Demand restraint could improve Ukraine’s energy system flexibility and resilience considerably while also reducing energy imports, exerting downward pressure on energy prices and providing a range of socioeconomic and environmental benefits. A comprehensive and integrated policy approach will be needed to help realise these benefits in a timely, efficient and cost-effective manner. The following discussion outlines a way forward, built on an integrated set of strategic goals and mutually reinforcing policy measures that could be deployed to advance demand restraint across the energy sector over an initial five-year period.

Strategic goals

Forming the basis of this roadmap are three key strategic goals:

  • Improve energy efficiency, by broadening and deepening energy efficiency in a few key high-consumption areas for which the potential to quickly realise substantial and ongoing energy savings is greatest.
  • Reduce fuel imports, by rapidly diversifying energy consumption away from energy imports and towards domestic energy sources.
  • Harness emergency demand restraint, by using demand restraint measures more effectively to help improve energy sector resilience and flexibility during emergency events and tight supply-demand conditions, especially in the electricity sector.

This combination of goals provides a complementary and mutually reinforcing foundation to pursue demand restraint, consistent with Ukraine’s wider socioeconomic policy priorities. The goals are also compatible with the various energy policies Ukraine has committed to under its 2014 Association Agreement with the EU and the related acquis communautaire. Gradual application of the EU energy policy framework could further strengthen the wider policy, legal and regulatory foundation for Ukraine to pursue proposed demand restraint goals.

The nature and scope of these goals reflect a broad, policy-relevant understanding of demand restraint and how it could be applied in Ukraine. The goals provide a strong foundation for pursuing demand restraint across the energy sector, reflecting the links between energy imports, intermediate consumption and energy end use, and how energy use throughout the value chain helps shape energy security and socioeconomic outcomes. Consequently, these goals can help accelerate roadmap development, simplify its implementation and maximise its effectiveness.

Residential sector measures

As space heating is a key source of household energy consumption in Ukraine, it is likely to offer the greatest opportunities for demand restraint in the residential sector. However, pursuing demand restraint in space heating could be challenging, as much of Ukraine’s residential space heating is provided through a fragile and obsolete district heating system, with average technical losses estimated at around 18.5% in 2018.1 Furthermore, stakeholder consultations revealed that Ukraine’s residential building stock is old, with insulation and weatherisation relatively limited. Stakeholders also noted that residential consumer responses to demand restraint incentives may also be restricted in some cases by insufficient ability to control temperature levels and by market distortions such as ongoing energy price subsidies.

A suite of policy measures will be needed to help address these challenges. International experience has proven several measures effective in advancing demand restraint and energy-saving in the residential sector.2

Insulating and weatherising existing buildings can considerably advance demand restraint and energy-saving, particularly by improving space heating efficiency. A variety of technologies are available, including double glazing; draught sealing; insulation; heating and cooling options; shading; low-emissivity coatings for “cool roofs”; and lighting and appliance replacement and disposal.

Building codes remain a key vehicle to promote energy efficiency, but it is difficult to transpose them directly from another jurisdiction because they need to reflect local conditions. Codes need to be reviewed and updated regularly to incorporate changes in building materials and practices, and resources must also be committed to ensure ongoing compliance through effective verification and enforcement.

Current policies have taken an integrated approach to address demand restraint in this area, reflecting the interrelatedness of the challenges associated with improving the energy efficiency of space heating and building envelopes.

Nevertheless, there is still scope to build on this foundation. Funding for thermal modernisation activities could be increased to boost their effectiveness and accelerate their deployment, potentially supported through the Energy Efficiency Fund. This could be combined with measures to introduce more efficient residential space and water heating on a new and replacement basis. An expanded thermal modernisation programme that builds on the successes and lessons learnt through schemes such as the Warm Loans programme could provide a practical and effective way forward.

These efforts could be supported by complementary education and awareness‑raising programmes targeting residential consumers. For instance, local weatherisation initiatives could be established offering in-home advice about managing energy consumption, potentially providing some low-cost consumable items (e.g. LED lightbulbs and door sealers) to demonstrate what can be done practically to save energy immediately. Such programmes are typically delivered in partnership with local utility service providers, retailers or energy service companies (ESCOs), and have successfully reinforced understanding and interest in reducing energy consumption.

At the same time, measures to strengthen energy efficiency standards governing new residential building construction could also be implemented, supported by more effective monitoring and enforcement, along with wider adoption of energy performance certificates for all residential buildings. Particular priority could be given to developing and implementing metrics and mechanisms to measure building energy efficiency improvements, which would address current deficiencies.3 Importance could also be placed on installing energy controls, including individual heating and temperature regulators in buildings that currently do not have them. Opportunities to install energy management and monitoring systems in government buildings could be explored, to demonstrate the benefits of more effective building energy management and to test the potential to expand deployment in the future.

Proposed policy measures to improve residential sector energy efficiency

  • Extend and expand energy efficiency programmes for existing buildings, and possibly introduce building energy monitoring and management systems, drawing on successes and lessons learnt from established programmes and funding mechanisms
  • Expand building energy performance certification coverage.
  • Strengthen energy efficiency standards governing new residential construction.
  • Strengthen monitoring and enforcement of building energy efficiency codes.
  • Strengthen financial incentives to encourage installation of more efficient residential heating appliances.
  • Complete metering rollouts for all residential consumers, including installing energy controls to enable all users to directly regulate their space heating.
  • Offer complementary education and activities to raise awareness of related energy‑saving options, possibly including low-cost weatherisation initiatives.
Transport sector measures

Road transportation dominates energy consumption in this sector and therefore offers significant demand restraint opportunities. More efficient energy use in road transport may also significantly reduce fuel imports. However, demand restraint measures are unlikely to deliver substantial savings quickly in Ukraine given the dominance of the used‑vehicle market and the relatively slow rate of vehicle replacement. This should not deter action now, especially to strengthen emergency management, as the potential for savings is considerable and the strategic importance of the sector to Ukraine’s energy security is growing. 

Improving energy efficiency

Ukraine’s vehicle fleet is relatively old. One stakeholder noted that the average vehicle age is more than 20 years,4 roughly double the EU average, and that it is rising due to the popularity of used vehicles. Such vehicles are likely to be relatively inefficient from a fuel economy and emissions perspective and, furthermore, most of them run on diesel and LPG, raising Ukraine’s liquid fuel import dependency (the majority of these fuels are imported from the Russian Federation and Belarus). Given that road transport usage is one of the few energy consumption areas that appear to be growing, maintaining the status quo may prove untenable from an energy security, economic performance and environmental sustainability perspective.5

International experience offers several examples of leading-practice measures that could encourage demand restraint in the transport sector.6 Mandatory measures such as fuel economy standards, which are increasingly being used to raise transport energy efficiency, are an effective way to gradually reduce transport sector fuel consumption, with the potential to deliver substantial savings and reinforce demand restraint over time.

However, given the relatively high capital cost of new vehicles in Ukraine and the slow rate of vehicle turnover, fuel economy standards are unlikely to deliver substantial demand restraint overnight. Instead, savings can be expected to accrue on a new and replacement basis at the prevailing rate of vehicle turnover. Dominance of the used‑vehicle market in Ukraine is expected to further retard the speed of improvement.

Increasing the vehicle turnover rate could be encouraged through measures to address high turnover costs. Examples include subsidies to reduce the upfront purchase price, such as differential sales taxes and import duties favouring newer vehicles, and operating-cost subsidies, such as registration discounts for vehicles meeting certain age or fuel efficiency requirements. These measures may have limited effectiveness in practice, however, especially if programme funding is so constrained that it has only a marginal influence on the timing of vehicle turnovers.

Alternatively, the government could adopt various incentives for people to drive less, for instance road-user charges; schemes to encourage the use of alternative modes of transport such as public transit; the development of park-and-ride systems; higher parking fees; congestion rules restricting access to city centres on particular days; and the replacement of roads with pedestrian thoroughfares and bicycle lanes in urban planning and projects. These kinds of polices have been adopted in various jurisdictions with some degree of success.

Furthermore, a range of complementary measures could be applied to increase consumer awareness of ways to improve vehicle fuel efficiency. Mandatory fuel economy and emissions labelling schemes used in several jurisdictions for decades have proven particularly effective in informing and influencing consumers’ vehicle purchase decisions. Other measures could include public education on ways to save fuel, such as through eco-driving, carpooling and regular vehicle maintenance; or promoting alternative modes of transport such as public transit and cycling. Such initiatives have been deployed elsewhere to complement mandatory and incentive‑based schemes, encouraging more efficient vehicle operation and the eventual purchase of more energy‑efficient vehicles.

Therefore, an effective strategy is likely to be based on primary motivators created by mandatory and incentive-based schemes, supported by complementary information and education programmes.7 For instance, an integrated strategy could be developed incorporating a range of measures such as upgraded fuel efficiency standards, user fees and pricing to promote more energy-efficient transportation options such as public transit or fuel-efficient vehicles. Incentive‑based measures could be delivered either through the taxation system, such as excise waivers for new and more recent imported vehicles or in the form of grants and subsidies. An information and education programme could also be introduced to support these measures.

Proposed policy measures to improve road transport energy efficiency

  • Upgrade fuel economy standards for all new and used vehicle imports, possibly starting with heavy-duty vehicles.
  • Implement vehicle fuel efficiency labelling for all domestic vehicle sales.
  • Develop financial assistance packages to encourage the purchase of more fuel‑efficient new and used vehicles, possibly through sales tax or import duty exemptions.
  • Introduce user charges to encourage greater use of more fuel-efficient transportation options, such as public transport.
  • Adopt complementary measures to inform and educate road users about ways to improve and maintain vehicle fuel efficiency.

Reducing fuel imports

As road transport is a major consumer of imported liquid fuels, considerable potential for demand restraint could be realised through switching consumption from imported to domestic energy sources. However, several stakeholders report that considerable barriers continue to impede the replacement of imported fuel with domestic sources.

New and recent fuel-efficient vehicle models are 20-40% more expensive than the used vehicles that currently dominate Ukrainian sales. Consumer preference for more affordable used vehicles that are typically imported from the European Union, no longer meet EU fuel efficiency or environmental standards and run on diesel or LPG, is adding to the challenge of reducing liquid fuel imports. Overall, stakeholders consider this price differential to be a major barrier to the uptake of more fuel-efficient vehicles in Ukraine.

In addition, several stakeholders noted that current fuel excise arrangements favouring imported LPG and diesel fuel products were discouraging production and consumption of domestically refined fuels and helping to reinforce import dependence. Stakeholders reported that LPG consumption has more than doubled in recent years, which they suggest is largely because the highly favourable excise rate differential translates into substantially lower prices at the pump.

At the same time, some stakeholders raised concerns about subsidies that currently favour electric vehicles over those that run on alternative low-emission fuels. They noted that although the National Energy Policy to 2035 provides support for all alternative fuels in principle, the more recent 2018 National Transport Strategy to 2030 incorporates a taxation measure favouring electric vehicles. It was suggested that this policy couldunduly limit the wider adoption of alternative-fuel vehicles by effectively restricting support to only one kind of alternative fuel and technology. 

Several policy options could be explored to address these and other obstacles to diversifying liquid fuel consumption away from imports and towards domestic sources. As some of these measures are closely related to the energy efficiency schemes discussed above, they also have the potential to improve energy efficiency in the road transport sector.

Some form of capital subsidy assistance could be considered to help address the cost disadvantage and encourage greater uptake of more fuel-efficient and alternative-fuel vehicles. Examples include direct grants of up to a certain amount for the purchase of a new or used vehicle that meets minimum fuel efficiency and/or environmental emission standards; lifting of sales taxes on vehicles meeting the standards; import excise and customs duty exemptions for vehicles meeting the standards; or some combination of these allowances. Stakeholders suggested that priority could be given to vehicles that offer thegreatest potential for fuel consumption savings including heavy-duty freight, commercial and public transport vehicles.

Reforming fuel excise rates to encourage switching to domestic fuel sources, especially lower-emission alternative fuels, could also be considered. Excise rates on LPG and diesel especially could be raised to bring them in line with current EU minimums. Stakeholders suggested that reforms of fuel excise arrangements could provide a substantial price incentive to consume domestic refined products and encourage much‑needed investment in local refineries. Discounting or eliminating excise taxes applied to these products could also further encourage switching to domestically produced alternative fuels. According to some stakeholders, modifying the excise rates would likely be a practical and effective means of encouraging a switch from diesel to alternative fuels while also ensuring the demand required to underpin domestic production in the longer term.

Some stakeholders also suggested that current taxation arrangements for electric vehicles be extended to cover all other forms of low-emission alternative transportation fuels to help increase and accelerate demand restraint in the transport sector. They consider that public passenger transportation and heavy‑duty freight vehicles would be the most practical and feasible targets for policies to increase alternative fuel consumption. As policies promoting alternative fuels have the potential to complement and reinforce incentives for import fuel switching created by mandatory and financial measures, they may have a role in an integrated strategy to promote demand restraint in the transport sector.

Complementary policies could also be adopted to promote alternative fuel use, such as a public vehicle fleet policy favouring alternative fuels. Such schemes could provide a practical way to pilot-test the potential of alternative fuels and of extending alternative fuel arrangements, while also providing a low-risk demonstration of their potential for key stakeholders.

Similarly, the potential for fuel-saving and import substitution through upgrading and extending public transport options in more densely populated urban areas could be explored. From a demand restraint perspective, benefits derive primarily from reducing the amount of fuel consumed per passenger-kilometre, but the potential for import substitution may increase significantly when public transport vehicles consume mainly alternative fuels or are fuelled primarily by domestic energy sources. 

Proposed policy measures to reduce road transport consumption of imported fuel

  • Encourage the purchase of more fuel-efficient, low-emission vehicles through some form of capital subsidy, possibly offered through direct payments or sales tax or import excise exemptions. Initial priority could be given to funding new or used public passenger, freight and commercial vehicles meeting specific fuel efficiency and/or emissions standards.
  • Reform fuel excise taxation to encourage switching away from imported fuels, especially diesel and LPG, and towards low and zero-emission domestic alternatives.
  • Consider extending the current taxation arrangements for electric vehicles to other cost‑effective alternative fuels and technologies to help accelerate import fuel switching.
  • Develop measures to support faster deployment of heavy freight and public passenger vehicles using domestically sourced alternative fuels.
  • Develop measures to upgrade and extend public transport infrastructure and increase usage in more densely populated urban areas, especially where these vehicles run on domestically sourced alternative fuels.

Harnessing emergency demand restraint

Ukraine’s growing dependence on liquid fuel imports, especially of diesel and LPG, expose it to the risk of unanticipated liquid fuel disruptions. Current liquid fuel emergency management relies on administrative and supply-side measures, including rationing and emergency stocks. However, concerns persist about the likely effectiveness of current measures. Development of some practical, readily deployable and cost‑effective demand restraint measures could complement and reinforce supply-side initiatives and reinforce the flexibility and resilience of the sector during periods of scarcity or emergency events.

International experience has demonstrated a range of potential measures to harness demand restraint during a liquid fuel emergency, including various forms of rationing, regulation, scarcity pricing and voluntary measures. The IEA has identified several key ways to encourage emergency demand restraint in the road transport sector.

Measures to harness demand restraint during a liquid fuel emergency

  • Public transport: As utilisation rates for public transport are typically low, considerable capacity could be mobilised during emergency events. Schemes to improve public transport use could be very helpful when applied in concert with measures to restrain private vehicle mobility, especially in urban areas with good public transit systems.
  • Corporate measures: Employers or institutions could offer more flexible work schedules involving less travel and allowing more frequent teleworking. Businesses can also help through voluntary measures such as establishing ride‐matching systems for their employees to commute to work.
  • Carpooling: As passenger vehicle occupancy is typically low, considerable capacity could be mobilised during a fuel emergency. Higher passenger occupancy rates, along with fewer vehicle trips, make carpooling an efficient option to reduce fuel consumption, especially where systems to enable and motivate ride-sharing are already in place.
  • Vehicle efficiency: Many simple, voluntary measures such as eco‐driving, proper tyre inflation and the removal of unnecessary (especially heavy) items from vehicles can be deployed at short notice to reduce fuel consumption. Campaigns calling on motorists to drive more efficiently are estimated to have great fuel-savings potential during a crisis.
  • Pricing strategies: Dynamic pricing strategies, such as electronic systems for charging road-user fees or pricing schemes for parking, are effective tools to manage vehicle use and help decrease fuel-wasting congestion. Systems that use real‐time pricing and clearly advertise the cost to drivers can be an especially effective rapid-response tool to reduce congestion during peak periods.
  • Driving restrictions: Schemes that limit vehicle circulation on certain days or at certain times can save substantial fuel (for example, odd‐even licence plate restrictions can be an effective way to mitigate panic-buying at filling stations). However, enforcement is required to make such measures effective. Systems to implement driving restrictions already exist in some countries for non‑emergency purposes, typically to reduce traffic congestion and particulate emissions in urban areas. These could also be used to restrain demand during a supply crisis.
  • Multi‐fuel vehicles: The ability for drivers to switch from oil products to alternative fuels (e.g. biofuels, LPG and natural gas) during periods of oil product scarcity could be a viable and effective short‐term emergency response measure where the capacity to make this switch already exists. For example, in cars enabled to use either LPG or gasoline, drivers could readily switch to LPG during an emergency event.
  • Freight trucking: Encouraging trucking companies to combine trips and keep trucks full could be included in a general information campaign. Similarly, encouraging eco‐driving, proper tyre inflation, speed reduction and fuel switching with higher-biodiesel blends could be beneficial.

Source: IEA (2018c), Saving Oil in a Hurry.

According to IEA analysis, the most effective of these options are driving restrictions, such as driving bans and speed limit reductions; substantially reduced public transport fares, possibly including free transit at specific times; flexible working arrangements; and public information campaigns promoting practical fuel‑saving measures.

As advance preparation and planning are crucial to successfully implement demand restraint measures during an emergency event, a practical first step is to develop a demand restraint policy that identifies the key measures to be used. The Lithuanian Energy Agency has recently published a liquid fuel emergency demand restraint strategy that provides a good example of how to tailor best‑practice principals to local circumstances.

Key features of Lithuania’s liquid fuel emergency demand restraint strategy

In 2020, the Lithuanian Energy Agency published Demand Restraint Measures for Liquid Fuels, establishing a framework for restraining liquid fuel demand during an emergency. The framework’s primary measures involve:

  • Promoting public transport use through fare discounts and increased service frequency.
  • Promoting remote working and other flexible working arrangements.
  • Reducing speed limits, including lowering maximum limits on motorways from 110 km/h to 90 km/h, and reducing all other speed limits to no more than 80 km/h.
  • Introducing fuel rationing for transit freight transport by imposing a refuelling limit of 150 litres per service station visit.
  • Introducing driving bans, using either the last licence plate digit or an “odds and evens” system.

To create a more favourable environment for implementing these key actions, the strategy also proposes several indirect measures: promoting eco-driving; restricting the movement of passenger and freight vehicles in urban areas; and raising parking fees. In addition, a communications campaign aims to build community support, keep the community informed about developments and provide practical advice to help consumers cope during emergencies.

The Lithuanian Energy Agency estimates that enacting these measures could save over 590 ktoe annually, representing one-quarter of Lithuania’s annual transport fuel consumption. Most of these savings (70%) are expected to result from the combined effects of fuel rationing for freight transit and speed limit reductions. 

Source: Lithuanian Energy Agency (2020), Demand Restraint Measures for Liquid Fuels.

The Government of Ukraine could consider preparing a similar document outlining objectives, strategies and operational practices to be deployed during an emergency event. The operational plan should address activation triggers and clearly identify the various stakeholders’ respective roles in delivering elements of the plan, and it should also draw on international experience to identify the best-practice principles and measures to employ, suited to Ukraine’s circumstances and requirements.

Proposed policy measures to harness emergency demand restraint in road transport

  • Develop an integrated range of primary demand restraint measures to be deployed during an emergency event, possibly including targeted fuel rationing; targeted driving restrictions such as limitations on the movement of passenger and freight vehicles in urban areas; speed limit reductions; more efficient freight logistics to reduce trips; reduced public transport fares to encourage greater usage; and various road-user pricing strategies.
  • Formulate a range of complementary measures to support more effective deployment of primary demand restraint measures, such as encouraging more flexible working arrangements; promoting eco-driving and other actions to improve vehicle efficiency; and encouraging various forms of carpooling.
  • Draw up a comprehensive communications strategy to engage the community more effectively and promote fuel-saving through compliance with mandatory measures; participation in voluntary measures; and ongoing support during the emergency response.
  • Prepare an integrated liquid fuel demand restraint strategy that incorporates primary and complementary measures tailored to Ukraine’s circumstances, ready to be deployed during liquid fuel emergencies. Test implementation procedures regularly with all key stakeholders to ensure it can be rolled out quickly and efficiently during an emergency event. 
Industry sector measures

Considerable progress has been made towards improving energy demand restraint in Ukraine’s industry sector. For instance, with the support of donor organisations, most of Ukraine’s energy-intensive industries have introduced energy management systems compliant with the ISO 50001 standard.8 Despite these positive developments, recent trends show that high levels of energy intensity accompany growth in final energy consumption across the industry sector.9 This suggests that there is scope for further demand restraint, particularly among energy-intensive industrial consumers.

International experience has proven several key measures that have the potential to increase demand restraint and energy-saving in the industry sector.10 In particular, application of a comprehensive energy management system, combined with an independently verifiable regime of energy efficiency auditing, can identify areas for energy efficiency savings and help establish a virtuous cycle of continual improvement in industry energy efficiency. Highly motivated industry “ownership” of energy efficiency processes and outcomes has prompted active engagement with industry‑driven energy efficiency networks, promoting targeted education, learning and information-sharing. In several cases, voluntary contracts have been a practical incentive for enterprises to deliver energy savings through greater efficiency.

Governments have supported the development and implementation of energy management systems through a range of measures, including enterprise-level energy audit programmes to identify initial energy-saving opportunities and establish operational baselines to monitor performance and implementation progress, and independent systems of monitoring, reporting and verification. These arrangements have been supported by a combination of policy measures such as tax relief; technical assistance; grants and various forms of concessions; and help for industries to establish networking arrangements.

Opportunities exist to build on Ukraine’s progress so far: policy measures in particular could complement and reinforce industry initiatives to increase their effectiveness, expand coverage and accelerate deployment. For instance, a more rigorous and comprehensive framework could be developed to help identify and implement substantial energy-saving opportunities, possibly drawing from best‑practice examples such as Australia’s energy efficiency opportunities scheme. Such an approach could incorporate a regime of regular, independent auditing to improve measurement and verification, a voluntary contractual framework to support more effective implementation of energy efficiency initiatives, and a mechanism to facilitate more transparent information exchange and dissemination of best practices and lessons learnt.

Industry-driven development and deployment of energy-saving measures could be further enhanced by more effective partnerships among energy efficiency practitioners and experts. Ukraine’s developing energy services sector could make a valuable contribution by drawing on its knowledge and experience of energy performance contracting, project development and related financing arrangements. Partnerships of this kind could help catalyse energy efficiency projects in the industrial sector, especially among smaller industrial and commercial enterprises.

Some stakeholders also noted that the high cost of more energy-efficient equipment and insufficient access to capital could delay or defer implementation of energy efficiency-related investments or process improvements in some cases. Various incentives could therefore be developed to address impediments to necessary capital equipment replacements and process improvements when the potential energy savings are substantial. Such programmes could link technical and financial assistance to implementation, possibly through a system of independent auditing and voluntary contracts as previously discussed.

Proposed policy measures to improve industry sector energy efficiency

  • Develop a more rigorous and comprehensive framework to identify and implement demand restraint options, which could include improving the application and coverage of energy management systems; supporting a regime of regular, independent energy auditing; and reporting results more transparently.
  • Support the development and deployment of voluntary contractual mechanisms to facilitate implementation of energy efficiency initiatives as well as more effective verification and compliance.
  • Expand support for industry-led efforts to improve education, capabilities and information exchange, incorporating training and capacity-building and the sharing of best-practice lessons among industry participants.
  • Develop incentives to address potential barriers to the deployment of energy‑efficient capital equipment and process improvements that have the potential to deliver substantial energy savings.
  • Facilitate the development of more effective partnerships between smaller commercial and industrial energy consumers and energy efficiency practitioners and experts, possibly by leveraging the knowledge and experience of the emerging energy services sector.
Energy utility sector measures

Power and district heating utilities are major consumers of imported fuels and key suppliers of energy to residential, commercial, public and industrial consumers. As a result, they hold a strategic position in Ukraine’s energy sector, with considerable potential to shape and drive demand restraint outcomes. 

Improving energy efficiency

Ukraine’s power and district heating utilities are typically operating old infrastructure, resulting in low levels of technical efficiency and high losses, especially in the electricity and district heating distribution systems.11 As a result, a considerable amount of the system’s energy potential is being lost, leading to substantial fuel over-consumption and wasted energy production.

International experience suggests there may be considerable potential for demand restraint to help reduce energy consumption and waste in the energy utility sector. Targeted application of a combination of mandatory, regulatory and financial incentives could help accelerate modernisation in this sector to reduce network losses and improve the efficiency of power generation and heat production.

Regulatory mandates, such as generator efficiency standards and network loss limitations, have been applied gradually in other countries to improve the technical and operational efficiency of power and district heating utilities, producing more efficient energy consumption and reducing energy waste. Mandates provide a verifiable and enforceable mechanism for extending coverage and delivering substantial savings in regulated network industries. However, costs could be an issue when mandates are poorly calibrated.

Similarly, various regulatory incentives have also been used to encourage energy efficiency and reduce losses. These have included financial rewards for meeting and exceeding energy efficiency targets or benchmarks and penalties for underperformance. Regulatory incentives have proven effective in driving behavioural change among energy utilities, especially when they complement other regulatory initiatives to deliver demand restraint and energy savings. For example, international experience has shown that appropriately incentivised utilities operating within an environment of cost‑reflective pricing can use their technical, financial, managerial and marketing capabilities to develop and deliver a range of timely, innovative and cost‑effective energy efficiency measures.12 However, this potential can be realised only if the regulatory framework permits utilities to provide such products and services.

Financial stimulus has also been used to strengthen mandatory and regulatory incentives to improve energy efficiency and reduce losses. Examples include investment incentives in the form of grants, loans, tax breaks and risk-sharing mechanisms. Although financial incentives have proven effective, their cost may limit their coverage and impact in practice.

Utilities could also be key enablers of demand restraint among their customers. Various programmes have been deployed offering advice to customers on relevant energy efficiency measures, or assistance accessing financial incentives; aiding with bulk procurement, distribution and installation of energy-efficient products; providing information and communication technology tools to support more efficient energy use; and enabling consumers to more actively control their energy use and energy providers to better monitor, aggregate and control loads.13

Opportunities to apply mandatory, regulatory or financial incentives could be explored to modernise the power and district heating sectors to speed the reduction of network losses and improve power generation and heat production efficiency. Targeted application of a combination of these measures could restrain energy demand considerably and also encourage more efficient investment, operation and end use in the power and district heating sectors, which can have a critical bearing on Ukraine’s energy security, economic competitiveness and environmental outcomes. Extending incentive regulation to the district heating and natural gas sectors could also be considered, to make the economic regulation of energy sector utilities more comprehensive and integrated.

An additional option is to expand the roles and functions of power and district heating utilities to enable them to offer their customers a range of energy efficiency services. In principle, utilities are well placed to leverage their detailed knowledge and understanding of their customer base to identify energy efficiency opportunities and to readily realise them through a range of energy-efficient products and services. They therefore have considerable potential to help accelerate demand restraint and energy-saving and may provide effective programme delivery for some demand restraint measures in Ukraine.

Power and district heating utilities could also be given the authority to more effectively engage with ESCOs to help develop and deploy targeted energy efficiency and energy-saving products and services. Such arrangements may initially focus onbuilding-retrofit opportunities in the residential, public and commercial sectors, enabling ESCOs to leverage their greater knowledge and experience in these areas and their growing regional coverage.

Proposed policy measures to improve energy efficiency in power and district heating

  • Develop mandatory measures to improve energy efficiency, possibly including generator efficiency standards and penalties for excessive network losses.
  • Formulate regulatory incentives, such as financial rewards for meeting energy efficiency targets or benchmarks, to encourage greater energy-saving and lower technical losses.
  • Develop financial incentives to complement and reinforce mandatory and regulatory measures, potentially focusing on critical investments to help accelerate sector modernisation.
  • Explore ways that power and district heating utilities can encourage energy efficiency and energy-saving among their customers, including by informing and educating them, possibly in partnership with ESCOs.
  • Examine ways to hasten the extension of incentive regulation and cost‑reflective pricing arrangements to the district heating sector. 

Reducing fuel imports

Renewable energy is now one of the most affordable sources of energy for power and heat generation14 and has considerable potential to displace energy imports in the power and district heating sectors. Ukraine’s policies to date have considerably advanced the production and consumption of renewables in the stationary energy sector in recent years. However, emerging policy uncertainty is raising concerns about the future of renewables, which could greatly reduce their potential to support import fuel diversification in power and district heating.

As international experience suggests that investment certainty is a fundamental prerequisite for renewable energy development and deployment, the current instability of Ukraine’s renewable energy framework needs to be resolved as soon as possible. Accordingly, consideration could be given to reviewing, and revising when necessary, the key elements of support mechanisms to minimise any undue administrative or regulatory uncertainty that could reduce programme effectiveness.

For instance, Ukraine’s original Green Tariff programme incorporated ex-post regulatory decision‑making in relation to eligibility and the rate of assistance provided. Introducing clear and predictable arrangements to determine and deliver assistance, established in advance of any investment decision, could greatly reduce investor uncertainty and help accelerate renewable energy deployment. Furthermore, publishing clear target trajectories for new renewable investment and production, possibly expressed in GWh per annum over a rolling three- to five‑year horizon, would facilitate more efficient planning, procurement and development.

At the same time, opportunities to deepen and expand support programmes could be explored to encourage greater renewables-based electricity and heat consumption. Extending renewable energy consumption mandates could also help reduce production risks; provide a stable market for renewable energy; and establish a more predictable trajectory for growth in renewable energy consumption. Various mechanisms could be deployed to this end, including purchasing quotas, consumption guarantees and various forms of price support.

Initiatives could also be considered to address network constraints that may unduly restrict access to domestic renewable energy. Introducing increasing volumes of intermittent renewable energy into a power system can create energy flows that networks were not designed to accommodate, creating new points of congestion and other technical issues that may limit access to reliable supplies. New network investment may be required to address these challenges.

International experience indicates that reviewing network planning and development arrangements, including network management and system operating practices, is an effective way to develop more integrated approaches to network development that support growing deployment of domestic energy sources, especially renewable energy. Effective longer-term planning can help identify emerging infrastructure bottlenecks and set more effective investment priorities. Consideration could be given to reviewing network development plans and related investment regulations to ensure that network constraints do not become an undue hindrance to renewable energy development and deployment, and to wider power sector development. In addition, power system operating protocols and practices could be reviewed to ensure that increasing volatility and new energy flow paths do not unduly constrain or disrupt access to domestic energy sources.

More effectively incorporating renewable energy into modernisation programmes for the power and district heating sectors could also facilitate its development and deployment.

Proposed policy measures to reduce the imported fuel consumption in power and district heating

  • Expand measures to encourage greater renewable energy use in the power and district heating sectors, possibly by extending consumption mandates through quotas, guarantees or various forms of financial incentive.
  • Review and upgrade the rules governing eligibility and access to the main measures supporting renewable energy development, to eliminate any undue regulatory or administrative uncertainty, risk and additional costs.
  • Resolve any remaining uncertainty surrounding Ukraine’s renewable energy support programmes.
  • Review and update power network planning and development frameworks to support more efficient and timely renewable energy development and consumption.
  • Examine opportunities to incorporate the development and deployment of renewable energy more effectively into modernisation plans for the power and district heating sectors.

Harnessing emergency demand restraint

Ukraine’s power infrastructure is old and fragile, increasing the risk of outages that may result in cascading system-wide failures.15 This risk may be magnified by growing volumes of variable renewable energy entering the grid, which is likely to place the power system under greater operational stress. Ukraine currently relies exclusively on supply-side reserves and administrative responses to maintain power system security.16

However, international experience has shown that even a relatively small degree of demand restraint can greatly increase power system flexibility, reliability and resilience, especially when systems are under stress or during emergency events. These benefits were particularly evident in the aftermath of the 2011 Great East Japan Earthquake event.

Demand restraint in Japan’s power sector following the 2011 Great East Japan Earthquake

The potential for demand restraint to help improve power sector flexibility and resilience during an emergency event was illustrated after the 2011 Great East Japan Earthquake.

In the wake of this event, Tokyo Electricity Power – which provided electricity to around 42 million individual consumers and corporations responsible for 40% of Japan’s GDP – lost around 40% of its generating capacity.

The Japanese government implemented a series of mandatory and voluntary savings measures to help address the shortfall, including:

  • Ten days of rotating load-shedding immediately after the incident.
  • Mandatory requirements for large industrial consumers to reduce electricity use by 15% (compared with the previous year) during July-September 2011.
  • Measures encouraging small businesses to take voluntary power-saving actions.
  • Measures encouraging households to take voluntary power-saving measures, including using electric fans instead of air conditioners, using blinds to reduce heat from sunlight, and disconnecting electric appliances when not in use.
  • A range of public sector energy-saving actions, including the dimming/switching off of lights, the raising of air conditioning temperatures, and less frequent running of trains and metros.

Applying these measures caused summer peak power demand to fall by around 15%, which helped eastern Japan avoid unscheduled power restrictions.

Sources: IEA (2019a), Multiple Benefits of Energy Efficiency; Kimura , O. and K. Nishio (2013) Saving Electricity in a Hurry: A Japanese Experience After the Great East Japan Earthquake in 2011; IEA (2012a), World Energy Outlook 2012.

There may also be opportunities to fine‑tune established regulatory mechanisms and protocols to manage demand during power sector emergency events to more effectively harness emergency demand restraint. International experience suggests some key preconditions to successfully develop and deploy regulatory forms of emergency demand restraint in the power sector:

  • Capacity to monitor and analyse power flows in real time, which depends on the ability of system operators to monitor, understand and respond to changing power system conditions as they happen, based on the availability and coverage of accurate, timely information on power flows and equipment performance.
  • Capability to manage power flows in real time, based on the nature, coverage and resilience of key system monitoring, diagnosis and control technologies.
  • Effective co‑ordination focused on the ability of all parties responsible for implementing demand restraint to work together in a way that maximises efforts to harness energy-saving potential.
  • Effective communication focused on the ability of parties responsible for co‑ordinating and implementing demand restraint measures to keep each other informed, and to keep other stakeholders and the community apprised of developments and actions they can take to support demand restraint initiatives.
  • Effective ongoing training and capacity-building to support the development and deployment of emergency demand restraint measures, including processes to test, review and develop procedures to implement these measures.

Current emergency management protocols and mechanisms could be reviewed to ensure that they will deliver the expected outcomes, and to verify that all the key preconditions for developing and implementing regulatory forms of emergency demand restraint align with current best practice.

Opportunities to develop emergency demand restraint resources could also be explored. For instance, emergency demand restraint could be achieved through voluntary measures, innovative contracting or scarcity pricing.

International experience shows that calls for voluntary energy savings can substantially reduce demand for short periods during emergency events, creating greater system flexibility and resilience in the wake of an energy system disruption. To date, most efforts to induce voluntary demand restraint during power shortages or emergency events have focused on media campaigns to inform consumers and encourage them to adopt behaviours that reduce power consumption.

However, realising this potential during a crisis can be challenging. The government could therefore consider developing a framework and mechanisms in advance to harness voluntary demand restraint during an emergency, and have it ready to be rolled out quickly when required.

Furthermore, introducing energy market and regulatory reforms consistent with those applied in the European Union would offer new opportunities to harness demand restraint through various forms of innovative contracting. For example, a range of incentive-based contractual arrangements have been deployed internationally to help harness demand restraint during periods when power systems are under stress or experiencing emergency conditions.

Contractual mechanisms to harness demand restraint in the power sector

  • Direct load control programmes permit operators to enter into contracts with customers, enabling them to remotely shut down or cycle a customer’s electrical equipment (e.g. air conditioners, water heaters, space heating) at short notice. Direct load control programmes are offered primarily to residential and small commercial customers.
  • Interruptible supply contracts incorporate curtailment options and provide a rate discount for agreeing to reduce load during predefined events. Penalties may be incurred for failure to curtail. Interruptible programmes have traditionally been offered to large industrial and commercial customers.
  • Demand bidding and buyback programmes enable customers to make bids to curtail, based on wholesale electricity market prices or an equivalent benchmark. Such products are usually made available to large customers only, with metering equipment that permits real-time monitoring and verification of compliance.
  • Emergency demand response programmes provide incentive payments to customers for load reductions during periods of reserve shortfalls.
  • Capacity market programmes accept bids from customers to curtail load as an alternative to procuring conventional generation or network resources. Customers typically receive same-day notice of events. Incentives usually consist of upfront reservation payments, and penalties for failure to curtail when required.
  • Ancillary services programmes permit customers to bilaterally contract to deliver curtailment, or to offer load curtailment in ancillary service markets as an alternative source of reserves for system operators. Where available, system operators pay customers the contract price (or market price in the case of an ancillary services market) for committing to curtail loads according to contract or dispatch requirements.

Source: IEA (2011b), Empowering Customer Choice in Electricity Markets.

Technologies to monitor, verify and enforce demand response in real time, such as smart metering and controllable devices, are generally deployed to enforce these contractual arrangements. The contracting party, usually a retailer, system operator, aggregator or other load-serving entity, makes the decision to activate these forms of demand restraint. Payments to customers are usually agreed in advance of any event that may trigger activation.

Consideration could be given to developing innovative contractual arrangements such as these to help turn demand restraint into a potential emergency management resource that could be procured by system operators, or other responsible parties, to complement and reinforce their traditional supply-side resources.

Alternatively, raising power prices to “scarcity” levels could provide a clear and effective incentive to reduce power consumption during periods when power systems are under stress or experiencing emergency conditions. The effectiveness of price signals in moderating demand during an emergency event depends very much on whether consumers are exposed to the price rise in real time and whether they have the capacity to respond.

If consumers are not aware that scarcity pricing is in effect, they will have no incentive to respond and their consumption is unlikely to change. In this situation, dramatic power cost increases can create unintended financial hardship. Similarly, when consumption is highly price-inelastic,17 exposure to scarcity pricing may simply result in a wealth transfer from consumers to producers without achieving the desired reduction in consumption. Care needs to be taken to ensure that any scarcity price mechanism is deployed appropriately and sends an effective signal to reduce, delay or defer consumption.

Proposed policy measures to harness emergency demand restraint in the power sector

  • To minimise unintended economic or social impacts and to improve the effectiveness of measures, fine-tune current regulatory mechanisms and protocols for load management, including emergency power flow monitoring and management capability; co‑ordination; communications; and training and capacity-building.
  • Devise targeted voluntary mechanisms to harness demand restraint during emergencies.
  • Develop a range of contractual mechanisms to help harness demand restraint during periods of scarcity and emergency events.
  • Explore the potential to apply various forms of scarcity pricing to help moderate demand during scarcity and emergency events.
  • Establish a comprehensive communications strategy to engage with communities more effectively to inform them about power-saving opportunities; to encourage them to participate in voluntary power-saving activities; and to garner ongoing community support during an emergency response.
  • Prepare an emergency demand restraint strategy for the power sector that is ready to deploy during periods of scarcity or emergency events. The strategy should provide an integrated framework for deploying emergency demand restraint, incorporating regulatory mechanisms, contractual mechanisms, voluntary mechanisms, and (potentially) pricing mechanisms. Implementation procedures should be tested regularly with all key stakeholders to ensure it can be rolled out quickly and efficiently during an emergency event.
Demand restraint policy development and implementation pathways

The table below, which presents some indicative pathways and time frames to develop and implement this roadmap, groups measures by target sector and strategic goal. It outlines an indicative five-year policy development and implementation pathway for each measure proposed.

Within each timeline, periods notionally allocated for policy development are identified by yellow cells. Detailed policy and programme formulation and related implementation arrangements would be developed and finalised during this period, including related policy, legal, regulatory, funding and programme delivery elements.

Blue cells pertain to implementation periods in which the practical delivery of measures would commence, including potential preliminary implementation arrangements such as pilot or demonstration programmes. Preliminary implementation programmes are typically undertaken to support incremental learning and risk management, especially when measures introduce new processes, are potentially sensitive, or are in some other way ground-breaking. 

Potential pathways to pursue demand restraint in Ukraine over the next five years

Ukraine 10 Year Timeline Eu4energy

An earlier proposed implementation date for a particular measure generally reflects higher priority. Indicative priorities for policy development and implementation for each measure were determined according to the following criteria:

  • Effectiveness: in terms of the potential contribution to demand restraint, including energy savings, system resilience and flexibility, and import fuel diversification. Measures that are likely to deliver the greatest demand restraint score more highly under this criterion.
  • Urgency: the degree to which a measure addresses a pressing policy need. Measures that resolve clear gaps or deficiencies in current arrangements gain a higher score for this criterion.
  • Timeliness: how quickly a measure can be developed, implemented and begin to deliver results. Measures that are likely to be developed, deployed and begin to deliver demand restraint more quickly score higher.
  • Deployment: the ease with which a particular measure can be developed and implemented, given the existing policy, legal and regulatory framework; likely resource requirements; level of complexity; institutional capability; and likely level of stakeholder and community support. Measures that are relatively simple to develop and administer, require fewer additional resources, and build on knowledge and experience developed through existing arrangements obtain a higher score.

For example, measures proposed to harness emergency demand restraint have the potential to deliver immediate benefits from a flexibility and resilience perspective. Some would also address gaps in current arrangements and should be relatively simple and quick to develop – and in the case of the power sector, they would largely build on existing frameworks. As a result, these measures are considered high priorities for development and implementation.

Similarly, measures proposed to improve energy efficiency in the residential and industry sectors offer substantial demand restraint benefits, and the potential to leverage existing resources and programmes to help broaden and accelerate their deployment. These measures are also generally rated as high priorities for development and implementation.

Conversely, several of the measures proposed for the transport and utilities sectors may be ground‑breaking; prove complex to develop and implement; require significant resources; raise various sensitivities; and be slower to deliver material levels of demand restraint. As a result, they may take longer to develop and implement and are likely to deliver benefits over a longer period. The related pathway proposals therefore indicate delayed commencement, lengthier development time frames, and implementation later in the initial five-year period.

This combination of measures provides a comprehensive approach for pursuing demand restraint across Ukraine’s energy sector. They cover all the major energy end‑users and the key intermediate energy consumers throughout the value chain and include the import-related dimensions of demand restraint, which are particularly relevant given Ukraine’s circumstances and energy security goals. At the same time, the proposals address emergency management with a range of practical measures focused on the areas of consumption likely to pose the greatest risk to future energy security.

This integrated approach to demand restraint also recognises the interrelatedness of the challenges across all energy-consuming sectors and throughout the energy value chain, and can support the development of mutually reinforcing policies and programmes that address cross-sectoral issues more effectively. Consequently, the proposed pathways are likely to be more durable and adaptable to changing circumstances and policy priorities.

Nevertheless, these proposed pathways are indicative suggestions only, as there are many ways to proceed with policy development and implementation. Irrespective of the course it chooses to develop and implement demand restraint policy, Ukraine is likely to encounter a range of evolving risks and challenges that will require ongoing flexibility and adaptability to resolve. International experience suggests that the most effective way to respond to these challenges is to adopt an incremental and innovative approach to policy development and implementation, reflecting the principles of continual improvement.

Under this approach, policies are typically implemented in stages, initially involving demonstration projects or some other targeted activity, with the lessons drawn from experience fed into the next iteration of policy development. Policies are developed and refined gradually in a co‑ordinated manner as these implementation cycles proceed. With increasing maturity comes greater confidence and the wider stakeholder support needed to progressively roll out policies to a larger target group, increasing the policy’s effectiveness while drawing on practical experience to reduce subsequent implementation risks and costs.

The Government of Ukraine could therefore consider adopting this type of approach, supported by effective management arrangements and appropriate whole‑of‑government co‑ordination, to ensure that demand restraint policies and measures are developed and implemented in a timely and effective manner. 

  1. See NEURC (2019), p. 145, p. 288 and Annex 4.2.6 for further details.

  2. See the Annex for some leading-practice examples of building and appliance energy efficiency measures.

  3. See SAEE (2020), p. 7.

  4. Comments provided by Naftogaz in a written submission to the consultation program.

  5. See SAEE (2020), p. 7 for further discussion of recent trends in transport sector energy consumption. 

  6. See the Annex for some leading-practice examples of transport sector energy efficiency measures.

  7. Mandatory policies typically establish legally enforceable standards, restrictions or other obligations that entities must meet over a specified period. Compliance is monitored and enforced, and non-compliance is penalised. Incentive-based policies seek to induce behavioural change to deliver desired policy outcomes, either by rewarding or penalising particular behaviours and outcomes. They can be delivered through various mechanisms, including pricing, taxation, charges, grants, licensing, and contractual arrangements. Compliance is typically monitored to help verify performance. Information and education policies incorporate a range of activities that seek to build stakeholder and community awareness, understanding, capability, engagement and support for policies and related behavioural changes. They are typically deployed to support and complement mandatory and incentive-based policies to improve overall effectiveness and outcomes.

  8. The ISO 50001 standard gives organisations a recognised framework to develop an effective energy management system. Like other ISO management system standards, it follows the “plan-do-check-act” process for continual improvement. The ISO 50001 requirements enable organisations to: develop a policy for more efficient energy use; fix targets and objectives to meet that policy; gather data to better understand and make decisions concerning energy use; measure the results obtained; review the policy’s effectiveness; and continually improve energy management. See ISO (2018) for further details.

  9. See SAEE (2020), p. 6 for further analysis of industrial energy consumption trends. 

  10. See the Annex for some leading-practice examples of industry sector energy efficiency measures.

  11. See NEURC (2019), p. 145, p. 288 and Annex 4.2.6, for further details.

  12. See the Annex for some leading-practice examples of measures that could be deployed to encourage demand restraint in the utilities sector and among utility customers.

  13. See IEA (2019a) for further discussion. 

  14. For instance, in the power sector the levelised lifecycle cost of renewable energy has fallen to a level that makes onshore wind and photovoltaic solar energy production less costly than new baseload generation from fossil fuels in many cases. See IRENA (2020) and IEA (2020c) for details.

  15. NEURC (2019), p. 31.

  16. See NEURC (2019), pp. 37-38 for an overview of the key emergency management reserves maintained by Ukrenergo, Ukraine’s power system operator (among its other functions). 

  17. Consumption is said to be price-inelastic when the rate of change in consumption is relatively unresponsive to the rate of change in price.