INTERNATIONAL ENERGY AGENCY UKRAINE ENERGY POLICY REVIEW 2006 Warning: Please note that this PDF is subject to specific restrictions that limit its use and distribution. The terms and conditions are available online at www.iea.org/w/bookshop/pricing.html INTERNATIONAL ENERGY AGENCY The International Energy Agency (IEA) is an autonomous body which was established in November 1974 within the framework of the Organisation for Economic Co-operation and Development (OECD) to implement an international energy programme. It carries out a comprehensive programme of energy co-operation among twenty-six of the OECD’s thirty member countries. The basic aims of the IEA are: • To maintain and improve systems for coping with oil supply disruptions. • To promote rational energy policies in a global context through co-operative relations with non-member countries, industry and international organisations. • To operate a permanent information system on the international oil market. • To improve the world’s energy supply and demand structure by developing alternative energy sources and increasing the efficiency of energy use. • To assist in the integration of environmental and energy policies. The IEA member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, the Republic of Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the IEA. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of thirty democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD. © OECD/IEA, 2006 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to: International Energy Agency (IEA), Head of Publications Service, 9 rue de la Fédération, 75739 Paris Cedex 15, France. 0001-01201-012 uukraine.inddkraine.indd SSec1:2ec1:2 111/09/061/09/06 116:27:176:27:17 This book is dedicated to Gordon Duff us, a leader, mentor and friend. Gordon joined the IEA as Head of Division for the Offi ce of Non-member Countries in 2002. He passed away on 28 February 2006. We will miss his good humour, his wise counsel and his courage. © OECD/IEA, 2006 0001-01201-012 uukraine.inddkraine.indd SSec1:3ec1:3 111/09/061/09/06 116:27:176:27:17 © OECD/IEA, 2006 0001-01201-012 uukraine.inddkraine.indd SSec1:4ec1:4 111/09/061/09/06 116:27:176:27:17 FOREWORD Ukraine is crucial to providing energy supplies to Europe because of its natural geographic position as a transit country: 80% of Russian gas supplies to Europe transit through Ukraine. Ukrainian energy policy is driven by the country’s strong desire to improve domestic energy security and reduce natural gas imports. Today, the majority of its energy supply comes from or through Russia. Ukraine now stands at a threshold as it confronts both dramatically higher energy prices and signifi cant changes in government. This Review highlights three key priority areas where the government could reduce its energy dependence and improve policy: energy effi ciency, cost-refl ective pricing and transparency. Ukraine has one of the most energy intensive economies in the industrialised world, thus energy effi ciency represents Ukraine’s single best opportunity to improve energy security. Improved effi ciency is essential for Ukraine’s growth and development, and for protecting its environment. Ukraine can considerably improve its energy effi ciency both through targeted policies and through market-oriented energy pricing. Today, most energy prices only cover operational costs, which has created a pressing need to invest in upgrading the infrastructure. Cost-refl ective prices are necessary to attract adequate investment and to provide incentives for needed reform across many areas of the energy sector. Ukraine could strengthen its energy policy by improving the transparency of energy data and clarifying market rules. The Review examines the energy sector from many angles, including the policy framework, environmental impact and developments in subsectors such as energy effi ciency, oil, gas, coal, electricity, district heating and renewables. The Review was an interactive process building upon a constructive dialogue between Ukraine and IEA. The Ukrainian government has worked very hard to make this Review a success; the process has enhanced cooperation between various branches of the government that address energy issues. Moreover, Ukraine has already made progress on the Review Team’s top priority recommendations. We congratulate the government on these achievements. At the same time, much remains to be done. We hope the Review and its recommendations can provide a useful input to Ukraine’s energy policy formulation and we look forward to working with the government as it continues its energy sector reforms. Claude Mandil Executive Director, International Energy Agency © OECD/IEA, 2006 0001-01201-012 uukraine.inddkraine.indd SSec1:5ec1:5 111/09/061/09/06 116:27:186:27:18 © OECD/IEA, 2006 0001-01201-012 uukraine.inddkraine.indd SSec1:6ec1:6 111/09/061/09/06 116:27:186:27:18 7 TABLE OF CONTENTS Foreword 5 Organisation of the Review and Acknowledgements 13 Executive Summary and Recommendations 17 PART I: SETTING THE SCENE 29 1. General Energy Scene and Energy Policy 31 2. Energy Trends 61 3. Energy and Environment 93 PART II: SECTORAL ISSUES 113 4. Energy Effi ciency 115 5. Natural Gas and Oil 159 6. Energy Transit 203 7. Coal 241 8. Electricity 269 9. District Heating 307 10. Renewable Energy 333 Annexes I. Energy Balances and Key Statistical Data 349 II. International Energy Agency “Shared Goals” 355 III. Abbreviations, Units, Proper Names and Transliterated Words 357 IV. Bibliography 365 List of Tables 1.1. Main Economic Indicators in Ukraine, 1992-2005 33 1.2. Investment Needs of the Ukrainian Energy Sector 49 2.1. Forecasts for Domestic Production and Imports of Primary Fuels, 2005-30 86 3.1. Key Energy and Environment Indicators in Ukraine and Annex I Parties 98 4.1. Breakdown of Total Freight Turnover, 1990-2004 141 4.2. Breakdown of Total Passenger Turnover, 1990-2004 141 4.3. Investments in Energy Effi ciency 148 5.1. Ukraine’s Oil and Gas Industry Structure 160 5.2. Structure of Naftogaz of Ukraine by Type of Ownership 162 5.3. Independent Oil and Gas Production, 2001 and 2003 164 TABLE OF CONTENTS © OECD/IEA, 2006 0001-01201-012 uukraine.inddkraine.indd SSec1:7ec1:7 111/09/061/09/06 116:27:186:27:18 8 5.4. Gas Production in Ukraine 173 5.5. Proven Natural Gas Reserves of Naftogaz of Ukraine, as of 31 December 2003 174 5.6. Gas of Ukraine Sales, by Consumer Category, 1999-2005 177 5.7. Regulated Final Gas Tariffs for End Users 183 5.8. Crude Oil and Natural Gas Liquids Production in Ukraine, 1992-2004 186 5.9. Proven Oil and Gas Condensate Reserves of Naftogaz of Ukraine, as of 31 December 2003 187 5.10. Oil Product Production and Use in Ukraine, 2004-05 191 6.1. Basic Features of Ukrainian Underground Storage Facilities, as of 2005 212 6.2. Projected Investments in the Gas Transportation System Reconstruction and Modernisation under the National Programme Oil and Gas of Ukraine to 2010 215 6.3. Characteristics and Utilised Capacity of Ukraine’s Oil Transport System 232 7.1. Projected Coal Sector Expenditures, 2006-2030 253 8.1. Installed Power Capacity in Ukraine, 2004 272 8.2. Comparison of Electricity Tariffs in Ukraine and Neighbouring Countries, Mid 2005 283 8.3. Energorynok’s Payment Collections, 1996-2001 284 8.4. Investment Needs in the Power Sector, 2006 to 2030 285 8.5. Electricity Exports in 2005 and Early 2006 286 8.6. Interstate Electric Power Transmission Lines of Ukraine and the Potential for Exports of Electric Power to Neighbouring Countries 289 8.7. Nuclear Power Plants in Ukraine 290 8.8. Average Wholesale Power Price by Type of Power Plant, July 2006 292 8.9. Ukrainian Uranium Production 296 9.1. Total Heat Production and District Heating Production in Ukraine, 1992-2005 309 9.2. Fuel Use at Combined Heat and Power and Heat-only Plants in Ukraine in 2005 310 9.3. Energy Losses in District Heating Systems Operated on Natural Gas 310 9.4. Projected Growth in Heat Production by Source, Reference Scenario 314 10.1. Renewable Energy Technologies in Ukraine 335 10.2. Estimates of Technically Feasible Renewable Energy Potential in Ukraine by Various Sources 339 10.3. Bioenergy Potential in Ukraine 340 10.4. Projected Use of Renewable and Non-conventional Energy Sources, Optimistic Scenario 345 List of Figures 1.1. Key Energy Policy Institutions of Ukraine 35 1.2. Ownership Structure in the Ukrainian Energy Sector, Early 2006 40 TABLE OF CONTENTS © OECD/IEA, 2006 0001-01201-012 uukraine.inddkraine.indd SSec1:8ec1:8 111/09/061/09/06 116:27:186:27:18 9 1.3.