Winter is Coming

Winter is coming

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Is Ukraine ready for the heating season?

Ukraine’s gas market is changing fast. This transformation will impact the price and services offered to ordinary consumers, the development of domestic production and the country’s future energy landscape.

A joint project by the Kyiv Post and the Federation of Employers of the Oil and Gas Industry addresses these and other issues with the help of some of the best experts in the field – to determine what the future of Ukrainian energy will look like.

Last week’s #EnergyThursday focused on preparations for the heating season.

This year those reserves are doing better than usual. As of July 20, the country’s underground storage system had some 20.9 billion cubic meters of gas in reserves – about 5.8 billion cubic meters more than at the same time in 2019. This suggests Ukraine will have enough gas in reserve to make it through the winter.

It does not mean, however, that all is good and ready.

Accumulating fuel is just part of the story

The middle of summer with its sweltering weather might seem like an unusual time to worry about heating, but it is actually a critically important moment in the energy timetable. Indeed, summer is the time when Ukraine’s gas storage reserves are filled up to get ready for the coming winter.

“Accumulating fuel is just part of the story,” argues Oleksandr Kharchenko, managing director of the Energy Industry Research Center, a think tank. “That fuel then needs to be processed more or less effectively and the ensuing heat needs to make it to buildings,” he added.

Oleksandr Kharchenko

Regulated gas supplies

Ukrainian legislation mandates that Naftogaz – the national oil and gas company that supplies local heating companies with gas so they can warm consumers throughout the winter – provides gas to these companies even if they have not paid for 100% of their earlier consumption.

The same regulations, however, prohibit Naftogaz to sell gas to producers who have paid for less than 90% of what they owe (or 60% for heating companies managed by the State Property Fund).

These rules are set out in so-called public service obligations (PSO) imposed by the government on Naftogaz until May 2021. In 2019, heating companies accounted for nearly 7.4 bcm of consumed gas, or nearly 25% of total consumption. After the PSO is abolished for the households segment gas supply to, heat producers will remain the last regulated segment of the Ukrainian gas market.

In 2019, heating companies accounted for nearly 7.4 bcm of consumed gas, or nearly 25% of total consumption

Record deficits

Over 40% of heat producers cover their bills in full and nearly 50% maintain indebtedness within the limits allowed by the government. However, this legal leeway results in accumulation of significant debt. This summer, debts to Naftogaz for gas supplied under the PSO reached a huge 69.4 billion hryvnias ($2.5 billion), around half of which is debt of heat producers.

Less than 10% of heat producers across the country have accumulated debts in excess of the allowed limit. These companies face the risk of having their requests for gas declined when the heating season starts unless they manage to find cash and climb above the cut-off limit. This group is causing the greatest concern for the government.

These “bad faith” organizations account for a minority of heat producers – just 108 delinquent companies out of a total of some 1,300 (see chart with the “top 30”) – but they can put tens of thousands of consumers, including schools and hospitals, at risk..

These 108 heat producers have almost 4.5 billion hryvnias in excess debt (over $160 million), with dim prospects to find the missing funds. If they do not manage to cover their dues - to pay over 1.2 billion hryvnas from their debt - local heat producers may be forced to delay the start of the heating season, which typically starts in mid- or end-October.

Smila, a town in Cherkasy oblast, is a similar case in point. In recent years Naftogaz has repeatedly issued warnings, highlighting the responsibility of local authorities and reminding that “most Ukrainian cities do not have problems with the heating season.”

This situation is set to repeat itself this year, as Smila Heating Company has only paid for about 36% of the gas that has been supplied.

Smila will be on time...it will only happen with the help of Naftogaz, central and local government...

Oleksandr Golubets

“Smila will be on time,” head of the district heating company Oleksandr Golubets told speakers at the EnergyThursday discussions. “I guarantee this,” he added, but warned it will only happen with the help of Naftogaz, central and local government to develop and support a debt payment plan.

...debts to Naftogaz for gas supplied under the PSO reached a huge 69.4 billion hryvnias ($2.5 billion), around half of which is debt of heat producers.

Local political inaction

The problem is that local governments and actors fail to mobilize efforts in time, argues Nataliia Khotsianivska, the Deputy Minister for Regional Development, Building and Housing.

“They will start saying ’People are freezing, President come rescue us’,” he noted, explaining how populist pressure is consistently applied by local governments ahead of the heating season.

Because of the accumulated debts, this winter may be one of the most challenging yet – despite the comfortable reserves on the central level..

To address this problem, experts believe the central government needs to step up and force local governments to become more accountable.

The UAH 70 billion number is scary, and I don’t think it will just go away

Vadym Hlamazdin, development director of the Federation of Employers of the Oil and Gas Industries, took a more cynical view. Local governments see they cannot or will not cover expenses and end up engaging in a sort of moral hazard.

Oleksandr Kharchenko

“As long as it’s the middle of July and its 25 degrees Celsius everyone is care-free. It’s when the temperature drops in October that people start to activate,” she explained.

“I am not too optimistic. I don’t think the heating season will be launched without a problem,” noted Kharchenko. “The UAH 70 billion number is scary, and I don’t think it will just go away.”

Year-round focus on energy efficiency

Being late with gas bills is just part of the problem. Local producers also need to invest in repairs and maintenance of the local network, while local governments must embrace opportunities to reduce their residents’ consumption needs through energy efficiency programs.

Galyna Dzhulay, a housing cooperative head for Novoyavorivsk city in Lviv oblast, provided an account on how such measures have reduced a building’s heating needs by 49%.

Such programs have long been supported by Western financial institutions in their efforts to improve Ukraine’s energy security.

The “EnergoDim” program compensates up to 70% of the expenditures on making a building more energy efficient. Supported by Ukraine’s state budget, the European Union, the German government, the program is one of the main tools for local governments to start to manage their energy needs – but one that requires bottom-up action and mobilization.

“We cannot do much about the gas price per unit but we can influence how many cubic meters we need,” says Dzhulay. “Ultimately, only the thermo-modernization of buildings can make a difference.”

Galyna Dzhulay

We cannot do much about the gas price per unit but we can influence how many cubic meters we need

Due to energy efficiency programs building’s heating needs have reduced by 49% (Novoyavorivsk city in Lviv region)

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