AND PROCUREMENT ACTIONS During the reporting period, MERP assisted key project stakeholders: MinRegion, Verkhovna Rada, Supreme Council of Ukraine (VR) committees, SAEE, the Ministry of Social Policy (MinSocPolicy), NEURC, partner cities, and members of the donor community. The Project has one registered recipients/beneficiary as of March 31, 2018. As of March 31, 2018, the Project staff comprised 13 employees. B.1.1 CONSULTING AGREEMENTS Table 1 lists the consulting agreements in place during the reporting period.

Table 1. Consulting Agreements in Place during the Reporting Period Consultant Amount Activity Area Start Date End Date Name (UAH)

Tarnovskyi M. Energy Management Consultant 1/2/2018 1/31/2018 70,168

Korchmit O. Local ESCO Expert 1/3/2018 2/28/2018 112,300

Bogun V. Local ESCO Expert 1/3/2018 2/28/2018 50,049

Artemova O. Senior Environmental Expert 1/5/2018 1/31/2018 46,041

Levytskyi D. Senior Legal Expert 2/1/2018 3/15/2018 104,578

Boyko T. Municipal Energy Reform Expert 2/1/2018 3/16/2018 41,770

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 11 B.1.2 SUBCONTRACTS The Project prepared and issued the Requests for Quotations for procurement of materials and equipment for Demonstration Projects in the following cities: Balta, Bolhrad, Izmail, and Dobropillya. Table 2 provides a list of the fixed-price subcontracts (purchase orders) signed during the reporting period.

Table 2. Fixed-price Subcontracts (Purchase Orders) Signed during the Reporting Period Amount Vendor Activity Area Start Date End Date (UAH) Production of MERP video on Private Enterprise achievements and results for final 1/29/2018 3/26/2018 55,000 "Economical Bulletin" conference Services on Organization of Press- briefings to highlight MERP Centre of Ukrainian achievements in its partner cities, and 2/8/2018 2/28/2018 246,075 Reform of Education LLP study tours to observe the most innovative EE/AE objects in the cities PE Okhindushko Oleh Demo Project (Balta) - ventilation units 2/12/2018 3/15/2018 252,000 Yevhenovych PE Gorbovyi Oleg Demo Project (Balta) - heating system 2/15/2018 3/20/2018 100,948 Lyubomyrovych PE Holmov Sergiy Demo Project (Balta) - wall and roof 2/16/2018 3/15/2018 1,305,968 Oleksandrovych insulation materials PE Holmov Sergiy Demo Project (Balta) - boiler room 2/16/2018 3/15/2018 105,624 Oleksandrovych equipment Demo Project (Balta) - boiler room PE Shyrin Valeriy equipment, automatics, controlling 2/20/2018 3/15/2018 442,555 Anatoliyovych equipment PE Kurylovych Vitaliy Demo Projects (Bolhrad and 2/20/2018 3/15/2018 391,700 Rostyslavovych Dobropillya) - ventilation system PE Bulochnyk Oleksandr Demo Projects (Bolhrad and Izmail) - 2/21/2018 3/15/2018 97,478 Oleksandrovych LED lamps PE Bulochnyk Oleksandr Demo Project (Dobropillya) - LED 2/26/2018 3/15/2018 275,928 Oleksandrovych lighting PE Lytvynenko Maksym Demo Project (Izmail) - kitchen 2/26/2018 3/20/2018 91,300 Vitaliyovych equipment PE Nosenko Tetyana Demo Project (Bolhrad) - windows and 3/1/2018 3/20/2018 916,571 Mykolaivna doors Demo Project (Dobropillya) - individual LLC “ENERGO-INVEST” 2/27/2018 3/20/2018 172,500 heat substation PE Dudnyk Petro Demo Projects (Bolhrad and Izmail) – 3/7/2018 3/20/2018 257,636 Ivanovych solar collectors PE Zhelyapova Demo Project (Bolhrad) - boilers 3/7/2018 3/20/2018 548,099 Yevgeniya Ivanivna PE Nosenko Tetyana Demo Project (Izmail) – windows 3/13/2018 3/23/2018 382,942 Mykolaivna

12 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT The project issued the following modifications for time and materials (T&M) subcontracts:  Period of performance extension for subcontract with Arnika-Center LLP. During the reporting period, the Project conducted several procurement actions related to purchases of services related to office operations, translations, conducting conferences, seminars, and public relations activities. B.1.3 GRANTS The project issued the following modifications for grant agreements:  Period of performance extension for grant agreement with Municipal Development Institute. B.2 COSTS A summary of project expenditures versus funding is provided in Table 3.

Table 3. Summary of Project Expenditures (USD)

Start Date 9/27/2013

End Date 3/31/2019

Task Order Ceiling Price $18,596,928

Total Obligated Toward Ceiling $18,596,928

Task Order Ceiling Remaining $0.00 Ceiling minus Obligated

Work Order: Programmed $18,596,928

Total Disbursed (Invoiced) $15,968,160

Accruals (Cumulative) $459,552

Pipeline Balance $2,569,216 Obligated minus Expended minus Accruals

Unprogrammed Funds $0.00 Total Obligated minus Total Programmed

Grants Disbursed $2,725,696 Cumulative as of March 31, 2018

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 13 B.3 ENVIRONMENTAL COMPLIANCE MERP is taking steps to conform to USAID environmental regulations, 22 Code of Federal Regulations (CFR) 216. The Project incorporated environmental mitigation measures as a standard component of its program management. The Project assessed and developed a plan to meet USAID and Ukrainian environmental requirements through mitigating and monitoring environmental risks. MERP does not foresee any significant adverse environmental impacts from Project activities. This is confirmed by the initial environmental examination (IEE) recommendation of “categorical exclusion” for most Project tasks and activities. “Negative determination with conditions” was defined for Project Tasks 1.2, 1.6, 2.2, 2.4, and 2.5. MERP assessed the possible environmental risks for these tasks and started implementing measures recommended by the IEE (4.3.1–4.3.4). The Project submitted to USAID the “MERP Environmental Compliance Report,” based on Task Order (TO) Contract ANNEX 1 – Initial Environmental Examination. The report includes the following items: Environmental Legislation Requirements, Environmental Determination, Mitigation Measures Plan (MMP), and Monitoring Plan. It is anticipated that many Project activities will have no effect on the environment and human health in Ukraine. Although some Project activities may have some effect, in most cases any environmental/health effects are expected to be positive; increased EE and greater use of CE will reduce energy consumption and GHG emissions. The preliminary environmental assessment of Project activities found the following potential environmental impacts and recommended environmental determination: a) Categorical Exclusion: The activity is not likely to have an effect on the natural or physical environment. No further environmental review is required. b) Negative Determination with Conditions: The activity does not have potentially significant adverse environmental, health, or safety effects, but may contribute to minor impacts that can be eliminated or adequately minimized by appropriate mitigation measures. B.3.1 PROJECT ACTIVITIES Activity 1. Improve the CE Regulatory and Legislative Enabling Environment All the activities during the reporting period were assessed against the IEE and Project Monitoring Plan. It was determined that because all activities meet the definition of a categorical exclusion and per 22 CFR 216.2(c)(2)(i), (iii), (v), and (xiv), neither an IEE nor an environmental assessment is required. However, it is recommended that the principle of aiming to prevent the depletion of natural resources and deterioration of environmental components (air, water, land, and plant and animal life) is mainstreamed into the draft laws and regulations that may be developed as a result of Project activities. Activity 2. Promote Investment in CE Technologies and Applications During the reporting period, the Project developed four documents/sets of documents that fall under negative determination with conditions. In particular, these include: 1. Report on prefeasibility study "Using Waste Heat of MK «ZAPORIZHSTAL» for Heat Supply of Zaporizhzhia City» 2. Report on prefeasibility study "Using Waste Heat of MK «ZAPORIZHSTAL» for Hot Water Supply of Zaporizhzhia City” 3. Report on prefeasibility study "Assembly of Thermal Networks of Boiler Plants on Streets Citrusova, 9 and K.-Karoho, 21b"

14 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 4. Presentation of “Results of energy audit of KKP "MARIUPOLTTEPLOMEREZHA" of the Mariupol city” No adverse environmental impact is likely, although, according to 4.3.5 of the IEE it is recommended to advise the assisted municipalities to integrate environmental/health considerations into the project/plans because they may have an adverse effect on the local environment. According to the Project MMP, the SEAP projects involving the construction of new energy supply/heating facilities or upgrade of existing facilities should undergo the national environmental assessment process including the preparation of an environmental impact assessment (EIA) in line with DBN A.2.2-1-2003. Feasibility studies shall include an Air and Environment Protection section. Following the Project recommendation, an EIA section has been introduced into all feasibility studies so that all the available and applicable environmental protection measures for reducing adverse environmental impacts would be taken into consideration during project implementation. The rest of the activities were assessed against the IEE and Project Monitoring Plan. It was determined that all activities meet the definition of a categorical exclusion and per 22 CFR 216.2(c)(2)(i), (iii), (v), and (xiv), neither an IEE nor an environmental assessment is required. There was an environmental review checklist (ERC) developed for the demonstration project “Modernization of Kazka Kindergarten Building in Dobropillya, Donetsk oblast”. The ERC was approved by USAID. Activity 3. Capacity Building and Dissemination There were no activities conducted during the reporting period. Activity 4. Enhance Capacity for the GOU in LEDS There were no activities conducted during the reporting period. The conclusions are that USAID MERP complies with Ukrainian and contract requirements on all implemented activities, and the MMP and Project Monitoring Plan are up to date and compliant with all requirements. The Project regularly monitors its activities for compliance with environmental regulations. B.4 PROGRESS AND ACCOMPLISHMENTS BY ACTIVITY B.4.1 ACTIVITY 1: IMPROVE CE REGULATORY AND LEGISLATIVE ENABLING ENVIRONMENT B.4.1.1 Task 1.1: Developing an Enabling Legislative and Policy Environment During the reporting period, MERP continued supporting the GOU in developing CE policies, legislation, and regulations. The assistance is based on EU Energy Community requirements and best international practice. Law on Housing and Communal Services On November 9, 2017, the VR adopted the Law on Housing and Communal Services (reg. #1581-d dated 10/12/201511). The law was developed and passed with assistance from MERP. The law went into effect on December 10, 2017, and implemented starts on June 10, 2018. During the reporting period and in response to the request of MinRegion related to the development of a regulatory framework to support the Law of Ukraine "On Housing and

11 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=57371

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 15 Communal Services," the USAID Project experts developed and provided to MinRegion a package of the following draft documents (secondary draft legal acts): 1. Draft Model Agreement on provision of communal services for the supply of thermal energy to the owner (tenant, another user) of the building 2. Draft Model Agreement on provision of communal services for the supply of thermal energy to the owner (tenant, another user) of a separate facility in a building, other than an apartment building 3. Draft Individual Contract on provision of communal services for the supply of thermal energy in a multi-apartment building (with the condition for servicing and providing ongoing repair of the indoor networks of the multi-apartment building) 4. Draft Individual Contract on provision of communal services for the supply of thermal energy in a multi-apartment building (without the condition for servicing and providing ongoing repair provision of the indoor networks of the multi-apartment building) 5. Draft Model Collective Agreement on provision of communal services for the supply of thermal energy in a multi-apartment building 6. Draft Model Agreement on provision of communal services for the supply of thermal energy to the collective consumer in a multi-apartment building 7. Draft Model Agreement on providing utility services for the supply of thermal energy to the collective consumers in an apartment building 8. Draft Resolution of the Cabinet of Ministers of Ukraine on adoption of the developed regulations. National Energy Strategy until 2035 In Q17, the Draft Action Plan to Implement National Energy Strategy until 2035 was published by the Ministry of Energy (MinEnergy) for public consultation.12 The draft plan includes actions on the legal framework for biomass market organization, competitive thermal energy market development, and liquid biofuels market. The draft action plan still should pass through the approval process; however, thus far, it demonstrates commitment to implementing market- based principles in the areas of district heating and biomass. USAID MERP worked on selected areas of the draft strategy. As of March 31, 2018, the adoption of the Action Plan to Implement National Energy Strategy until 2035 is pending. Municipal Energy Sector Reform GOU approved an amendment to the Resolution of the Cabinet of Ministers of Ukraine dated June 18, 2014 № 217, and changed the Procedure for Distribution of Funds Accrued to Current Accounts with a Special Use Regime for Settlements with the Natural Gas Supplier.13 Under amended procedure, payments for thermal energy produced from biofuels will be subject to “secured expenses.” This amendment will end direct discrimination of bio-heat and biofuels use as opposed to gas-heat and natural gas itself. The discrimination worked as a market entry barrier for entities using alternative fuels and prevented the fuel conversion process in the heating sector. MERP supported these changes by providing analytical inputs to MinRegion. In

12http://mpe.kmu.gov.ua/minugol/control/uk/publish/article;jsessionid=1D769C8619D5747180AED4C10FBE1BB7.app 2?art_id=245265499&cat_id=35109 13 https://www.kmu.gov.ua/ua/news/uryad-vregulyuvav-proceduru-rozrahunku-za-teplo-viroblene-ne-z-gazu

16 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT particular, the discriminatory barriers specified in the MERP report on the impacts of GOU Resolution #217 in 2016. The draft resolution was developed by MinRegion with participation of the SAEE and the Bioenergy Association of Ukraine and support from MERP.14 Biomass Market Development In Q17, MERP provided the report Recommendations on the Organization of the Solid Biofuels Market in Ukraine to SAEE. The report provided an overview of how biomass markets function in different EU Member States (MS), formulated recommendations for Ukraine regarding biomass sector organization, and analyzed legal barriers preventing efficient biomass sector organization. It contained a package of draft legal acts, including draft laws as well as draft GOU resolutions, aimed to implement the concept of biomass sector organization on market principles. During the reporting period, the Project disseminated information about biomass sector organization in Ukraine. In March, the article “What Bioenergy Can Do to Overcome Gas Crises” 15 was published in the popular Ukrainian media outlet Ekonomichna Pravda. The publication analyzes the current situation with bioenergy and its potential in Ukraine, international regulatory practices, and what Ukraine should do to achieve significant replacement of natural gas with biofuels. The publication was produced by a group of authors: Oleksandr Dombrovsky – Member of Parliament, Acting Chairman of the Fuel and Energy Complex, Nuclear Policy and Nuclear Safety Committee; Serhiy Savchuk – Head of SAEE; Diana Korsakaite – MERP COP; and Heorhii Geletukha – Head of the Bioenergy Association of Ukraine. In March, the MERP COP presented "Renewable Energy Sources in District Heating: in Search for a Tailored Model" at the Ukraine Renewable Energy & Power Infrastructure Investors Conference, organized by the European Business Association. The opportunity was used to present possibilities in the biomass sector in Ukraine to the investment community, taking into account principles of biomass sector organization that are being developed by the Project and being considered by SAEE. District Heating During the reporting period, the Project completed a framework for third-party access to existing DH infrastructure. MERP submitted to SAEE the report Model of Third Party Access (TPA) to Existing Infrastructure in District Heating. The technical part of the report provides analysis of the current situation for potential TPA in selected cities (Zaporizhzhia and Vinnytsia) with 11 economically assessed scenarios. The economic assessment of the technical scenarios demonstrates that the simple payback period varies from 10.13 to 1.86 years for Zaporizhzhia and 16.93 to 4.56 years for Vinnytsia (based on current financial and economic indicators). The report contains economic market model for TPA. The model, inter alia, covers: 1) Annual auctions for thermal energy, organized by a single-buyer operator (the operator is defined as the one having at least a 50 gigacalories per hour (Gcal/h) connected consumer heat load during heating season), with submission of two separate price bids for the heating and non-heating seasons 2) Setting size of mandatory reserve capacities of the operator to be paid by third parties

14 http://saee.gov.ua/uk/news/2221 15 https://www.epravda.com.ua/publications/2018/03/27/635394/

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 17 3) Setting the upper limit for heat energy price at the auction for independent heat energy producers at the level of 90 percent of the tariff set for the operator in this competitive system. The report includes a sensitivity analysis conducted to evaluate the impact of a natural gas price increase for the target consumer groups. It also provides analysis of the administrative barriers to third-party access functioning in the current DH system. In support of proposed economic model suggested, the Project also prepared a draft amendment of the Heat Supply Law, a draft amendment of the Law on Privatization of State Property, a draft amendment of the Law on State Regulation of Communal Services, and a draft amendment of the Law on Housing and Communal Services. In February 2018, the Project presented network integration and optimization modelling scenarios to high-level municipal representatives and the DH utility in Zaporizhzhia. 16 The meeting was attended by major decision makers such as the Director General of Zaporizhzhia DH utility, deputy director of CHP at the Zaporizhzhia steel company, and others. The participants recognized the existing potential and expected positive impacts of the proposed scenarios with utilization of residual industrial energy through the third-party access model developed by the Project. As a result of the meeting, the Project developed two specific scenarios at a more detailed level and submitted an updated report to the municipality in February 2018. Advocacy Campaign to Support Legal and Regulatory Changes To support the approval process for the key legal acts, the Project conducted an advocacy campaign. Specific activities included the following:  Participating in working groups of the VR  Holding a series of talks with representatives of the Cabinet of Ministers of Ukraine (CMU) and Members of Parliament  Advocating the need for adoption through media events and various communication activities B.4.1.2 Task 1.2: Assistance to NEURC IFI Loans In August 2017, as part of the public consultation process, NEURC posted on its website17 the Draft Resolution on approval of the order for concurring with NEURC regarding loans from international financial institutions (IFIs) for investment projects by entities dealing with generation of heat energy (except heat energy generated at heat and power plants, thermoelectric power stations, nuclear plants, and cogeneration plants that use nonconventional or RE sources), transportation of heat energy by main and local (distribution) networks, and supply of heat energy. As of March 31, 2018, comments on the draft resolution provided by MERP and other stakeholders (European Bank for Reconstruction and Development [EBRD] and licensees) were

16 http://zp.gov.ua/uk/articles/item/1956/u-zaporizhzhi-obgovorili-pitannya-integracii-sistemi-centralizovanogo- teplopostachannya 17http://www.nerc.gov.ua/data/filearch/Proekty/poekty_oznaky_regulatornyh_aktiv/2017/pr_274/pr_274_09.08.2017.p df

18 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT not posted on NEURC’s website, and the date for public hearings on the draft resolution is yet to be set. Support Changes to the Asset Valuation Methodology for Natural Monopolies in the DH and Water and Wastewater Sectors Valuation of Assets: Heating Sector During the reporting period, the State Property Fund posted on its website the draft order “On Approval of Changes to Methodology for Valuation of Assets of Natural Monopolies and Subjects Operating in Adjacent Markets in the Area of Combined Heat and Power Production” for public consultation.18 The proposed changes are based on results from a pilot valuation of the assets of the Kyivenergo and Chernihiv Heating Company Oblteplokomunenergo and on ARVIs developed. As of March 31, 2018, the adoption of the Asset Valuation Methodology by State Property Fund is pending. Improvement of Regulatory Reporting Forms In Q17, the Project developed and submitted to NEURC reporting forms and instructions for licensees in DH and centralized water supply and sewage sectors, which will apply incentive- based tariffs. Two sector-based draft resolutions by NEURC are provided for improvement of regulatory reporting forms. During the reporting period, NEURC considered, at the open meeting, the draft resolution “On approval of Reporting Rules for reports submitted to NEURC by subjects of economic activities who apply incentive-based tariffs for HE transportation by main and local (distribution) networks” 19 and placed it on the website for public consultation. In March 2018, NEURC completed the procedure of collecting comments on the draft resolution. The adoption of the resolution was planned for March 23, 2018; however, due to the lack of a quorum, the resolution is pending. During the reporting period, draft reporting forms and instructions for licensees in the centralized water supply and sewage sectors, which will apply incentive-based tariffs, have been undergoing internal processing at NEURC. In the letters dated February 2, 2018, and March 2, 2018, regarding respectively draft reporting rules for district heating and water and wastewater sector licensees, NEURC stated that the draft resolutions developed by the Project shall be used in NEURC practice. Assist NEURC in the Gradual Introduction of Incentive Tariff Regulation for Heating and Water Utilities In Q16, the Project assisted NEURC in developing eight draft NEURC resolutions to implement incentive-based tariff regulation in the DH transportation and water supply and wastewater treatment sectors.20 On January 10, 2018, the resolutions were published in the Government newspaper Uryadovyi Kurier, and on January 11, 2018, they went into effect. The NEURC resolutions are:

18 http://www.spfu.gov.ua/ua/documents/press-list/fund-regulations-publication/12299.html 19 http://www.nerc.gov.ua/?news=7233 20 Four resolutions for the heating sector and four resolutions for the water supply and sewage sector.

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 19  Resolution #964 “On approval of the Procedure for the setting of incentive-based tariffs for heat energy transportation by main and local (distribution) heating networks” (http://zakon0.rada.gov.ua/laws/card/v0964874-17)  Resolution #965 “On setting the regulatory rate of return of subjects carrying out (intending to carry out) heat energy transportation by main and local (distribution) heating networks” (http://zakon2.rada.gov.ua/laws/card/v0965874-17)  Resolution #966 “On approval of the Procedure for determining the regulatory base of assets of subjects of natural monopolies carrying out (or intending to carry out) economic activities on heat energy transportation by main and local (distribution) heating networks” (http://zakon3.rada.gov.ua/laws/card/v0966874-17)  Resolution #967 “On approval of the Tariff Formation Procedure for incentive-based tariffs for heat energy transportation by main and local (distribution) heating networks” (http://zakon2.rada.gov.ua/laws/card/v0967874-17)  Resolution #1132 “On approval of the Tariff Formation Procedure for incentive-based tariffs for centralized water supply and sewage (http://zakon3.rada.gov.ua/laws/card/v1132874-17)  Resolution #1133 “On approval of the Procedure for the setting of incentive-based tariffs for centralized water supply and sewage” (http://zakon2.rada.gov.ua/laws/card/v1133874-17)  Resolution #1134 “On setting the regulatory rate of return of subjects carrying out (intending to carry out) centralized water supply and sewage” (http://zakon3.rada.gov.ua/laws/show/v1134874-17)  Resolution #1135 “On approval of the Procedure for determining the regulatory base of assets of subjects of natural monopolies carrying out (intending to carry out) economic activities on centralized water supply and sewage” (http://zakon2.rada.gov.ua/laws/card/v1135874-17). Heating Sector In December 2017, the Project completed and submitted the first test calculations of incentive- based transportation tariffs for district heating entities to NEURC. In the letter dated January 11, 2018, NEURC stated that they “highly appreciate the work done by the USAID Project and that the results achieved can be used during practical assistance to utility companies transitioning to incentive-based regulation.” Centralized Water Supply and Wastewater Treatment Sector In January 2018, the Project submitted test calculations and an analytical note on incentive- based tariffs for water and wastewater entities to NEURC. The test calculations predict a tariff increase of up to 67 percent as compared to the current level may be expected. Part of the increase is due to projected inflation (about 15%). The reminder is due to the changes in tariff setting methodology, with the increase in the tariff due to changes in capital expenses (investment, revaluation) and regulatory return being partially counterweighted by savings on operational costs (electricity consumption reduction by 12.4% and water loss reduction by 9.2%) during the regulatory period. The volume of investment, planned over the regulatory period (UAH60 million), is based on pilot utility company projections, which in reality may be amended after NEURC reviews the declared efficiency of investment. In Q17, the Project submitted to NEURC the draft manual Methodological Recommendations for Licensees on Development of Long-Term Investment Programs in Water Supply and Sewage

20 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT Sector under Incentive-Based Tariff Regulation. In the letter dated February 2, 2018, NEURC stated that “the Methodological recommendations can be practically applied by NEURC while providing methodological assistance to the licensees developing investment programs”. Development of a Mechanism to Use Benchmarking Indicators Based on an Analysis of Best International Practice Heating Sector In December 2017, the Project submitted to NEURC a revised list of KPIs for the heating sector. The revised list was brought in line with the new reporting forms approved by NEURC Resolution #717 dated September 14, 2017. The regulator, in a letter dated January 11, 2018, stated that they “highly appreciate the results of the work done. The specified list of KРІs and the proposed calculation algorithm will help the Commission to establish efficient benchmarking system for DH sector.” On December 21, 2017, the Report on Benchmarking of Utility Companies Operating in the Heating Sector was submitted to NEURC. The report provides results of clustering and testing of methods of the comparative analysis in the areas of HE generation, transportation, and supply. In a letter dated January 11, 2018, NEURC expressed appreciation for the work done by the Project regarding development of the methodology for clustering of heating companies and implementation of benchmarking based on KРІs. NEURC stated that the data obtained may be used in its regulatory activities. Develop Methodological Recommendations on Accounting for Licensed Types of Activities Heating Sector In Q17, the Project developed a draft procedure (rules) for separated accounting by licensed activity (DH) to reflect the specifics pertinent to incentive-based regulation. During the reporting period, NEURC considered the draft resolution “On approval of Accounting Separation Rules/Procedure for DH under incentive based regulation” at a public proceeding, and posted the draft on its website. In March, NEURC approved the resolution "On approval of Procedure/Rules on separated accounting by type of licensed activity in heating sector (incentive based regulation).” 21 . The rules implement a financial unbundling framework for licensees engaged in more than one regulated activity in case the entity is under an incentive- based tariff for district heating transportation service. Centralized Water Supply and Sewage The Project provided assistance to NEURC to revise the draft resolution to reflect the results of the open discussion and comments received during the public consultation process. The resolution “On Approval of the Procedure (Rules) for Separated Accounting by Type of Licensed Activity by Business Entities Operating in the Centralized Water Supply and Sewage Sector (cost+)” was approved by NEURC on December 27, 2017. The publication of the resolution is pending. In Q17, the Project developed a Procedure (Rules) for Separated Accounting by Type of Licensed Activity (WSS) to reflect the specifics pertinent to incentive-based regulation. Following discussions with NEURC, the Project prepared the draft document and submitted the last version to NEURC in February 2018. The draft resolution “On approval of Accounting

21 http://www.nerc.gov.ua/?news=7479

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 21 Separation Rules/Procedure for Water and Wastewater under incentive based regulation” is undergoing internal NEURC processing. B.4.1.3 Task 1.3: Supporting Improvement of the Social Safety Net for the Vulnerable The task was completed in Q16. B.4.1.4 Task 1.4: Supporting EE Standards The task was completed in Q17. B.4.1.5 Task 1.5: Public Information and Awareness Campaign EE Campaign in the Most Popular Ukrainian Online Media The Project team and Internet media outlet Obozrevatel continued a joint social project—a series of publications on energy saving, energy efficiency, and management of HOA buildings. The publications were issued on a weekly or biweekly basis. They feature ways to reduce energy consumption and consequently energy bills, make one’s home more energy efficient and comfortable, get money for EE measures implementation, and effectively manage HOAs, as well as tips on thermal modernization and introduction of energy saving technologies in residential and private buildings. As part of the joint campaign, 15 articles were published in the column “Consumer’s Basket” and viewed by about 210,000 Internet users. Video PSAs MERP, in cooperation with SAEE, distributed its video PSAs to regional and national TV channels in Ukraine. It was completed in January following special approval that confirmed the social status of the video ads was granted by the National Commission of TV and Radio broadcasting. In total, 46 TV channels are broadcasting the four video PSAs daily to an audience of approximately 10 million people. The PSAs are also shown on the screens of the speed trains to a monthly audience of more than 200,000 passengers. Video PSAs were also placed on websites and Facebook pages of Project partners, including the Cabinet of Ministers portal (teplo.gov.ua) and SAEE. Overall, about 154,000 people viewed the new video PSAs in social media marketing (SMM), while more than 289,000 users were reached through Facebook. These video PSAs were created as part of a new phase of the outreach campaign. They appeal to consumers of communal services to advocate their rights on service quality, state and municipal programs available for the implementation of EE/AE measures, installation of metering equipment, verification of energy consumption, and use of “warm loan” programs to improve EE of their dwellings. Outdoor Campaign During the reporting period, advertisements were placed on 227 billboards and 284 city lights for free in the Project partner cities as part of the outreach campaign dedicated to the issues of HOA establishment, implementation of EE technologies, and defending rights of communal services consumers. The free placement of billboards was done as part of the social project between MERP and BigMedia Company, the biggest outdoor advertisement agency in Ukraine. This partnership has saved more than $600,000 on placement cost during the Project’s lifetime, which BigMedia took over as part of our joint socially oriented effort. Your Home TV Program On March 30, 2018, the UA-ONE National TV Channel broadcasted the last episode of the third season of the Project Your Home program. During its lifetime, the program was among the most popular shows on television. It brought attention to the issues of commercial metering,

22 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT maintenance of multi-apartment buildings, protection of co-owners’ rights, tariff regulations, energy efficiency, alternative energy sources, and effective management of HOAs. The potential audience of the program viewers on UA-ONE and 35 regional channels was about 4.7 million. Your Home is also available online through social networks like YouTube and Facebook, where it was viewed by more than 2.1 million users. According to research by the Kyiv International Institute of Sociology in the autumn of 2017, about 20 percent of Ukraine’s adult population saw the Your Home program one or more times. Hotline on EE/AE and “Warm Loans” Program On March 2, 2018, the MERP Hotline stopped providing services due to the graduation of the Project. The hotline was launched in 2016 by MERP in cooperation with Kyiv City Administration and SAEE to address the most urgent issues faced by Ukrainian communal service consumers. Due to outreach through USAID Project video PSAs, billboards, and Internet resources, as well as the excellent professional reputation of the operator, the USAID Project Hotline on energy efficiency was in a high demand among Ukrainians. During the year and a half period, it served 10,206 clients, including 468 during January–February 2018. Most of their questions were related to the conditions of the “Warm Loans” state program and subsidies for communal services. Other topics included issues on the establishment and effective management of HOAs, energy saving measures in multi-apartment buildings, and legal aspects of the relationship between consumers and their energy suppliers. “Warm Loans” Program To promote opportunities provided by the state and municipal government to support energy- efficient projects in the residential sector, MERP promoted the “Warm Loan” program via video PSAs, billboards, brochures, and the Your Home TV program. Project staff also demonstrated benefits of the program through media events, study tours of EE objects, and trainings for journalists. Educating Journalists on EE/AE The USAID Project team, in cooperation with SAEE, conducted information marathons with its partner cities, Khmelnytskyi (west Ukraine) and Zaporizhzhia (east Ukraine). The marathon— conducted under the slogan “Energy Efficiency and Renewal Energy for the Benefit of Communities: Best Practices”—attracted more than 130 participants including journalists from national and regional media outlets, and representatives of the communal utilities and city councils. Each event was opened by a press briefing, followed by press tours of EE or RE projects that were implemented through the joint efforts of MERP, SAEE, and partner cities within the implementation of the SEAP. In Zaporizhzhia, journalists visited Kindergarten #100 and Municipal Hospital #1, where EE measures were implemented under SEAP. Due to the implemented EE measures, during November–December 2017 and January 2018, the kindergarten had consumed three times less energy than similar kindergartens in the neighborhood. At the hospital, journalists visited the new 2-megawatt (MW) biofuel boiler house, which provides heat for the hospital and the neighboring Emergency Medical Service Center. The press tour in Khmelnytskyi included a visit to a local solid fuel boiler house with 2MW capacity, operating on wood chips and providing heat to the neighboring public and residential buildings. In addition, journalists visited the landfill gas utilization station producing electricity (0.6MW capacity). The station was installed by a private investor on the city’s landfill site and the investor provides the city with 13 percent of their revenue flow from the “green” tariff. As a result of the marathon, more than 50 publications and TV and radio newscasts were released in national and regional media.

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 23 Outreach Materials and Events to Support Energy Sector Reform By the end of March 2018, the Project team disseminated 400,000 brochures and posters to raise awareness about EE/AE, tariff regulation, HOA creation and management, and new legislation in the communal sector. The informational materials were also published on the MERP website and Facebook page. The printed materials were delivered to 18 HOA/Clean Energy Resource Centers (HOA/CE RCs) for dissemination. In addition, they were distributed via targeted events, including conferences, workshops, Sustainable Energy Weeks, and EE Days in MERP partner cities. Legacy Booklet and Video To describe the Project path, its challenges, reforms, and accomplishments in Ukraine, the MERP team created a publication and video that were presented during the MERP summarizing conference on March 15, 2018. Both Ukrainian and English versions of the booklet22 and 10- minute movie23 were placed on the Project web site and Facebook Page. MERP Summarizing Conference More than 260 guests gathered at the On the Path to Energy Efficiency: Challenges, Reforms, Accomplishments conference that summarized the Project's, partners’, and beneficiaries' impressive results of joint work, achieved in the four years of Project activities in Ukraine. Among the conference guests and speakers were Ukrainian government officials, members of the Ukrainian Parliament, USAID representatives, members of international financial organizations, international donors, representatives of national state agencies, NGOs, professional associations and academia, top management officials of MERP partner-cities, community leaders, and others. The conference included two sections (panels) that highlighted the USAID Project achievements at the national and municipal levels, respectively. The National Level Panel participants included Ostap Semerak, Minister of Ecology and Natural Resources of Ukraine; Susan Fritz, Director, USAID Mission to Ukraine and Belarus; Aliona Babak, Member of Ukrainian Parliament, Deputy Chairman of the Parliament Committee on Construction, City Planning, Housing and Communal Services; Dmytro Vovk, Chairman, National Energy and Utilities Regulatory Commission; Serhii Savchuk, Head, State Agency for Energy Efficiency and Energy Saving; Oleksandr Slobozhan, Executive Director, Association of Ukrainian Cities; Sergiy Maslichenko, Associated Director of Energy Efficiency and Climate Change Department, EBRD in Ukraine; and Diana Korsakaite, COP, USAID MERP Project. The panel discussion was focused on the Project support to the Government of Ukraine in improving the legal framework for implementing necessary reforms in the municipal energy sector, introduction of the tariff regulation system, social safety net adjustment for its dynamic functioning in the communal sector, and enhancing capacity for developing and introducing low emission development strategies. The second panel was devoted to Project cooperation with its partner cities and highlighted best practices in reforming energy and communal services sectors on the municipal level. The Municipal Level panel participants included Oleksandr Symchyshyn, Mayor of Khmelnytskyi; Mykola Vitenko, First Deputy Mayor of Ivano-Frankivsk; Serhii Mishok, First Deputy Mayor of

22 http://www.merp.org.ua/images/Docs/MERP_Legacy_2018-03-29_ENG.pdf 23 http://www.merp.org.ua/index.php?option=com_content&view=article&id=1030:usaid-project- conference&catid=80&Itemid=973&lang=us

24 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT Zaporizhzhia City; Mykhailo Kohut, First Deputy Mayor of Mariupol City; Volodymyr Voitenko, First Deputy Mayor of Sumy; Liudmyla Maksymenko, Head, Division of Economic Development, City Administration of Chernihiv; and Vira Illiash, Director of Communications and Government Relations, USAID Project. Overall, the Project cooperated with 36 municipalities covering 44 percent of the urban population. The Project helped the cities develop SEAPs and set up the operational aspects of the energy management and energy monitoring systems. In addition, Project experts and local specialists worked on investment catalogues, feasibility studies, and business plans that enabled the cities to receive funding for implementing the numerous EE and RE projects in the key municipal infrastructure sectors. The emphasis was on cooperation on outreach activities to change the behaviors of Ukrainians toward EE and promote use of AE resources. It included working directly with consumers during public events, development and dissemination of numerous information materials and PSAs, press events, and media campaigns. As a result of the successful informational campaign, more than 87 percent of the population of partner cities implemented EE/AE measures in their homes. B.4.2 ACTIVITY 2: PROMOTE INVESTMENT IN CE TECHNOLOGIES AND APPLICATIONS B.4.2.1 Task 2.2: Assisting Municipalities with Planning, Preparing, and Financing for CE Projects Energy Planning As of March 31, 2018, 15 new SEAPs have been prepared (first and second groups of cities), and 14 of them have been approved by the city councils. It is expected that the SEAP for Kyiv will be considered by the city council in Q19 of the Project. Project Preparation As of the end of March 2018, MERP prepared 61 project proposals valued at approximately USD489 million for IFI, public-, and private-sector funding. As of the end of the reporting period, the Project mobilized IFI and private-sector funding for 16 new projects 24 valued at approximately USD125 million and provided implementation support to five projects valued at USD74 million. During the reporting period, the Project finalized assistance to the City of Khmelnytskyi to update the feasibility study for thermomodernization of public buildings (EIB funding). Project Implementation Support In January 2018, MERP conducted seminar for partner cities participating (included in the preliminary list for financing) in the EIB Municipal Infrastructure Program and some cities in the Urban Public Transport Project. The purpose of the seminar was to provide a general overview of the Project Implementation Unit (PIU) roles and responsibilities during the project’s preparation and implementation. The primary focus of the training was on the Municipal Infrastructure Program, as a preliminary list of projects was formed and the operational manual for this program was approved by MinRegion and EIB. Funding Mobilized for Residential EE The “Warm Loans” program was not operational during the reporting period. The number of loans issued and corresponding cumulative (since the start of the program) amount remained unchanged: 274,662 loans (value of ~USD195 million), including 1,248 loans to HOAs.

24 Excludes public funding (municipal and state budgets).

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 25 B.4.2.2 Task 2.3: Introduction of Energy Management Systems Municipal Level In January 2018, TMS (official representative of TÜV SÜD in Ukraine) issued an audit report on certification of Sumy City Council in accordance with the ISO 50001 Energy Management standard. The audit concluded that the city is eligible to receive ISO 50001 certification. Sumy is the first large city in Ukraine to receive this certification. The establishment of energy management in the city was supported by MERP activities, including development of comprehensive EM documentation and supporting approval process by the city (instructions, policies, procedures), conducting capacity building and training for over 170 persons, and performing an internal audit of EM system to ensure compliance with ISO 50001 and to prepare for certification. In January 2018, the Project experts conducted 2-day seminar for the Kremenchuk city energy management unit to introduce energy management systems according to ISO 50001 requirements. B.4.2.3 Task 2.5: Support Mechanisms that Mobilize Private Sector Investment Support to Odesa Region Localities The Project provided support for introducing energy service in the public buildings of the Odesa Oblast localities. Through MERP efforts, the Odesa Oblast Council and Odesa and Bilhorod- Dnistrovskyi city councils announced 40 tenders for procuring energy modernization services in general educational institutions on the prozorro.gov.ua web portal. Because of Project support 15 contracts concluded with private ESCOs. According to investors’ estimates, implementation of these initiatives in the chosen government-funded institutions will enable these facilities to realize energy savings of 20 percent to 30 percent. Generating Responsible Home Ownership through Support of HOA/CE RCs To date, MERP RCs have conducted more than 6,600 public outreach events on the local level (including trainings and meetings on HOAs establishing) and more than 15,000 initiative groups and individuals have received consultations on legal, administrative, and technical issues. Some new 4,198 HOAs were created (between the beginning of 2015 and March 31, 2018), which is about 34.25 percent of all new HOAs established in Ukraine during the same period (12,254). B.4.2.5 Task 2.7: Implementing Sub-Activity 2 Tasks in Odesa Oblast and Ukrainian Territories Affected by the Conflict with Russia Eastern Ukraine Energy Audits and Specific Project Support In January 2018, MERP experts presented results of an in-depth energy audit of the DH system of Mariupol. The presentation covered:  Analysis of the current economic situation of the utility  Analysis of efficiency in use of fuel in the utility  Analysis of efficiency in use of heat energy along the whole chain of the heat supply system (generation-transportation-consumption)  Analysis of efficiency in use of electricity  Analysis of efficiency in use of water  Measures to improve efficiency of the utility

26 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT  Introduction of the energy management system according to ISO 50001 requirements. The overall value of the proposed measures is estimated at UAH790 million (approx. USD30 million). Their implementation will reduce annual CO2 emissions by about 88,000 tons. Odesa Oblast Energy Planning As of the end of the reporting period, six of eight Sustainable Energy and Climate Action Plans (SECAPs) developed by MERP were approved. Two plans for the cities of Yuzhne and Chornomorsk are awaiting city council approvals. Regional Energy Plan (REP) On February 8, the final draft of the Odesa REP was presented in Odesa. The event was attended by 25 participants, including Odesa Oblast State Administration, oblast council deputies, members of the Working Group on REP Development, representatives of eight cities (signatories of the Covenant of Mayors: Balta, Bilhorod-Dnistrovskyi, Bolhrad, Izmail, Odesa, Reni, Chornomorsk, Yuzhne), members of the Public Council attached to Odesa Oblast State Administration, and the USAID COR. The Acting Head of the Housing and Municipal Economy Department of Odesa Oblast State Administration communicated appreciation to the USAID Project for assistance in developing the first REP in Ukraine, which they see as the path to improving energy efficiency at the oblast level. Odesa Oblast authorities expect the implementation of the Odesa REP will be successful, as well as SEAPs for Odesa oblast cities, which are currently being implemented and are already providing promising results. The final version of the Odessa REP was submitted to regional authorities in February 2018. Implementing the REP will save nearly UAH2.6 billion by 2022 while reducing energy consumption (natural gas by more than 22% and electricity by 36%) and CO2 emissions, and diversifying energy generation with renewable resources. The REP investment program includes energy efficiency projects in various sectors of the regional economy, which will require UAH29.5 billion to implement by 2022. Demonstration Projects During the reporting period, the Project finalized procurement, delivery, and verification of materials and equipment for several demonstration projects in the Odesa and Donetsk oblasts. The variety of materials included mineral wool insulation, plastic windows with double glazing, electric kitchen equipment, circulation pumps, individual heat substations, individual ventilation units with heat recuperation, solar collectors for hot water production, condensing gas-fired boilers, and LED lamps and panels. Content and geographical scope of the demonstration projects included:  Comprehensive modernization of Bendzarivska T.P. Bondar Secondary School building, including installation of ventilation systems with energy recovery, automated heat controls, energy saving lighting with solar batteries, door replacement, switching heating system from coal to electricity, and heat insulation of the building envelope and attic. The project was conducted in partnership with the Balta City Council, Odesa oblast.  Modernization of the kindergarten Teremok building, including installation of solar collectors, installation of an individual heat substation, window replacement, and modernization of the lighting system and kitchen equipment. The project was conducted in partnership with the Executive Council of Izmail City Council, Odesa oblast.

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 27  Comprehensive thermal modernization of the kindergarten # 5 Zhuravushka building, including replacement of the gas-fired boilers with the condensation boilers, introduction of the hot water supply system with solar collectors and local supply and exhaust ventilation with heat exchange, reconstruction of the heating system, and replacement of the old wooden windows and wall insulation (capital renovation). The project was conducted in partnership with the Bolhrad City Council, Odesa oblast.  Comprehensive modernization of the combined-type pre-school Kazka building, with use of energy efficient technologies and introduction of alternative energy sources. The project was conducted in partnership with the Dobropillya City Council, Donetsk oblast. B.4.3 ACTIVITY 3: CAPACITY BUILDING AND DISSEMINATION All tasks under this activity have been finalized. B.4.4 ACTIVITY 4: ENHANCE CAPACITY FOR THE GOU IN LEDS Task 4.1: Strengthening Institutional Capacity in Planning LEDS-Resource Efficiency Development Strategies (REDS) Paris Agreement Implementation: LEDS Policy Document In February 2018, the Minister of Ecology and Natural Resources of Ukraine, Ostap Semyrak, for the final draft of the Low Emission Development Strategy of Ukraine until 2050 at the Ukrainian Energy Forum in Kyiv. This was the first time the final draft was presented publicly. Mr. Semyrak emphasized that the key section of the Strategy is de-carbonization of the domestic energy sector, as this is the source of 65 percent of the country’s GHG emissions. According to the latest calculations, the carbon intensity of the gross domestic product of Ukraine is 3.3 times higher than the countries of the European Union. Thus, the future of the Ukrainian economy, in particular, of the energy sector, is in low-emission development. The Inter-ministerial Commission on Climate Change has already approved the Strategy and in the near future it should be submitted for approval of the Government. Minister Semyrak in his presentation acknowledged the support received from MERP in developing the Strategy.25 Implementation of Paris Agreement Provisions: National GHG Inventory Enhancement The Project finalized support to SAEE on the implementation of EU Directive 2009/28/EC. The Project finalized the text (final draft version) of the national standard on liquid biofuels and bio liquids based on the comments and suggestions from the stakeholders. Crosscutting Activities Donor and Other Project Cooperation USAID Project Deputy COP and USAID COR had coordination meetings with International Finance Corporation (IFC) and EBRD representatives. The discussions focused on MERP activities that will be discontinued after March 31, 2018. In particular, these are related to energy efficiency (municipal and residential), clean energy, and climate change. The purpose of the meetings was to verify if some developments or activities initiated/conducted by MERP will be supported through the efforts of these organizations. The results of the discussions will be reflected in the MERP Hand-Over Action Plan.

25 https://menr.gov.ua/news/32111.html

28 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT Gender and Inclusive Development Per contract requirements, MERP ensures that men and women are equally supported through Project activities and that gender awareness and gender dynamics are taken into consideration. Gender issues are crosscutting for all MERP activities. Strengthening women’s roles in the design, implementation, management, and use of sustainable energy solutions is critical for reaching development goals. During the reporting period, women were actively involved in Project activities at both national and local levels: 93 persons took part in MERP events, including 31 women (33%) and 62 men (67%). MERP works with a wide range of people, ensuring inclusive development for all groups of the populace. The Project provides opportunities for everyone to take part in the seminars, workshops, roundtables, and other activities, regardless of age, sex, ethnic origin, health status, family structure, sexual orientation, education, employment, income, housing, food security, safety, or any other dimensions of human diversity.

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30 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT C. DELIVERABLES

MERP’s Eighteenth Quarter (Q18) deliverables and reports are as follows:  MERP Seventeenth Quarterly Report, October 1–December 31, 2017  Standard MERP Task Order (MTO) PowerPoint presentation  Basic talking points on main assistance areas (part of MTO PowerPoint presentation)  List of MTO accomplishments by tasks and activities  MTO Fact Sheet The most important documents and materials produced under MERP during Q18 of the Project are listed in Table 4.

Table 4. Most Important Documents and Materials Produced under MERP during Q18 of the Project # Activity Task/Subtask Month Document Title Language Letter to Mr. Savchuk dated January 16, 2018, on 1 Activity 1 Task 1.1 January submission of Model of Third Party Access to Ukrainian Existing Infrastructure in District Heating

Report Model of Third Party Access to Existing 2 Activity 1 Task 1.1 January Ukrainian Infrastructure in District Heating

Task 1.2 Letter to Mr. Vovk dated January 22, 2018, on 3 Activity 1 January submission of pilot calculations of incentive-based Ukrainian (Subtask 1.2.3) tariffs for water and wastewater (working papers)

Task 1.2 Pilot calculations of incentive-based tariffs for 4 Activity 1 January Ukrainian (Subtask 1.2.3) water and wastewater (working papers) - 2 files.

Letter to Mr. Mashliakivskiy dated February 6, Task 1.2 2018, on submission of Draft Rules of Accounting 5 Activity 1 February Ukrainian (Subtask 1.2.4) Separation for Water and Wastewater entities under incentive-based regulation

Task 1.2 Draft Rules on Accounting Separation for Water 6 Activity 1 February and Wastewater entities under incentive-based Ukrainian (Subtask 1.2.4) regulations, with Annex (2 files) Report on prefeasibility study "Using waste heat 7 Activity 2 Task 2.5 December of MK «ZAPORIZHSTAL» for heat supply of Ukrainian Zaporizhzhya city” Presentation of the results of prefeasibility study 8 Activity 2 Task 2.5 December "Using waste heat of MK «ZAPORIZHSTAL» for heat supply of Zaporizhzhya city” Report on prefeasibility study "Using waste heat 9 Activity 2 Task 2.5 December of MK «ZAPORIZHSTAL» for hot water supply of Ukrainian Zaporizhzhya city”

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 31 Table 4. Most Important Documents and Materials Produced under MERP during Q18 of the Project # Activity Task/Subtask Month Document Title Language Presentation of the results of prefeasibility study 10 Activity 2 Task 2.5 December "Using waste heat of MK «ZAPORIZHSTAL» for hot water supply of Zaporizhzhya city” Report on prefeasibility study "Assembly of 11 Activity 2 Task 2.2 December thermal networks of boiler plants on streets Ukrainian Citrusova, 9 and K.-Karoho, 21b" Presentation of the results of prefeasibility study 12 Activity 2 Task 2.2 December "Assembly of thermal networks of boiler plants on streets Citrusova, 9 and K.-Karoho, 21b" Presentation "Research of the technical and 13 Activity 2 Task 2.2 December economic efficiency of the integration of heating Ukrainian networks in Zaporizhzhya City" Presentations for the seminar “The role of Project 14 Activity 2 Task 2.2 January Implementation Units (PIU) in European Ukrainian Investment Bank projects in Ukraine” (5 files) Technical report "Energy audit of Sumy 15 Activity 2 Task 2.2 March Specialized School №7 named after Maxim Ukrainian Savchenko" Report “Concept of centralized water supply and 16 Activity 2 Task 2.7 January sewage systems in settlements of the Odessa Ukrainian region in which there are no such services” Environmental review checklist for identifying potential environmental impacts of project 17 Activity 2 Task 2.7 January activities and processes for the Project English “Modernization of Kazka Kindergarten Building in Dobropillia, Donetsk oblast” Presentation “Implementation of the energy management system in accordance with the ISO 18 Activity 2 Task 2.2 January Ukrainian 50001:2011 standard” from the workshop for Kremenchuk Energy Management Team Results of Energy Audit of KKP 19 Activity 2 Task 2.2 January "MARIUPOLTTEPLOMEREZHA" of the Mariupol Ukrainian city Reports on express energy scanning of 31 20 Activity 2 Task 2.7 January potentially attractive objects for ESCO Ukrainian mechanisms in Odesa oblast (207 files).

Report on Presentation of the Regional Energy 21 Activity 2 Task 2.7 February Ukrainian Plan for Odesa Oblast, with 3 annexes (4 files).

32 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT D. MILESTONES

The list of milestones for Q18 of the Project and completion status are presented in Table 5, Table 6, and Table 7.

Table 5. Q18 Milestones for Activity 1: Improve CE Regulatory and Legislative Enabling Environment

Task/Milestone Deadline Status Comments

Task 1.1. Developing Enabling Legislative and Policy Environment M 1.1.2 Laws for DH market operations February 15, Not Completed registered by VR 2018 Task 1.2. Assistance to National Energy & Communal Services Regulatory Commission (NEURC) M 1.2.3.3 Test calculations of tariffs for water & wastewater, DH (transportation) February 15, Completed based on the incentive-based regulation 2018 submitted to NEURC Task 1.5. Public Information and Awareness M 1.5.1 National public awareness campaign to promote EE, energy February 28, Completed conservation, and RE implemented, tariff 2018 regulation reform

Table 6. Q18 Milestones for Activity 2: Promote Investment in CE Technologies and Applications

Task/Milestone Deadline Status Comments

Task 2.2. Assisting Municipalities with Planning, Preparing and Financing for Clean Energy Projects М. 2.2.1 Kyiv SEAP approved by the city December 31, Not completed Approval is expected in Q19 council 2017 Task 2.7. Implementing Sub-Activity 2 Tasks in Odesa Oblast and Ukrainian Territories Affected by the Conflict with Russia February 15, М 2.7.3 REP developed and discussed Completed 2018 M 2.7.4 At least five projects initiated February 28, and/or implemented with U.S. Government Completed 2018 assistance

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 33 Table 7. Q18 Milestones for Activity 4: Enhance Capacity for the GOU in LEDS

Task/Milestone Deadline Comments

Task 4.1. Strengthening Institutional Capacity in Planning LEDS-REDS

M 4.1.4 Section 4 and 5 of 7th National January 31, Communication on Climate Change Completed 2018 submitted

34 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT E. PROBLEMS

The list of key challenges affecting MERP implementation are presented below:  Lack of finance and limited capacity at the local (municipal) level prevent effective (rapid) implementation of EE projects identified in SEAPs and affect the implementation of EM.  The macroeconomic situation (e.g., interest rates) has a considerable effect on lending and investment provided by commercial lending organizations and IFIs. Despite these challenges, the Project continued to make substantial progress in accomplishing the SoW and corresponding Work Plan.

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36 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT F. PLANS

F.1 ACTIVITY 1: DRAFT LIST26 OF PLANNED ACTIVITIES IN QUARTER 19 F.1.1 Task 1.1: Developing Enabling Legislative and Policy Environment Subtask 1.1.1. Providing Targeted Legislative and Regulatory Support Related to District Heating Network Planning, Optimization, and Development  Assessment of the current state of the existing legal and regulatory framework and institutional decision-making structure governing the DH sector’s operations in the area of long-term network development planning  Development of a roadmap to improve the existing legal and institutional framework  Drafting and facilitating amendments to the current legislative and regulatory framework including, but not limited to long-term integral network development, optimization, and investment planning, and diversification of heat supply  Supporting development of biomass market organization including the legislation framework. F.1.2 Task 1.2: Assistance to NEURC Subtask 1.2.5. Providing Targeted Assistance to NEURC as related to tariff setting and district heating network planning, optimization, and development  Developing investment methodology and reviewing procedures that incorporate long- term network development planning  Developing thermal energy generation tariff-setting methodology that incorporates third- party access considerations  Developing connection-to-network rules and connection-to-network-fee establishment rules and methodology  Assistance to NEURC to further incentive-based regulation and regulatory accounting including separate tariff setting for different licensed activities. F.2 ACTIVITY 2: DRAFT LIST27 OF PLANNED ACTIVITIES IN QUARTER 19 F.2.1 Task 2.8. Assisting Municipalities with District Heating Network Optimization and Development Planning  Develop selection criteria for selecting beneficiary DH companies meeting the terms established by USAID

26 Subject to USAID approval of MERP Work Plan for the period April 1, 2018 – March 31, 2019. 27 Subject to USAID approval of MERP Work Plan for the period April 1, 2018 – March 31, 2019.

USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT 37  Select DH companies complying with the requirements and committed to work on optimization and on developing a long-term system development plan  Development of a baseline information database on DH system component conditions and on operational data  Assess the need and provide appropriate training and capacity building to the beneficiaries in the identified areas of need  In selected cases, where a need is identified and with USAID approval, aid in the areas of asset evaluation and inventory, and improvement of corporate structure and management practices  Assist DH companies with acquisition of DH system modelling software. The tentative28 lists of milestones for Q19 of the Project are presented in Table 8 and Table 9.

Table 8. Q19 Milestones for Activity 1: Improve CE Regulatory and Legislative Enabling Environment

Task/Milestone Deadline Comments

Activity 1: Improve Clean Energy Regulatory and Legislative Enabling Environment Task 1.1.1. Providing Targeted Legislative and Regulatory Support Related to District Heating Network Planning, Optimization, and Development

M 1.1.1.1. Cross-referenced catalog developed and June 15, 2018 submitted to GOU

M 1.1.1.2. Roadmap to improve the existing June 15, 2018 framework is developed and submitted to GOU

Table 9. Q19 Milestones for Activity 2: Promote Investment in CE Technologies and Applications

Task/Milestone Deadline Comments

Task 2.8. Assisting Municipalities with District Heating Network Optimization and Development Planning M 2.8.1. Competitive selection announced and May 10, 2018 conducted M 2.8.2. Memoranda of Understanding with June 10, 2018 beneficiaries signed

28 Subject to USAID approval of MERP Work Plan for the period April 1, 2018 – March 31, 2019.

38 USAID MUNICIPAL ENERGY REFORM PROJECT – EIGHTEENTH QUARTERLY REPORT G. PERFORMANCE INDICATORS

No reporting for the period.

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40 USAID MUNICIPAL ENERGY REFORM PROJECT – SEVENTEENTH QUARTERLY REPORT

U.S. Agency for International Development 1300 Pennsylvania Avenue, NW Washington, DC 20523 Tel: (202) 712-0000 Fax: (202) 216-3524 www.usaid.gov

USAID MUNICIPAL ENERGY REFORM PROJECT – FOURTEENTH QUARTERLY REPORT 1