The risks of low tariffs

photo: Dimitri Karastelev

It's a alarming future. It has not yet arrived, but it is a matter of time. We have to make it better. Put a cushion where we might fall. Or we can start an energy revolution in our city, just as our European neighbours have done. This is what my article is about.

Ukraine is an energy-dependent country. And today, cities are at the heart of this dependence. For a long time, it was based on energy-intensive industry, but now it is being replaced by cities that are in no hurry to modernise their buildings and give up natural gas consumption.

Low electricity and gas tariffs are driven by government policy, which is accompanied by subsidies for households. With the outbreak of a full-scale war in 2022, Ukraine's state budget lost almost half of its revenues. Financial assistance to Ukraine from Western countries has supported these manoeuvres for almost two years during the formation of state budgets.

By borrowing money to compensate for low tariffs, we carried our debts over to future periods, and the amount of these debts has been steadily increasing. Also, the arrears of heat and electricity bills of households and district heating companies have been growing steadily even with low tariffs, and are currently estimated at over UAH 100 billion.

Within the natural gas and electricity markets, a similar policy of shifting debts to the final market entity in the payment chain, which will never be physically able to pay these debts, is being implemented. Debts that are already measured in many tens of billions of hryvnias.

Gas and oil prices on global markets are highly volatile, so gas, heat and electricity tariffs depend on these fossil fuels. And, of course, the main risks for Ukrainian cities are posed by the war. 

If foreign aid to Ukraine decreases or disappears, tariffs will rise rapidly. The state budget will not be able to maintain tariff subsidies and preferences at the current level for long - it will simply run out of money. Cities need to prepare for the moment when aid decreases and the stage of repayment of debts to the state incurred through wartime loans begins. Tariffs for gas, heat and electricity will start to rise by up to 200-300%, and according to various estimates, we are only 1-2 years away from this growth.

This inevitable energy inflation will quickly plunge the majority of Ukraine's population into real energy poverty. The debts of the population today will be a drop in the ocean compared to the debts that will be there tomorrow (today, approximately 30% of the population is in debt, with tariff increases tomorrow, this number will be 80%).

How to reduce the risks of low tariffs for Ukrainian cities - examples from EU countries

1. Review the principles of municipal energy planning and develop plans similar to the well-known pan-European REPowerEU plan. It is necessary to understand the cost and timing of an energy transition similar to that in the EU. It is necessary to form a base of investment projects that ensure this transition. Given the general political volatility, plans should include a pessimistic scenario to maintain the energy security of cities in wartime and post-war conditions.

The war in Ukraine has become a catalyst for energy changes in the European Union, centred on the large-scale REPowerEU plan and changes to a number of key EU Directives. The REPowerEU plan aims to phase out fossil fuels, decarbonise heating and reduce energy poverty.

Some of the elements of the plan:

• A special EU strategy for solar energy envisages doubling solar photovoltaic capacity by 2025 and installing 600 GW by 2030;
• mandatory installation of solar panels on the roofs of new commercial and public buildings by 2025, and on the roofs of new residential buildings by 2029 (the goal is to double the capacity of solar photovoltaic energy by 2025 and reach 600 GW by 2030);
• Doubling the rate of introduction of heat pumps and measures to integrate geothermal and solar thermal energy into modernised district and decentralised heating systems;
• a ban on the installation of gas boilers in new buildings.

Achieving the REPowerEU targets requires additional investments of €300 billion by 2027. The planned reduction of Russian natural gas imports could save almost €100 billion a year.

2. Natural gas is the most worrisome and entails the greatest risks. Cities need a plan for the gradual abandonment of this fuel. The example of the EU plans provides us with a roadmap for such a process. Heating and electricity from renewable energy sources should replace hydrocarbon fuels. Every city in Ukraine needs a roadmap for removing natural gas from municipal energy balances.

3. Buildings are the main energy consumers in cities. Similar to EU countries, it is necessary to prohibit the construction of any new buildings in cities that do not meet the ZEB (Zero Emission Buildings) standard. This standard should ensure that buildings are highly energy efficient, with zero energy consumption from renewable energy sources throughout the year.

4. Today, thermal modernisation of residential, public and commercial buildings has begun or is ongoing in almost all Ukrainian cities. The vast majority of these projects do not meet the ZEB (Zero-Energy Building) standard, especially when it comes to the use of renewable energy sources. These building modernisation projects do not meet the requirements of the European Union adopted after 2022. Today, we are modernising buildings in ways that will require repeated modernisation in the near future. This contradiction requires a unified policy for Ukrainian cities to modernise existing buildings, state standards that meet EU requirements, and design and construction solutions that meet these standards. In addition, each city needs a long-term policy for the modernisation of residential and public buildings that is in line with EU policy.

5. Ukraine has launched a new wave of development of city heating schemes. Decarbonisation of heat supply systems should be a prerequisite for every city. Heat supply schemes should become roadmaps for cities to switch to heating and cooling buildings from renewable energy sources. There is no longer any point in modernising gas boilers, boiler houses and CHP plants. The International Energy Agency considers it necessary for all countries to completely abandon gas boilers in the period from 2025 to 2028. For Ukrainian cities, the example of Germany is very important - the new Building Energy Act, adopted by the Bundestag in September 2023. It mandates that from 1 January 2024, new heating systems must be powered by at least 65% renewable energy sources. By 2028, all existing building heating systems in German cities must be switched to renewable energy sources. In order to switch to renewable energy sources, each German city must develop a municipal heat supply plan. The government is helping the transition by subsidising 30% to 70% of the cost of new heating systems. The law is expected to come into force in 2024 and will initially apply only to new buildings. For the remaining buildings with existing heating systems, a transition period until 2028 is proposed, depending on the size of the municipality.

6. The current chaos of building modernisation and municipal energy projects in Ukrainian cities should be replaced by plans for pilot projects of low-rise and high-rise residential buildings, public buildings, commercial buildings (compliant with the ZEB standard), biofuel boilers, CHP plants, and rooftops. These islands of the energy future should show the reality of the energy transition in Ukrainian cities, similar to cities in the European Union.

Vasyl Stepanenko, Ecological Systems Energy Service Company, 2023