Decades of regional insecurity and economic upheaval have left Ukraine’s energy sector in a precarious position. Much of the existing energy infrastructure is old, fragile and in need of major refurbishment or replacement, so operating efficiency is low and technical losses are relatively high, especially in the district heating and power distribution systems.

A combination of continuing policy uncertainty and ongoing disruptions have also constrained upstream energy production and discouraged sufficient, timely investment, particularly in the hydrocarbon sector. As a result, Ukraine’s energy reserves remain underdeveloped, which will progressively reduce the sector’s capacity to meet domestic demand. As domestic production stagnates, the energy system is becoming increasingly dependent on energy imports.

Energy sector resilience to disruptions is low, and the combination of deteriorating energy infrastructure and growing fuel import dependence is raising the risk of further major energy disruptions in the future. Maintaining access to reliable and affordable energy services is likely to become increasingly problematic in these circumstances. 

Ukraine’s energy use is concentrated in the residential, industry and transport sectors, which were responsible for over 80% of total final energy consumption in 2019. The industry and residential sectors accounted for over 60%, with iron and steel production alone representing over half of all industrial use and around 17% of total final consumption. Transport accounted for a further 20% of total final consumption in 2019. Efforts to maximise energy demand restraint are therefore likely to be most successful if they target these highest-consuming sectors.

Furthermore, a breakdown of energy consumption by end use suggests that a few well‑targeted demand restraint measures may be able to deliver the majority of potential savings. For instance, space heating, water heating and household appliances accounted for over 85% of Ukraine’s total residential energy consumption in 2019. Space heating alone represented over half of residential end use and around 16% of total final consumption (Figure 1). Measures targeting these end uses therefore have considerable potential to improve demand restraint.

At the same time, adding district heating consumption to household total final energy use puts residential natural gas consumption at around 15.4 bcm in 2018, which was over 140% of Ukraine’s annual gas import requirements.1 This suggests that demand restraint measures targeting residential consumption could also support ongoing efforts to reduce exposure to energy imports. Other key consumption sectors may present similar opportunities.

Trends in total final energy consumption by sector since 2010 indicate that consumption growth has begun to stabilise, since the economic crisis and conflict in the first half of the decade cut energy demand substantially in all sectors, especially residential and industry. The more moderate energy consumption of recent years likely stems from a combination of cyclical and structural factors.2

However, some signs of growth in industry demand since 2017 reflect improving economic conditions. Energy-intensive sectors such as iron and steel dominate industrial energy consumption. As this kind of industrial energy consumption in Ukraine is likely to be relatively energy-intensive,3 greater industrial activity may indicate an increase in relatively inefficient energy consumption. These emerging conditions suggest that it may be an opportune moment to pursue demand restraint, especially among energy-intensive industrial consumers.

The rate of change in energy consumption by sector since 2010 displays these trends more clearly. The significant drop in the first half of the period is evident, as is the relative stability since 2015. Interestingly, this analysis more clearly reveals a return to sustained growth in transport sector energy consumption in recent years. 

Natural gas continues to dominate domestic energy consumption, especially when heat production is added, as it is largely generated from natural gas. With the addition of heat, the natural gas share of total consumption rises to around 40%. Oil products and electricity were Ukraine’s next-largest energy sources in 2019, each accounting for over 20% of domestic energy use.

However, natural gas consumption had fallen considerably during the first half of the previous decade, with more moderate reductions among the other major energy sources. Energy consumption appears to have stabilised at more moderate levels since 2015.

These trends are revealed more clearly in Figure 6, which illustrates significant reductions in the consumption of all energy sources, particularly during the first half of the previous decade. In recent years, domestic fuel consumption has continued to fall or is levelling off for most energy sources. The exception is oil products, for which consumption has grown steadily since 2015.

Recent growth in oil product consumption suggests that it may merit closer examination from a demand restraint perspective. The transport sector clearly dominated consumption of oil products in 2019, accounting for 80%. Road transport accounted for nearly all the sector’s consumption and was alone responsible for 77% of Ukraine’s total oil product use in 2019. 

The figure below shows the rate of change in total oil product consumption overall compared with the road transport sector in the past few years. The relatively close correlation between growth in road transport consumption and overall domestic consumption is not surprising given the extent to which road transport dominates oil product use. These trends suggest that it could be fruitful to target demand restraint measures towards road transport oil product consumption. 

Recent energy import trends largely mirror those of domestic fuel consumption. The substantial drop in natural gas consumption is clearly reflected in declining natural gas imports over the period and, to a lesser extent, in declining imports of crude oil, natural gas liquids and feedstocks. However, a trend towards higher oil product and coal imports has appeared more recently. 

The figure below more clearly illustrates the divergences among the different energy imports. While substantial declines are evident for natural gas and crude oil, oil product and coal imports have generally been rising, especially over the last few years. 

While Ukraine’s rise in coal imports may reflect an increase in domestic coal demand, it may equally result from the need to replace lost domestic production. However, rising oil product demand may be more concerning from an energy security perspective, given that the majority of imported oil products cannot be domestically produced in large quantities at present. These trends suggest that demand restraint, particularly in the road transport sector, has the potential to reduce liquid fuel import dependence, consistent with the government’s energy security goals.

Overall, Ukraine’s recent energy consumption trends suggest several potential demand restraint priorities:

• As Ukrainian energy consumption is concentrated in the residential, transport, industry and energy utility sectors, an effective demand restraint programme should target these areas for maximum impact.
• Space heating is a key driver of residential energy consumption and may therefore provide substantial demand restraint opportunities.
• Similarly, road transport dominates energy consumption in the transport sector and may hold prime energy-saving opportunities. Applying demand restraint measures to road transport would have the added advantage of exerting downward pressure on oil product import growth.
• Energy-intensive subsectors such as iron and steel dominate industry energy consumption. Their relatively high levels of energy intensity per unit of production suggests potential for further energy-saving.
• The power and district heating sectors may also offer considerable demand restraint potential, given that they are major intermediate energy consumers and suppliers of energy to final consumers in the residential, industry and services sectors. 

Ukraine’s strategic energy policy framework emphasises its ongoing commitment to promote energy demand restraint to help improve energy security and self‑sufficiency.4 Policy priorities include improving energy efficiency; increasing renewable energy production; and reducing reliance on imported fuel through diversification.5 This policy framework also reflects EU strategic goals and principles, consistent with Ukraine’s commitments under its 2014 Association Agreement with the European Union.6

Ukraine is in the process of transposing the EU legislative framework, which could provide a strong and stable foundation to pursue demand restraint if the relevant provisions are fully implemented.7 Key framework legislation required to implement energy‑related policy initiatives is largely in place, along with a significant proportion of the secondary legislation required to give effect to the operative provisions.8 However, several stakeholders consulted during preparation of this roadmap raised concerns about remaining gaps in the secondary legislation, which have the potential to introduce uncertainty, risk and additional costs that may delay or distort demand restraint responses.9

Translating these policy principles into effective actions that can deliver lasting outcomes remains a fundamental challenge. Several policies and programmes within the strategic policy framework that could encourage demand restraint include initiatives for energy efficiency; energy diversification; and energy‑emergency management.

Ukraine’s progress in developing and implementing policy measures to improve the energy efficiency of buildings and appliances has been considerable, consistent with its 2014 Association Agreement to implement the standards of the EU Energy Efficiency Directive.10

Key laws and regulations provide a foundation for monitoring and enforcing mandatory certification of energy efficiency in buildings, which was introduced in August 2020.11 A long-term building renovation strategy to 2050 is also being considered, and procedures for introducing energy management systems for public buildings are being developed.12

Several important programmes have been established to help fund and drive improvements in the energy efficiency of residential buildings and appliances:

• The Energy Efficiency Fund, established in 2017 in close co‑operation with the European Union in accordance with the Law on the Energy Efficiency Fund of 8 June 2017 (No. 2095-VIII). The Fund has so far focused on financing energy efficiency retrofits of apartment buildings, but it is expected to be extended to retrofits of privately owned detached housing.
• The Warm Loans programme, established in 2014 to provide households with financial assistance to improve the energy efficiency of their residences through insulation, weatherisation and upgrading of major appliances such as space and water heaters. The programme has assisted 838 000 households to date, and supported investments of more than UAH 8.5 billion, including around UAH 3.2 billion in reimbursements to households.
• 23 technical regulations covering eco-design, and 11 covering energy labelling for a range of appliances. In 2020, the Ministry of Energy approved additional energy labelling regulations for decentralised heating; commercial refrigerators; residential ventilation systems; solid-fuel boilers; temperature controllers; and solar energy installations.

In addition, substantial resources have been provided to support training and capacity‑building in relation to energy efficiency certification for buildings, energy efficiency auditing and energy management systems.

In the transport sector, Ukraine pledged to introduce EU standards for fuel quality, fuel efficiency and fuel emissions under its 2014 Association Agreement. A key achievement has been implementation of the Euro 5 fuel quality standard,13 which has been obligatory for fuels marketed in Ukraine since the beginning of 2018. European fuel economy standards for light- and heavy-duty vehicles are set to increase significantly in the next decade, which suggests that the EU policy framework will continue to provide a sound foundation for Ukraine to gradually increase demand restraint and energy efficiency in the transport sector.14

Ukraine has also supported the development and implementation of several industry‑led initiatives to broaden and deepen demand restraint in the industry sector, including:

• Two Learning Energy Efficiency Networks, in which 24 companies co‑operate and share information to reduce their collective energy consumption by 10 500 MWh and CO₂ emissions by 61 010 tonnes by the end of 2020.
• Various awareness-raising and capacity-building projects, particularly to implement the International Organisation for Standardisation (ISO) 50001 energy management system standard.
• Enterprise monitoring and reporting of energy efficiency trends.
• Emerging contractual arrangements for compliance with voluntary energy efficiency undertakings.15

In relation to energy utilities, ongoing investments in the electricity and district heating sectors are being used to modernise generation and network infrastructure, including through installing metering and other technologies that allow consumers to more effectively control their consumption.16 However, progress has been slow to date due to financial constraints and inadequate commercial incentives, largely because the regulatory framework does not provide sufficient cashflow to justify investments to modernise plant and network infrastructure.17

Ukraine is in the process of implementing incentive regulation for the electricity sector, with similar reforms planned for natural gas.18 They have the potential to address current deficiencies by adjusting revenues on regulated assets to offer commercial rates of return. In principle, previously implicit community service obligations, such as universal rights of access and price subsidies for residential consumers, are made transparent and fully funded by the government under this form of regulation. Full implementation of these arrangements, consistent with the approach commonly applied across the European Union, would help to address the fundamental financial and commercial constraints that currently hamper power sector modernisation.

The 2017 National Energy Strategy to 2035 reaffirmed the government’s commitment to pursue import replacement and increase energy self-sufficiency, with a focus on reducing natural gas imports. It also reaffirmed support for developing domestic conventional, non-conventional and offshore hydrocarbon reserves, and committed to substantially expand renewable energy production to further strengthen energy security.

The government has recognised the need to diversify liquid fuel use and has therefore adopted several policies to promote the development and deployment of alternative fuels. The National Energy Strategy to 2035 envisages a growing role for alternative fuels in meeting domestic transport sector fuel demand. This plan reflects Ukraine’s commitment under the 2014 Association Agreement to adopt various policies related to the development and deployment of alternative fuels for transportation, potentially hydrogen, electricity, biofuels, compressed natural gas, liquefied natural gas and various synthetic fuels.

Similarly, Ukraine has adopted a range of policies and programmes to promote the development and deployment of renewable energy, consistent with the 2035 National Energy Strategy and the National Renewable Energy Action Plan to 2020.19 The most prominent of these has been the Green Tariff programme, which offered generous feed-in-tariffs to encourage investment in renewable generation capacity and the production of renewable energy.20

By 2019, this programme had supported investments in approximately 4.7 GW of new renewable capacity, which represented over 40% of all renewable energy capacity serving the power sector. Production from new renewable generators approached 10.9 GWh in 2020, representing around 7.3% of total electricity production. New renewable generation helped significantly raise the renewable energy share of overall electricity production from around 4% in 2014 to 11.3% in 2020.^[3] Although programme performance was mixed overall, it did boost capacity and production substantially, albeit from a low base.

Ukraine’s initial energy-emergency management aim to reduce exposure to natural gas import disruptions has largely been achieved through policies promoting import diversification and domestic fuel switching. The success of these policies is evidenced in a near 40% reduction in annual natural gas imports between 2014 and 2019 and a shift towards more reliable gas suppliers in recent years.21 These policies were supported by a range of emergency measures designed to manage gas rationing more effectively during emergency events.

Ukraine’s policy response was complemented and reinforced by its 2014 Association Agreement, which incorporated an early-warning mechanism and procedures to support Ukraine in the event of an energy emergency caused by an external supply shock affecting imports of natural gas, oil or electricity.22 Co‑operation includes ongoing technical assistance and research projects to improve legal and regulatory frameworks governing natural gas emergency management and stocks.23

Ukraine has built up considerable experience managing major energy supply disruptions caused by the unexpected loss of natural gas supplies in the past two decades. Policies developed and implemented over this period have delivered more flexible and responsive emergency reserves, which leverage the considerable natural gas storage infrastructure in place to support trade and transit; more effective emergency management co‑ordination mechanisms; and more refined protocols for implementing emergency rationing arrangements. These practices have been applied successfully to help moderate the worst impacts of natural gas supply disruptions, most recently during the natural gas emergency event of March 2018.24 Overall, these measures, combined with Ukraine’s substantial natural gas production and storage infrastructure, provide a solid foundation for managing shortages resulting from natural gas import disruptions.

However, Ukraine’s dependence on liquid fuel imports, especially of diesel and liquefied petroleum gas (LPG), expose it to the risks of unanticipated liquid fuel disruptions. In general, liquid fuel emergency management arrangements tend to rely heavily onsupply-side measures based on the deployment of emergency stocks of crude oil and key liquid fuel products, supported by administrative interventions such as rationing.

Under its 2014 Association Agreement, Ukraine is required to apply the EU Energy Security Directive, which requires that member states develop crisis management plans and maintain emergency stocks of no less than 90 days of fuels imports.25 However, implementation is progressing slowly and the Energy Community Secretariat’s 2020 implementation report notes that although a draft law on minimum stocks of crude oil and petroleum products has been pending approval, no emergency oil stocks policy is yet in place. Similarly, a draft law proposing an Oil and Petroleum Products Market Crisis Plan has been prepared, but it has yet to be adopted. As a result, Ukraine currently has no liquid fuel emergency management procedures that comply with the Energy Security Directive.26

In Ukraine, the Cabinet of Ministers is the ultimate decision-making body for energy‑related matters. It is responsible for policy co‑ordination and the oversight of state energy companies. Energy policy is high on its political agenda, with the Parliament and the President also involved in the decision-making process. The main national-level institutions with energy policy responsibilities that could influence demand restraint policy development and implementation are:

• The Ministry of Energy, responsible for most energy supply policies and sustainable energy policy, and for co‑ordinating energy policy across the government and providing advice to the Parliament.
• The Ministry of Finance, in charge of taxation policies relating to the energy sector.
• The Ministry for Communities and Territorial Development (Minregion), which develops policies and programmes affecting demand restraint at the local government level.
• The Ministry of Environment Protection and Natural Resources, responsible for a range of matters that could affect the development of demand restraint policies and programmes, including environmental protection; climate policy; ecological, biological, radiation and genetic safety and protection; and sustainable fisheries, forestry and hunting management.
• The State Agency on Energy Efficiency and Energy Saving (SAEE), the central government body responsible for advancing and promoting energy efficiency and renewable energy development and technologies.
• The National Energy and Utilities Regulatory Commission (NEURC), which supervises and regulates the natural gas, electricity and district heating sectors. NEURC is subordinated to the President and accountable to the Parliament.
• The Anti-Monopoly Committee, tasked with preventing excessive concentration of market power in the energy sector.
• The State Nuclear Regulatory Inspectorate, which has regulatory responsibility for the operation of nuclear facilities, including uranium mining, radioactive waste storage and decommissioning at Chernobyl.

Ukraine’s energy governance and institutional arrangements are relatively fluid and have changed considerably in recent years. Notably, SAEE has been incorporated into the Ministry of Energy. Consolidation of their policy functions and other related activities could improve the consistency and co‑ordination of policymaking related to demand restraint, which may raise its effectiveness over time. Similarly, consolidation of a range of regulatory functions within NEURC since 2014 may improve the administration of energy-related regulation. The Energy Community Secretariat’s most recent annual assessment of Ukraine’s national authorities is generally positive.