This publication was prepared with the support of the European Union. The contents of this publication

are the sole responsibility of NGO “DIXI GROUP”, as well as Civil Network “OPORA”, All-Ukrainian NGO

“Energy Association of Ukraine”, Resource & Analysis Center “Society and Environment”, Association

“European-Ukrainian Energy Agency”, and can under no circumstances be regarded as reflecting the

position of the European Union.

The project “Enhancing impact of civil society in monitoring and policy dialogue on energy and related

sectors’ reforms in line with the Association Agreement implementation” aims at strengthening the role of

civil society in advocating reforms in the energy and related sectors.

The key objectives of the project are:

monitoring of the implementation of the energy provisions of the Association Agreement, including

relevant environmental and trade-related commitments;

strengthening the civic experts’ and local actors’ capacity to track actual implementation of the

reforms;

facilitation of public dialog to lead in proper implementation of the European energy and

environmental reforms;

informing stakeholders and the Ukrainian society about the meaning and potential benefits of

European reforms in energy and related sectors in order to empower them to keep the government

accountable for pursuing these reforms.

www.enref.org

Executive Summary

In January 2017, against the background of a lull in the reforms implementation, the natural gas sector was not distinguished by dynamics. Experts note only initiatives in natural gas accounting in units of energy. News about direct gas supplies to Ukraine by European importers was also a positive signal. In the electricity sector, the situation of blocking the supply of coal, on the solution of which government initiatives were focused, is of great concern. Within a month, MPs of the relevant committee of the Verkhovna Rada not only failed to advance in the discussion of the draft law on the electricity market, but failed to consider the legislative initiative on the termination of the previous law on the matter. However, the Coordination Group for the implementation of the new market model continued its work. The energy efficiency sector is no exception through the general lack of activity in implementing reforms. In this area, discussion of developed solutions, that include draft laws on the Energy Efficiency Fund, energy characteristics of buildings and others, goes on, but specific decisions, including the urgent issue on the prolongation of the “warm loans” program were not taken during the month. The progress in the social issues block is slowed down by too slow rates of enacting the law on electricity market and the implementation of the laws on energy regulator and gas market. Failure of Ukraine to fulfill commitments in the environment sector has led to the fact that the country received a reasoned opinion from the Energy Community Secretariat. But, even this step did not help the corresponding draft law to gain the necessary support of MPs. Experts note the extension of implementation against the background of the failure to meet the planned time constraints in the part of fulfilling commitments in the sector of oil and oil products. In particular, most of the commitments did not move to the stage of implementation, and despite the public statements of intent to prepare certain decisions and documents, they have not been properly published.

Events in the business climate, where experts note the publication for discussion of the resolution on

determining regulation fees, encourage optimism, which indicates movement towards implementation of

the law on NEPURC. Positive developments include a new mechanism of VAT refund. Against this background,

the problem of subthreshold procurement and possible manipulation in this area is named as a problem

issue.

Abbreviations:

NAK – National Joint Stock Company Naftogaz of Ukraine VRU - Verkhovna Rada of Ukraine EC - European Commission FEC - Fuel and Energy Complex GTS - Gas Transportation System CMU - Cabinet of Ministers of Ukraine OPP - Odessa Port Plant LNG - Liquefied Natural Gas DHC – District Heating Company NBU - National Bank of Ukraine SFSU - State Fiscal Service of Ukraine PRT - provider at a regulated tariff SSTC NRS - State Scientific and Technical Center for Nuclear and Radiation Safety SES - State Emergency Service SAUEZ - State Agency of Ukraine on the Exclusion Zone TCNS - Tools of cooperation in the field of nuclear safety in Ukraine WANO - World Association of Nuclear Operators

TPP - Thermal Power Station AA - Association Agreement GDN - Gas distribution networks SNRIU - State Nuclear Regulatory Inspectorate of Ukraine MECI - Ministry of Energy and Coal Industry NEPURC – National Energy and Public Utilities Regulatory Commission CERN - European Organization for Nuclear Research CRSNF - Centralized repository of spent nuclear fuel CRSSIR - Centralized repository for long term storage of spent sources of ionizing radiation UES - United Energy System of Ukraine RW - Radioactive Waste SIRS - Spent ionizing radiation sources SNF - Spent nuclear fuel CSF - Chernobyl Shelter Fund SSNF – Storage of spent nuclear fuel DCSSNF – Dry cask storage of spent nuclear fuel

Gas

The first month of 2017 cannot be considered too active phase of implementation of the reform of the gas

sector. Thus, during January, no appreciable progress in reforming either the legal framework or Naftogaz

was achieved, which is largely through, on the one hand, to the New Year “holidays” at the beginning of

the year, on the other hand, to the escalation in the combat zone in the Eastern Ukraine almost from the

second decade of January.

No draft law related to the reform of the gas market was put by the deputies of VRU on the agenda of 4

days of plenary sessions, which ended the fifth session of the Parliament in January, and only one new

draft law (on changing the rules of commercial accounting of natural gas) was registered.

However, the national regulator does not reduce the rate of adjusting regulatory acts of the gas sector in

accordance with the Law “On Natural Gas Market”. In January, the resolution of NEPURC on amendments

to the Codes of GTS and GDN intended to establish the procedure for determining the amount of natural

gas in units of energy was adopted and two new draft resolutions were also published.

The process of market opening continues: two foreign suppliers - Engie and Trafigura - through their

Ukrainian subsidiaries supply gas to the domestic market of Ukraine. In January 2017, both gas transit for

European consumers through the Ukrainian gas transport system and its import from Europe for Ukrainian

ones were higher than in January 2016: the transit volume increased by 38%, the import volume - by 59.4%.

The Directive 2009/73/EC on common rules for internal market in natural gas, which replaces the Directive 2003/55/EC (Art. 338, 341, Annex XXVII AA) according to Art. 278 AA: VRU registered the draft law # 57221, which regulates the procedure for establishing meters of natural gas to domestic consumers. The draft law is aimed against the practice of installation of building level gas meters, instead of the individual ones in apartment houses, to which GDM operators massively resort, using the fact that the Law “On Providing Commercial Metering of Natural Gas" does not define how exactly gas meters are to be set and according to what procedure. By doing so the GDM operators actually make consumers pay for the amount of gas consumed by the apartment house in general, regardless of the actual amount consumed by a particular user. The authors of the draft law propose to eliminate this legal uncertainty by regulation of the relevant provisions in the law on commercial gas metering. Although the GRM Code provides that in points of commercial gas metering, its volume must be transferred to the units of energy, lack of clear rules of such procedure in the laws makes impossible the execution by GTS and GDN operators of their obligations to consumers. In order to complement the network codes by the procedure of the transfer of gas volumes from volume units to energy units, on January 26, NEPURC adopted the Resolution # 842 approving the relevant changes. GTS and GDN operators are obliged to define and publish on sites the data on the weighted average higher gas calorific value by the routes and enter the data to payment documents of consumers about the amount of the gas consumed in energy units (kWh, Gcal, mJ). NEPURC also informed on consideration of comments and suggestions received from market players and other interested parties3. At the same time, NEPURC published new draft regulations: on amendments to the methods of calculating the tariff for the distribution of natural gas4 (in order to adapt domestic consumers to new terms of payments

1 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=61018 2 http://www.nerc.gov.ua/?id=23448 3 http://www.nerc.gov.ua/index.php?news=5668 4 http://www.nerc.gov.ua/data/filearch/Proekty/poekty_oznaky_regulatornyh_aktiv/2017/pr_187/pr_187_20.01.2017.pdf

Gas

for the distribution services as payments for power) and on approval of amendments to the Code of GTS5 (to organize the relationship between the GTS operator and gas producer concerning access to GTS, in particular in the part of creation of one virtual point of entry to GTS from an adjacent gas producing enterprise, which combine all its physical points of entry). During a special working meeting on the discussion of urgent issues on the protection of domestic consumers of gas, NEPURC summarized the most pressing appeals (household meters checking, conferring EIS code to consumers, price of gas) and presented a vision of their solution6. On January 11, CMU appointed a new head of the operator of the Ukrainian GTS7 - PJSC Trunk Gas Pipelines of Ukraine. The Vice President of Ukrtransgaz V. Nozdrin, the candidature of whom was proposed by the Minister of Energy and Coal Mining, will serve as the head of this public company. Instead, the Ministry of Economic Development published for discussion the draft government resolution “On Ensuring Efficient Use of Gas Distribution Systems”8. The document provides for the use of GDN on a leasehold basis (based on a leasing contract), while handing over networks for production operations is possible (based on a standard operation contract) - till the time of entry into force of the law on lifting the ban on renting GDN out. According to the draft of this resolution, during 3 months, the Ministry of Energy and Coal Mining should carry out inventory of GDN owned by the state (as well as evaluation, together with the State Property Fund) and take measures as to concluding operation contracts. Meanwhile, in January, the new articles of association of NJSC Naftogaz of Ukraine entered into force9. Its main difference from the previous version consists in limiting the powers of the board of management of Naftogaz: all key decisions should be consistent with the supervisory board. In addition, the current articles of association also provide for obligatory entry of head of subsidiary PSJC to the board of Naftogaz. From February 1, 2017, Naftogaz has raised the price of gas by 21-22% compared to prices in January of this year10. According to the new price list11, the price of gas increased to UAH 10,141.2 per thousand cubic meters (compared with the January price – by 21%). For industrial and other consumers that are not covered by the provision on charging with special duties, but have no debts to Naftogaz and purchase from 50 thousand cubic meters of gas on prepayment terms12 - the price in USD 9,214.8 per thousand cubic meters (increase by 22%) is proposed. On January 25, CMU changed the formula by which the standard of transferring the funds paid to heat supply enterprises for generated heat and rendered services for central heating and hot water supply to gas suppliers is calculated (Resolution # 7013). Thus, the coefficient of the level of settlements is reduced with due regard to the cost of gas used by heat suppliers per a month preceding a settlement one. The average level of settlements in 2016 for natural gas for heat production was 75%14. For the last week of

5 http://www.nerc.gov.ua/data/filearch/Proekty/poekty_oznaky_regulatornyh_aktiv/2017/pr_192/pr_192_27.01.2017.pdf 6 http://www.slideshare.net/NKREKP/18012017-71218066 7 http://www.kmu.gov.ua/control/ru/cardnpd?docid=249657168 8 http://me.gov.ua/Documents/Detail?lang=uk-UA&id=94752e2e-aa66-41c6-9613-dee152f7aa78&title=ProektPostanoviKabinetuMinistrivUkrainiproZabezpechenniaEfektivnogoVikoristanniaGazorozpodilnikhSistem 9 Approved by the Resolution of CMU # 1044 of December 14, 2016 10http://www.naftogaz.com/www/3/nakweb.nsf/0/DF74E1BF3338DC68C22580B100521DEE?OpenDocument&year=2017&month=

01&nt=%D0%9D%D0%BE%D0%B2%D0%B8%D0%BD%D0%B8& 11 http://www.naftogaz.com/files/Information/Naftogaz-gas-prices-Feb-2017.pdf 12 Payments during a calendar month preceding a month of gas supply 13 http://www.kmu.gov.ua/control/uk/cardnpd?docid=249740130 14 http://www.naftogaz.com/www/3/nakweb.nsf/0/061B4287D7D0CF85C22580BA0034F9AF?OpenDocument&year=2017&month=02&nt=%D0%9D%D0%BE%D0%B2%D0%B8%D0%BD%D0%B8&

Gas

January 2017, the total outstanding debt of heating enterprises to Naftogaz reduced by UAH 3,030 (11.2%) and as of January 31 it totaled UAH 23,135 milliard15. The debt of DHC and CHPP enterprises for natural gas used in the production of heat is about 82% of total debt (debt of direct industrial customers is about 10%, the debt of CHPP for the natural gas used in power generation is about 8%). The highest total arrears for the gas used in this category are accumulated by DHC and CHPP companies of the Donetsk region (UAH 5.7 milliard). Naftogaz pointed out that it could provide the appropriate categories for gas for heat generation for the population only to those heat suppliers who promptly carry out current payments and repay debts16. However, much depends on local authorities, which should facilitate the conclusion and implementation of already agreed repayment schedules. Meanwhile, Naftogaz has filed 2 claims, which were registered on January 2317, to the Economic Court of the Odesa region, demanding to recover from the OPP UAH 1,5 milliard of debt for the natural gas supplied to it in 2016 (the press service of NAK clarified that the claims were submitted as regards the total debt of OPP). Regulation (EC) # 715/2009 on conditions for access to the natural gas transmission networks, replacing Regulation (EC) # 1775/2005 (Art. 338, 341, Annex XXVII AA) according to Art. 278 AA, trade issues (Art. 269-274 AA): Against the background of reducing the total volume of import of gas by Ukraine in 2016 as compared to 2015 by 32% (from 16.4 to 11.1 milliard cubic meters)18, an increase in imports by private traders and consumers of gas was an important result of the last year. The share of Naftogaz in imports continues to reduce in favor of private importers. According to Naftogaz19, in 2016, these companies imported 2.6 times more gas than in 2015 – 2.9 milliard cubic meters as compared to 1.1 milliard cubic meters. The share of private companies in import in 2016 was 26%, the share of Naftogaz - 74%. At the same time, Naftogaz is not ready to pay VAT on gas imports20 and considers it necessary to adjust the standard on cancelling the exemption from payment of VAT on transactions of gas imports into the customs territory of Ukraine21, which entered into force on January 1, 2017 (according to the media, the appropriate application to the Prime Minister V. Hroisman was sent by the Chairman of the Board of Naftogaz A. Koboliev). The company also complained of a disadvantage in which it finds itself through disclosing commercially vulnerable information required by the Law “On the Open Use of Public Funds”22. In this regard, Naftogaz addressed the deputies of VRU with a proposal to revise the requirements to information disclosure so that to make them equal for companies of any forms of ownership. Another important achievement of the last year was the ensuring by Ukrtransgaz of direct access to the internal gas market of Ukraine to European suppliers, which sold gas to Ukrainian gas traders at the state border of Ukraine (Engie, DufEnergy, TrailStone) before entering into contracts. In January, 2 foreign suppliers carried out direct gas supplies to the domestic market of Ukraine.

15 The same 16 http://www.naftogaz.com/www/3/nakweb.nsf/0/D40530A5A1797EB6C22580AB00593414?OpenDocument&year=2017&month=01&nt=%D0%9D%D0%BE%D0%B2%D0%B8%D0%BD%D0%B8& 17 http://www.epravda.com.ua/news/2017/01/24/618610/ 18 http://www.naftogaz.com/www/3/nakweb.nsf/0/18B71C646FCCF61DC22580BC00453AE0?OpenDocument 19 The same 20 http://www.epravda.com.ua/news/2017/01/24/618628/ 21 Introduced from January 1 by amendments to the Tax Code of Ukraine under the draft law # 5368 adopted on 21.12.2016 (http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=60443) 22 http://www.naftogaz.com/www/3/nakweb.nsf/0/934699EF95DB2E2BC22580B9006BFA6A?OpenDocument&year=2017&month=01&nt=%D0%9D%D0%BE%D0%B2%D0%B8%D0%BD%D0%B8&

Gas

Thus, Engie started to import gas directly to domestic consumers from January 1 (through its subsidiary Engie Energy Management Ukraine). According to Ukrtransgaz23, under Engie nominations, daily volume of supplies

makes up 0.4 million cubic meters. The indicated volumes of gas are imported by Engie from the territory of Poland via GMS Hermanovychi. Another importer that supplied natural gas to end users of Ukraine in January (through its Ukrainian subsidiary Trafigura Ukraine) is Trafigura24, which is considered the third by volume power trader in the world. This company purchases gas from Polish ONICO Energia Spolka, and although the volume of its imports to Ukraine are insignificant and does not exceed 5 million cubic meters per month, this monthly gas supplies directly to the domestic market are stable, starting from November 2016. All of these changes on the gas market of Ukraine became possible due to the adoption of the Law “On Natural Gas Market”, the GTS Code, the new business model of Ukrtransgaz and other measures aimed at creating an open and transparent natural gas market, implemented by Ukraine under AA. In January, the Ministry of Energy and Coal Mining held a working meeting with representatives of Berlin Economics and the German Advisory Group (GAG), as well as Ukrainian experts, during which the use of experience of foreign partners and advice as to stimulating gas exchange trading in Ukraine were discussed25. Ukraine also intends to join the Unified Transit Mode Convention (within the framework of execution of the clause 35 of the action plan for the implementation of AA). This requires the introduction of customs declarations that meet EU declarations for implementing the procedure of the common transit during trade between Ukraine and the contracting parties to the convention, regardless of the type and origin of the goods. The draft law # 562726 on introducing appropriate changes to the Customs Code, registered on 29.12.2016, is considered by the committees of VRU. Meanwhile, operators of GTS of Ukraine and Moldova have begun consultations with market participants on cooperation agreements, under which they will provide services in natural gas transportation in GTS connection points27. Consultations will be carried out from 1 February till 1 April 2017. Instead, the Ministry of Energy and Coal Mining published a draft Procedure for Decommissioning of Pipelines of Oil and Gas and their Products28. As stated in the explanatory memorandum, the document is required to resolve the issues of decommissioning and writing-off of trunk oil and gas pipelines or their parts unsuitable for further use (through expiry of operation, moral or physical deterioration, construction, expansion, reconstruction and technical re-equipment). Directive 2004/67/EC concerning measures to safeguard security of gas supply (Art. 338, 341, Annex XXVII AA), action of “Early Warning Mechanism” (Annex XXVI AA), actions in emergencies (Art. 275-276, 309, 314): The phase of expert discussion of the project “Energy Strategies of Ukraine till 2035”, published by the Ministry of Energy and Coal Mining on December 19, 201629, ended in January. From controversial issues discussed, the question whether the measures outlined by the document are sufficient to achieve the energy security of Ukraine was the key one. In their comments, the representatives of the European Commission

23 http://utg.ua/utg/media/news/2017/01/start-engie.html 24 http://biz.liga.net/all/tek/novosti/3589947-odin-iz-krupneyshikh-v-mire-treyderov-vyshel-na-rynok-gaza-ukrainy.htm 25 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245175928&cat_id=35109 26 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=60887 27 http://utg.ua/%D0%A2%D0%B5%D0%BA%D1%81%D1%82%20%D0%B4%D0%BB%D1%8F%20%D0%BA%D0%BE%D0%BD%D1%81%D1%83%D0%BB%D1%8C%D1%82%D0%B0%D1%86%D1%96%D0%B9%20%D0%9C%D0%BE%D0%BB%D0%B4%D0%BE%D0%B2%D0%B0.pdf 28 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245170651&cat_id=35082 29 http://mpe.kmu.gov.ua/minugol/control/uk/doccatalog/list?currDir=50358

Gas

pointed to neglect of risks associated with the transit of the Russian gas after 2019 and the lack of strategic vision of reintegration of the temporarily occupied territories of Ukraine. The German regulator Bundesnetzagentur reduced the limit of the OPAL30 pipeline by Gazprom to the previous level of 50%, connecting European consumers with the Nord Stream due to the ruling of the Court of Justice of EU that suspended the decision of the European Commission on expanding access of the gas monopolist RF to pipeline capacities. However, according to Naftogaz, this did not lead to a reduction in actual volumes of transportation in January31. The use of additional capacities of OPAL allowed Gazprom to load the Nord Stream pipeline to the maximum and increase supplies to Europe along this route, bypassing Ukraine. Only with the beginning of the gas day on February 1, Gazprom reduced the flow of gas through Nord Stream and its eastern branch of OPAL32. Poland is taking steps to get an alternative source of gas (from a supplier that does not depend on Russia) - Norwegian gas that will flow to Poland through future Baltic Pipe gas pipeline33. According to Naftogaz34, this initiative is useful for Ukraine - by using it, it will be possible to gain access to Norwegian gas and to LNG to – through the Polish terminal in the Swinoujscie. In January 2017, Ukrtransgaz promptly and fully complied with the application of European countries importing gas and transported to Europe through transit 8.9 milliard cubic meters - by 2.5 milliard cubic meters (or 1.4 times) more than index of same period of the last year35. However, in January of this year, Ukraine increased gas imports from Europe for the needs of local consumers - to the level of 1.455 milliard cubic meters, which is 1.6 times more than in the same period of the last year36 (as is well known, Ukraine does not import gas from Russia for more than 400 days). Traditionally, most of the gas from Europe came by the Slovak gas transit corridor - 1.3 milliard cubic meters. In early January, the Deputy Prime Minister V. Kistion37 and the Minister of Energy I. Nasalyk38 made statements on the readiness of the energy complex to overcome the expected decrease in temperature. In the last week of January, due to a sharp fall in temperature, selection of gas from storage to meet the needs of domestic consumers has been increased by 42% - to 78 million cubic meters per day39. According to Ukrtransgaz40, 2.1 milliard cubic meters of gas were selected from UGS in January 2017. On February 1, gas reserves in UGS amounted to 9.8 million cubic meters and the level of their filling has fallen to 31%41.

30 http://www.naturalgasworld.com/opal-line-use-back-to-half-regulator-35258 31 https://ru-ru.facebook.com/NaftogazUA/ 32 http://interfax.com.ua/news/economic/400264.html 33 http://www.polskieradio.pl/42/3167/Artykul/1719347,Baltic-Pipe-gaz-norweski-alternatywa-dla-rosyjskiego 34 https://www.facebook.com/NaftogazUA/?hc_ref=SEARCH&fref=nf 35 http://utg.ua/utg/media/news/2017/02/transit-jan-2017.html 36 http://utg.ua/utg/media/news/2017/02/import-jan-2017.html 37 http://www.kmu.gov.ua/control/publish/article?art_id=249649285 38 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245172246&cat_id=244895180 39 http://utg.ua/utg/media/news/2017/01/psg-icnrease-42.html 40 http://utg.ua/utg/media/news/2017/02/ugs-jan-2017.html 41 The same

Electricity and Nuclear Security

January, traditionally, is not the most active month for legislators, government and regulator, but on January 18, in the FEC Committee of VRU with the participation of deputies, Deputy Prime Minister Volodymyr Kistion and Hennadiy Zubko, heads of MECI, NEPURC, the draft Energy Strategy of Ukraine till 2035 was presented and its further discussion and consideration of comments were proposed.

January has come with a sharp drop in temperature and has become an indicative test for the government in issues of preparation and providing the population of Ukraine with heat, which was passed rather successfully with useful conclusions, in particular the head of government made a proposal to create an immovable coal reserve in the amount of 1.9-2 million tons. The difficult situation in providing coal reserves was even more complicated at the end of the month because of the blockade of railways in the Luhansk region, because of which cars with anthracite coal from the ATO zone were blocked. By the end of January, this issue was not resolved and is quite critical.

SNRIU has made decision on the eliminating inspections in nuclear safety at the Chernobyl site and the formation of the new Inspectorate for Nuclear and Radiation Safety in the exclusion zone, a structural unit of SNRIU.

Directive 2009/72/EC of 13 July 2009 on common rules for the internal market in electricity and repealing Directive 2003/54/EC (Art. 269, Chapter 11, Section IV of the EU-Ukraine Association Agreement) On January 18, on the Committee on Fuel and Energy Complex, Nuclear Policy and Nuclear Safety of VRU, it was scheduled to consider the draft Law on the recognition the Law of Ukraine “On Principles of Functioning of the Electricity Market of Ukraine” as such that is void (Dombrovskyi O.H., Pidlisetskyi L.T., Bondar M.L., Lopushanskyi A.Y., Bandurov V.V. Ksenzhuk O.S., # 5625). Consideration failed due to lack of quorum of deputies - members of the Committee.42 Regulation 714/2009 EC of 13 July 2009 on conditions for access to the network of cross-border exchange in electricity and repealing Regulation 1228/2003 (Art. 270, Chapter 11, Section IV of the EU-Ukraine Association Agreement) NEPURC developed a draft decree “On approving the Procedure of Electronic Auctions in Distribution of Capability of Interstate Electrical Networks”. The adoption of the resolution, according to the regulator, will improve the state regulation of cross-border exchange of electricity and resolve the issue of organization of e-auction platform that impact the introduction of daily auctions.43 On January 26, at SE NPC Ukrenergo, the meeting of the Ukraine – Moldova project team, the purpose of which is preparation of the Directory of the requirements for power systems of Ukraine and Moldova as to joining ENTSO-E, the coordination of the procedure for its implementation and fulfillment and determining the overall roadmap of the process of synchronization as special part of future accession agreements between SE NPC Ukrenergo, SE Moldelectrica and ENTSO-E, the European Continental Network of Electricity Transmission System Operators, was held. Within two weeks, the parties have to agree on the shape and timing of the measures, which the Roadmap will include. Ukrenergo specialists will also join the discussion of the legal aspects of the future Agreement on the accession of IPS of Ukraine to ENTSO-E.44

42 http://kompek.rada.gov.ua/documents/zasid/73049.html 43 http://www.nerc.gov.ua/?news=5638 44 http://www.ukrenergo.energy.gov.ua/Pages/ua/DetailsNew.aspx?nID=3516

Electricity and Nuclear Security

Regulation 714/2009/EC of 13 July 2009 on conditions for access to the network of cross-border exchange in electricity and repealing Regulation 1228/2003 (Art. 271, Chapter 11, Section IV of the EU-Ukraine Association Agreement) NPC Ukrenergo published lists of effective sectoral regulations on operation and maintenance of power plants and networks45 updated as of January 1 and effective sectoral regulations of the former USSR in the construction industry for use at electric power industry facilities (ISCS).46 Directive, Directive 2009/72/EC of 13 July 2009 on common rules for the internal market in electricity and repealing Directive 2003/54/EC (Article 273, Chapter 11, Section IV, of the EU-Ukraine Association Agreement) On January 11, the meeting of the Coordinating Group on implementation of the new market model of electricity, chaired by a member of the National Commission for State Regulation of Energy and Public Utilities Volodymyr Yevdokimov was held. The issues on the implementation of the Plan Schedule for Introduction of the New Model of Electricity Market47; the state of drafting of basic regulations: the Code of Transmission System, Code of Commercial Account, Code of Distribution System, Market Rules, Market Rules “for a Day Ahead”, Rules of Supply (of retail market), Rules of Diurnal Market.48 From January 12, consumers can receive compensation for low-quality services in power supply. This day, the Procedure for Ensuring the Standards of Quality of Services in Power Supply, approved by the regulation of NEPURC # 1841 of 18.10.201649, entered into force. The Procedure establishes common and guaranteed standards of quality of providing services, establishes the procedure for providing compensation to consumers for inobservance of the guaranteed standards50. Directive, Directive 2009/72/EC of 13 July 2009 on common rules for the internal market in electricity and repealing Directive 2003/54/EC (Article 274, Chapter 11, Section IV of the EU-Ukraine Association Agreement) On January 18, the Draft Energy Strategy of Ukraine till 2035 was presented during the meeting of the FEC Committee of VRU and the Board of the Ministry of Energy and Coal Mining. The meeting was also attended by the Deputy Prime Minister Volodymyr Kistion and Hennadiy Zubko51. The Committee recommended finalizing the Draft Strategy, taking into account the comments of experts, as well as donors and international organizations. Art. 338, Chapter 1, Section V of the EU-Ukraine Association Agreement. Agreements on cooperation with IFIs In order to secure the protection of electricity infrastructure and with regard to cases of interference in the work of the power system that have been recorded in Ukraine in past years, in January, the two-day training seminar on energy security (processing the experience in countering possible threats) involving representatives of the NATO Center in energy security (Vilnius, Lithuania) was held in MECI.52

45 http://www.ukrenergo.energy.gov.ua/Pages/ua/DetailsNew.aspx?nID=2563 46 http://www.ukrenergo.energy.gov.ua/Pages/ua/DetailsNew.aspx?nID=2564 47 http://www.nerc.gov.ua/data/filearch/Plan-hrafik_model_elektro.pdf 48 http://www.nerc.gov.ua/?news=5650 49 http://www.nerc.gov.ua/index.php?id=23071 50 http://www.nerc.gov.ua/?news=5661 51 http://kompek.rada.gov.ua/news/main_news/73059.html 52 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245174791&cat_id=35109

Electricity and Nuclear Security

In January, Ukraine took part in the meeting of the Council of the European Organization for Nuclear Research (CERN) as an associate member for the first time53. Under the project “Improvement of the National System of Personnel Training in Radioactive Waste Management, Decommissioning and Rehabilitation of Territories”, the service contract between the European Commission and IDOM Consulting, Engineering and Architecture S.A.U. (Spain), the leader in a consortium with another Spanish company GRUPPO DOMINGUIS and the Ukrainian NPP Operational Support Institute (NPP OSI), was signed. The project implementation is planned for three years. SAEX is the beneficiary and SSE Chornobyl NPP and State Higher Educational Establishment Ukrainian Radiological Training Centre is its end user54. On January 19, discussion of the ways to implement the Memorandum of Understanding on energy strategic partnership between Ukraine and the European Union together with the European Atomic Energy Community prepared by the European Commission was held in MECI. The representative of the Energy Directorate of the European Commission Hans Ryan assured the participants that the EU will continue to support the development of bilateral relations in the energy sphere between Ukraine and the EU and the implementation of commitments of Ukraine under the Association Agreement between Ukraine, on one hand, and the European Union, the European Atomic Energy Community and its member states55. On January 20, representatives of the SE Energorynok took part in the meeting with international experts who will work on the project “Assistance to Ukraine in Implementing Reforms in the Energy Sector in accordance with International Commitments of the Country”, which aims to support further implementation of reforms in the energy sector of Ukraine, strengthening financial stability and ensuring a more transparent and favorable environment to the energy sector according to the obligations of Ukraine under the EU-Ukraine Association Agreement and the Energy Community Treaty56. The meeting discussed in detail the specific priority tasks to be implemented within the framework of the Technical Support of SE Energorynok in reforming the electricity market (sub-clauses 12, 13 of the Work Plan of the Project). On January 24, the coordination meeting within the framework of the IAEA technical cooperation UKR9035 “Providing assistance in decommissioning and handling RAW ChNPP took place. At the meeting, Head of SAEZ V. Petruk, Head of IAEA national project K. Diofren IAEA, Deputy Director General of ChNPP V. Seida and specialized experts took part. During the meeting, they discussed implementation of the measures planned for 2017: scientific visits, during which training of the ChNPP personnel in global experience in decommissioning nuclear power plants is planned; monitoring the decommissioning of the ChNPP cooling pond; the possibility of expanding the project in 2017, plans for 2018-2019 and more57. Art. 339, Chapter 1, Section V of the EU-Ukraine Association Agreement, Carbon Market According to the information provided by the press service of MECI, production of thermal and coking coal in Ukraine in 2016 increased by 2.8% compared to 2015 - up to 40.864 million tons from 39.76 million tons. Of these, 5.789 million tons, or 14.2% of total coal was mined at state mines58. On January 12, the Minister I. Nasalyk informed that the situation of the coal reserves at warehouses is fully controlled and about 1.9 million coal were at the warehouses as of January 12. During January 1-10, at a temperature -17-20 degrees, wear of warehouses for 10 days was 1.7 thousand tons or 0.1 of warehouse59. In turn, the Prime Minister of Ukraine V. Hroisman proposed the creation of coal reserves in the amount of

53 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249654234&cat_id=244276429 54 http://dazv.gov.ua/novini-ta-media/vsi-novyny/chornobilska-aes-bere-uchast-u-novomu-proekti-evropejskoji-komisiji.html 55 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245173664&cat_id=35109 56 http://www.er.gov.ua/ 57 http://dazv.gov.ua/novini-ta-media/vsi-novyny/u-2017-rotsi-magate-prodovzhit-tekhnichne-spivrobitnitstvo-v-ramkakh-mizhnarodnikh-proektiv-u-zoni-vidchuzhennya.html 58 https://economics.unian.ua/energetics/1740112-vidobutok-vugillya-v-ukrajini-zris-do-41-milyona-tonn.html 59 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245172222&cat_id=35109

Electricity and Nuclear Security

1.9-2 million tons, which has to be immovable and available to ensure stable operation of the power system60. In 2017, MECI plans to increase coal production in 2017 at state mines to commission 11 new longwalls, the head of MECI said on January 17. For their preparation, it is planned to attract loans against state guarantees. Compensation for the difference in the cost of finished commodity coal in the amount of USD 870 million is also provided for in the State Budget for 2017 for restructuring coal enterprises in the amount of USD 847 million and the completion of the Novovolynska mine # 10 in the amount of UAH 150 million. At present, inefficiency of work is a great problem for state-owned mines. Yes, at some mines, from 10% to 30% of employees are not involved in the production process, which leads to arrears of wages upon low production. Debt of mines for the electricity consumed exceeds UAH 5 milliard, while energy efficiency measures are not being introduced. According to the Minister, measures for restructuring coal mines will be carried out this year. I. Nasalyk also said he has instructed as to the audit of procurement of equipment to discover the facts of abuse and overpricing61. According to him, all tender procedures, including those that would be applied to the modernization of enterprises and introduction of new longwalls, will be subjected to hard analysis. Today, a corresponding working group headed by the Deputy Minister H. Karp to verify compliance with the current laws during tendering procedures for the purchase of mining equipment required for the introduction of new working faces by credit in the amount of UAH 300 million is working. The same working group will check the use of credit in the amount of UAH 1 milliard, provided for the use against the state guarantees for the launch of new longwalls62. According to the statements of the Minister, the issue of debt to the miners in 2016 is completely resolved and all debts on wages already paid off63. During the meeting with representatives of the Independent Trade Union of Miners, which was held on January 26, the head of MECI noted that he supported the initiative to increase the tariff salaries to miners, but pointed to the need for optimization, reducing the number of workers not involved in the production and handover of the infrastructure to the balance sheet of local government, except for sanitary facilities64. On January 24, the MECI specialists informed the experts of the governmental and public initiative “Together against Corruption” on the state of coal mines and prospects of their work. One of the central issues concerned the possible corruption risks in the approval of liquidation projects and conservation of coal mining enterprises belonging to the MECI management, in particular the detailed procedure for deciding on the possible closure of coal mines, the issue of control over the preservation of property, motivation and opportunities for taking enterprises out to break-even operations were of interest. For its part, MECI explained that the decision as to restructure and closure of mines that have exhausted their resources are adopted on the results of the study of the dynamics of the mining activity, enterprise performance and this question is necessarily considered by the scientific and technical council. The social component, the issue of regional development is considered; possibilities for the use of the area of an enterprise and real estate to create jobs of other spheres of activity are considered. MECI also assured that the international experience in dealing with reforming of the sector will be also taken into consideration. Establishment of the National Coal Company (within the framework of the reform of the coal industry) will shorten the terms of liquidation of mines and reduce the estimated cost of the liquidation projects. In addition, employees of socially unprotected categories that will be dismissed upon the liquidation of such mines will be offered a corresponding work at the mines that will be updated and increase coal production. MECI will also conduct systematic monitoring of the use of public funds allocated to the program of restructuring and liquidation of mines65.

60 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249652592&cat_id=244276429 61 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245172974&cat_id=35109 62 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245174832&cat_id=35109 63 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245172974&cat_id=35109 64 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245174832&cat_id=35109 65 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245174376&cat_id=35109

Electricity and Nuclear Security

One of the hot topics of the month was the blockade of railways (Luhansk-Popasna) in the Luhansk region, which began on January 25 with a view to trade blockade of the occupied regions of Donbass and which directly jeopardized the stable operation of the power industry. In particular, traffic of 12 trains with a total number of 700 cars was blocked. On the one hand, this route is the only branch, by which the supply of coal to TPS in Schastia is carried out, that is why, according to G. Tuka, this situation can lead to the fact that all the Luhansk region will remain without electricity66. On the other hand, empty cars for transporting coal to the territory controlled by Ukraine were also blocked. According to Y. Harbuz, if the fuel supply is not restored, thermal power stations in the Central and Western Ukraine can have no energy carriers67. The head of the government V. Hroisman responded to such a situation, saying that he was against smuggling and abuse on the line of demarcation. But in turn, the government will do everything possible to have enough coal to meet the needs of the population. Today the economy of Ukraine consumes annually about 33 million tons of coal, of which 9 million tons – A group coal and it is produced mainly in the uncontrolled areas. He accented that the transition to other groups of coal will require modernization and this in turn - time and financial resources. Assuming that it is necessary to provide the population with the light and warmth now, he does not see today other option but to get coal from the ATO zone, moreover, in his opinion, all the mineral resources are located on the Ukrainian land and correspondingly they are Ukrainian, as the enterprises registered in Ukraine68. According to media reports, in order to switch from anthracite coal to gas coal group, the Zmiyivka Thermal Power Station, PJSC Tsentrenergo and LLC Kotloturboprom signed an agreement on re-equipping with the value of UAH 131.83 million69. Art. 342, Chapter 1, Section V of the EU-Ukraine Association Agreement, Cooperation in the Nuclear Field, Council Directive # 2014/87/Euratom, Council Directive # 2013/ 59/Euratom, Council Directive # 2006/117/Euratom To fulfill the obligations on harmonization of the laws of Ukraine with EU laws, on January 23, the draft Law “On Amendments to Some Laws of Ukraine in the Field of Nuclear Energy Use” was registered in VRU under the # 570370. This draft law amends the Laws “On Nuclear Energy Use and Radiation Safety” and "On Permit Activity in the Field of Nuclear Energy Use” in order to optimize and improve the procedures for issuing permits for activities in the field of nuclear energy use, compliance with the law “On Administrative Services”71. During visits to the separate subdivision of Khmelnytska NPP SE NNEGC Energoatom, the Prime Minister V. Hroisman said that nuclear power development program till 2040 should be checked for the Ukrainian nuclear power industry to work progressively. However, he noted that the industry should also get a task in the medium term - for the next 5 years72. The priority task for the government is to ensure 100 percent safety of nuclear power plants and a 100 percent workload level of NPP for stable and balanced energy system73. So the completion of 3 and 4 power units of KhNPP is important. Currently, the project of the completion of these power units undergoes state examination, after which it will be passed to CMU. Only after approval by the government, nuclear engineers will begin preparatory period for the completion of

66 https://economics.unian.ua/energetics/1750932-tse-nashi-nadra-Hroisman-ne-bachit-inshogo-variantu-yak-otrimuvati-vugillya-z-nepidkontrolnih-teritoriy.html 67 https://www.rbc.ua/ukr/news/blokirovka-zh-d-putey-luganskoy-obl-ostavit-1485443849.html 68 https://economics.unian.ua/energetics/1750932-tse-nashi-nadra-Hroisman-ne-bachit-inshogo-variantu-yak-otrimuvati-vugillya-z-nepidkontrolnih-teritoriy.html 69 https://www.rbc.ua/ukr/news/zmievskuyu-tets-perevodyat-antratsita-dnr-1485511685.html 70 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?id=&pf3511=60992 71 http://www.snrc.gov.ua/nuclear/uk/publish/article/350932 72 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249687366&cat_id=244276429 73 https://economics.unian.ua/energetics/1744767-novi-bloki-hmelnitskoji-aes-zmojut-generuvati-dodatkovi-15-milyardiv-kvt-god-elektroenergiji-na-rik-energoatom.html

Electricity and Nuclear Security

power units74. Commissioning of the third and fourth power units of KhNPP will provide additional electricity generation to the united energy system of Ukraine at the level of 15 milliard kWh per year75. According to the data from documents on the technical and economical grounding for the launch of two new reactors, the cost of completion of 3 and 4 power units of the Khmelnitsky NPP will be EUR 3.7 milliard. As part of the diversification of sources of nuclear fuel supply for nuclear power plants of Ukraine, by the end of this year, fuel of Westinghouse (Sweden) is planned to be loaded in the active zoneof power units #1, 3, 4 of ZNPP, which in turn provides for modernization of systems of the reactor internal control. Currently Westinghouse fuel assemblies are already used at the power unit # 3 of the South Ukraine NPP and power unit # 5 of ZAES76. On January 19, a meeting of the working group on implementation of the pilot project of the European Commission “Automated System of Information on Station Configuration” (ASISC) implemented within the framework of the EC Instrument for Nuclear Safety Cooperation program was held at the Rivne NPP77. The pilot project on removal and further management of RAW from the Vakulenchuk repository in the Zhytomyr region and recultivation of the area was also completed. The project was implemented under the Implementation Agreement with the NATO on Support (SNPs) in management of RAW produced as a result of military programs of the former USSR in Ukraine, ratified by the Law of Ukraine # 526-VII of 17.06.201578. The Zaporizhia NPP (ZNPP) was attended by 73 foreign delegations, including representatives of the International Atomic Energy Agency and the World Association of NPP Operators for the purpose of inspection and control of compliance with international agreements in the field of nuclear energy. Foreign experts also performed works under international treaties, controlled execution of ongoing projects and provided technical support of certain types of work. Cooperation and exchange of experience were also carried out in preparation for the extension of operation of power units # 1 and 2, upgrading and replacement of equipment, conducting presentations and training of the personnel of the station, as well as partial implementation of the Westinghouse new fuel79. In January, at the Rivne NPP, work on the procedure of the unloading spent fuel from station reactors and its further displacement and transportation to CRSNF in the Kiev region continued. According to the press service, performance of works is carried out exclusively during routine preventive maintenance80. NNEGC Energoatom also announced the tender for works on the construction of site for CRSNF that must be made within the period from 20 February to 20 August 2017. According to the tender documentation in the ProZorro system, the expected value of works makes up UAH 34,302 million (including VAT). Energoatom expects to attract USD 250 million from the Bank of America Merrill Lynch (BofA-ML) on the construction of this facility till October 2017. The works on the CRSNF are currently financed from the funds provided for by NEPURC at the Energoatom tariff for electricity. The beginning of the active phase of construction at the site of CRSNF is scheduled for March 2017. And at the end of 2018, it is planned to have the first batch of SNF in the HI-STORM container systems, where it will be transported and stored on site of CRSNF81.

74 http://elektrovesti.net/51318_dostroyka-dvukh-energoblokov-khmelnitskoy-aes-oboydetsya-v-37-mlrd-evro 75 https://economics.unian.ua/energetics/1744767-novi-bloki-hmelnitskoji-aes-zmojut-generuvati-dodatkovi-15-milyardiv-kvt-god-elektroenergiji-na-rik-energoatom.html 76 http://www.energoatom.kiev.ua/ua/press/nngc/46345-zaporzka_aes_otrimala_novu_partyu_paliva_westinghouse/ 77 http://www.energoatom.kiev.ua/ua/press/nngc/46317-na_rvnenskyi_aes_vdbulos_chergove_zasdannya_robocho_grupi_z_realzatc_proektu_asks/ 78 http://www.snrc.gov.ua/nuclear/uk/publish/article/350730 79 http://www.energoatom.kiev.ua/ua/press/nngc/46260-v__rotc_zaporzku_aes_vdvdali__nozemn_delegatc/ 80 https://economics.unian.ua/energetics/1741561-rivnenska-aes-vidpratsovue-protseduru-vivantajennya-vidpratsovanogo-yadernogo-paliva-ta-yogo-transportuvannya-do-tssvyap.html 81 http://www.energoatom.kiev.ua/ua/press/nnegc/46351-podgotovka_stroyiploschadki_dlya_tchoyat_doljna_byt_zavershena_v_avguste__goda/

Electricity and Nuclear Security

On January 24, the meeting of representatives of Energoatom with representatives of Toshiba (Japan), during which the prospects and the possibility of attraction of experience and investments of the Japanese company to implement projects of modernization of turbines and electric generators on power units of NPP of Ukraine were discussed, was held. In the near future, the parties will also consider the possibility of signing a memorandum of understanding in the nuclear energy sector, which is planned to include provisions for the potential participation of Toshiba in implementation of the projects to increase capacity on power units of NPP of Ukraine82. Art. 342, Chapter 1, Section V of the EU-Ukraine Association Agreement, Cooperation in the field of nuclear power, Cooperation are aimed at solving the problems caused by the Chernobyl accident and decommissioning of the Chernobyl Nuclear Power Plant On January 27, SNRIU announced the decision to eliminate the Inspection of Nuclear Safety at the Chernobyl NPP site and the formation of regional territorial authority - Inspection of Nuclear and Radiation Safety in the Exclusion Zone, as a SNRIUU structural unit. The authority of the newly form inspection will include ensuring public control in the implementation of activities in the field of nuclear energy use throughout the exclusion zone and zone of unconditional (obligatory) resettlement (hereinafter – the exclusion zone), including the industrial site of theChernobyl NPP. While taking the corresponding decision, the change of status of objects at the Chernobyl NPP site and plans for expansion of activities of enterprises for dealing with RAW and SNF in the exclusion zone83.

82 http://www.energoatom.kiev.ua/ua/press/nngc/46336-energoatom_ta_toshiba_obgovorili_mojlivst_spvrobtnitctva_v_napryam_modernzatc_energoblokv_ukranskih_aes/ 83 http://www.snrc.gov.ua/nuclear/uk/publish/article/352577

Energy Efficiency and Social Issues

Against the background of stopping in carrying out reforms in the field of energy efficiency, the only directions, in which persons making decisions show at least some results, are those related to financing. For January, the government approached the adoption of the resolution to extend the “warm loans” program and paid great attention to the adoption of the draft Law on Energy Efficiency Fund. Unfortunately, none of these directions of work can be considered important for the implementation of EU laws in the field of energy efficiency and officials cannot boast of significant successes even in them. The extremely low ability of the Verkhovna Rada to find consensus around these issues stands in the way of really important reforms that should be started by the adoption of framework draft laws in the field of energy performance of buildings, provision and commercial accounting of housing services. The draft Law on Energy Efficiency Fund can become the victim of the situation, as it will not be adopted without guarantees of partial filling by international donors, according to MPs. Donors, in turn, expect the adoption of these principle draft laws in the first place. In the field of social security, the situation is even less optimistic, since for the full implementation of social standards under the Third Energy Package, the country needs to complete the large-scale structural reforming of the electricity and gas market sectors, besides that in both cases no appreciable progress has been recorded over the last few months. Moreover, implementation of even those laws that have already passed the session hall of the parliament, as the law of NEPURC, is “stuck”.

Directive 2012/27/EC on energy efficiency Energy audits and energy management systems (Article 8) According to sources in the Ministry of Regional Development, Construction and Housing, the draft resolution of the Cabinet of Ministers “On Approval of the Action Plan on Implementation of Energy Management in Budget Institutions” was agreed by all the relevant authorities and submitted to the Cabinet of Ministers for approval. In the case of adoption and implementation, public institutions can implement a systematic approach to energy management and as a result - significantly reduce their consumption of energy. Accounting (Article 9) During preparation for the second reading of the draft law “On Commercial Accounting of Public Services”(reg. # 4901 of 06.07.2016)84, MPs submitted 181 amendments, of which 116 were considered by the Committee of the Verkhovna Rada on Construction, Urban Development and Housing. During the meeting of 18 January 2017, the Committee decided to send the draft law to the Central Scientific Experts Office85. Upon receipt of the expert opinion, the draft law must be approved by the Committee before the second reading. Despite the fact that the relevant Deputy Prime Minister H. Zubko named this project among the priorities of the Verkhovna Rada in the field of energy efficiency86, as of the end of January, the document is under consideration of the committees, leaving the question of the timing of its vote in the Verkhovna Rada unclear. National Energy Efficiency Fund, financing and technical assistance (Article 20) During the meeting of the Parliamentary Committee on Construction, Urban Development and Housing on 18 January 2017, the Deputy Prime Minister - Minister of Regional Development, Construction, Housing and Communal Services of Ukraine H. Zubko once again presented the draft law “On Energy Efficiency Fund”87. People’s deputies, by the results of the discussion of the draft law decided on the recommendations to the Committee to adopt the draft law as a basis. At the same time, the Deputy Prime Minister confirmed the intention to actually launch the Energy Efficiency Fund, as before, starting from April 2017, which looks less likely88. Taking into consideration the central role of this law, provided to it by the Ukrainian government, it is worth to expect its successful vote in the session hall of the Verkhovna Rada in the near future. However,

84 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=59553 85 http://kombud.rada.gov.ua/kombud/doccatalog/document?id=51867 86 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249686421&cat_id=244276429 87 http://kombud.rada.gov.ua/kombud/doccatalog/document?id=51867 88 http://ukrrudprom.com/digest/Gennadiy_Zubko_Mi_zapustim_Fond_energoeffektivnosti_s_1_aprelya.html

Energy Efficiency and Social Issues

it remains unclear whether within the framework of the announced day of energy efficiency people’s deputies will be able to use such impulse for substantial promotion of other related laws, without the work of which the Fund will not be as effective. First of all, this refers to the draft law “On Energy Efficiency of Buildings”, as the Art. 18 (2) of the draft law “On Energy Efficiency Fund” provides that funding the measures for improving energy conservation and efficiency shall be carried out subject to availability of a corresponding certificate89. In turn, the energy certification system should be introduced precisely as a result of the implementation of the law on energy efficiency of buildings. At the same time, according to the government, the European Commission is ready to provide financial assistance in filling the Fund in the amount of at least USD 100 million, but instead it expects from Ukraine the consistent fulfillment of obligations to adopt the laws necessary for the proper functioning of the Fund90. The draft government resolution on the extension of the State Target Economic Program on Energy Efficiency and Development of Production of Energy Carries from Renewable Energy Sources and Alternative Fuels for 2017 with the funds provided for its financing in the amount of USD 400 million was approved on 19 January 2017 at a meeting of the Government Committee for European, Euro-Atlantic Integration, International Cooperation and Regional Development91. In accordance with the regulations, after the approval of the draft resolution, it had to be filed for government approval. However, despite the considerable pressure of civil society92, till the end of January 2017, the corresponding draft government decree on the extension of the “warm loans” program for 2017 has not been presented for consideration by the Cabinet of Ministers. This situation is contrary to the declared purposes of the reform of energy efficiency in housing as one whole month of this year is already lost, and the risk of losing the confidence of the consumers in connection with inconsistent funding of the program, which was emphasized by experts, has started to be implemented. At the same time, due to nationalization of PrivatBank, officials are considering the possibility to joint it to the “warm loans” program93. While it is difficult to say if such possibility is realistic, but it is likely that joining the number of operator banks by one of the largest financial institutions of the country will increase competition and will be generally beneficial to the program, subject to its recovery. Directive 2010/31/EC on the energy performance of buildings MPs decided to issue the Law “On the Energy Performance of Buildings” (registration # 4941)94 for the repeated first reading. Although during a brief discussion of this draft at a meeting of the relevant Committee of VRU on Housing and Utility Infrastructure, MPs informed that the project was revised and re-submitted to Parliament for first reading. At the same time, in late December, the group of MPs, including heads of the Committee of VRU on Housing and Communal Services, submitted to the Verkhovna Rada an alternative draft law, which was registered under # 4941-д95. It is remarkable that the MP O. Riabchyn, which withdrew his own draft law, registered before under number 4941-1, is also indicated among the co-authors96. Comparative analysis of two current draft laws (with the remark that unfortunately no updated text of the government draft law (# 4941) is publicly accessible at the moment) allows making a preliminary analysis. In particular, the new parliamentary draft law, in addition to minor technical changes, more rightly regulates the rights and obligations of experts who will conduct certification of energy efficiency (Art. 10) and gets rid of provisions on the principles of

89 http://w1.c1.rada.gov.ua/pls/zweb2/webproc34?id=&pf3511=60811&pf35401=411308 90 https://www.unian.ua/eurobusiness/1718046-es-gotoviy-vidiliti-ukrajini-100-milyoniv-evro-dlya-napovnennya-fondu-energoefektivnosti.html 91 http://saee.gov.ua/uk/news/1524 92 https://www.facebook.com/zhytlo.in.ua/photos/a.561465287308634.1073741828.560972500691246/1152572388197918/?type=3&theater 93 http://www.kmu.gov.ua/control/publish/article?art_id=249705389 94 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=59631 95 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=60730 96 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=60595

Energy Efficiency and Social Issues

operation of the Energy Efficiency Fund uncharacteristic for this law (Art. 15). At the same time, the draft law 4941-д provides significant (till 01.01.2018) deferral of implementation of key provisions of Directive 2010/31/EC and establishes a longer term to the Cabinet of Ministers for the development and adoption of subordinate regulations (6 months after entry into force). But removal from the text of the rules of mandatory certification of buildings and separate parts of buildings that are sold or transferred to the lease (rent) for at least one year (Art. 7) can be named the most questionable step of MPs. Thus, achieving the fundamental objectives of the stated Directive in terms of direct effects on the population, which is the most interested party of relevant legal relations and direct beneficiary of the energy efficiency enhancement, is essentially limited. In particular, it refers to the paragraph 22 of the preamble of Directive 2010/31/EC, which provides for as follows: “a possible buyer or tenant of a building or a particular part of a building should be provided a certificate of energy efficiency and accurate information on its energy efficiency, as well as practical advice on how to improve it ... An energy efficiency certificate should also inform on the real impact of heating and cooling on the energy needs of a building, the consumption of primary energy by them and carbon dioxide emissions caused by them”97. If the draft law 4941-д as amended is adopted, the necessity of a substantial revision and change of the law to fully take into account all the requirements of the Directive will arise. Directive 2010/30/EU on the indication by labeling and standard product information of the consumption of energy and other resources by energy-related products During January, officials have not made any progress towards the adoption of the necessary Technical Regulations. From the approach chosen by specialists of the State Agency for Energy Efficiency and Energy Conservation, in the implementation of the last year’s project on technical assistance in the legislative process, funded by the FINTECC initiative, it is clear that the government plans, at least in part, to fulfill its obligations under the Directive 2010/30/EU by including the relevant provisions of the draft law “On Energy Efficiency”. Given the fact that work on such draft law is not specified in the medium-term plan of priority actions of the government for the period until 202098, it is of no use to hope for the rapid implementation of such commitments. Social issues Medium-term plan of priority of government actions by 2020, the discussion of which by public continued in January99, involves the development of subordinate regulations to implement the law “On Electricity Market” within 12 months after its adoption (Art. 15 (8) of the document)100. Among other acts of government, as it is expected, procedures for protection of consumer’s rights vested in Art. 3 of Directive 2009/72/EU will be developed. This is consistent with the provisions of the draft law101, which is in the public domain (clause 16 of Section 17). Thus, considerable part of the commitments in implementation of the stated article of the Directive is vested on the updated controller by the draft law (clause 17 of Section 17), the development and implementation by which of relevant regulations must also be completed within a period of one year after the entry into force of the law. Unfortunately, in this respect, the Ukrainian government shows no significant political will - after the adoption of the draft law # 4493 “On Electricity Market of Ukraine” in the first reading in September 2016, consultations in the relevant Committee and beyond carry on, but still there is no clarity as to the exact date of vote for the draft law in the second reading and as a whole. In addition, implementation of the law on the National Commission carrying out state regulation in the field of energy and communal services is also not as fast as the public would want it to be. According to unofficial information, only the Cabinet of Ministers elected its representative to the Nominating Committee, which is to elect candidates to the contest within the framework of first wave of NEPURC members rotation. So it is the turn of the relevant decisions of the Verkhovna Rada (2 members) and the President (2 members). In

97 saee.gov.ua/documents/dyrektyva_2010_31.doc 98 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249629697&cat_id=246711250 99 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249670661&cat_id=244277212 100 https://drive.google.com/open?id=0B61-BQ1OnhBWMEQxR25rdmstdjE5TFhCTUFtblVhSHFWOUVV 101 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=58829

Energy Efficiency and Social Issues

addition, the delay in the formation of the Nominating Committee postpones the work of the updated controller, without which it will be impossible to introduce the adequate consumer protection pursuant to the provisions of the EU Third Energy Package.

In the part of full launch of the gas market, which would allow consumers to take full advantage of liberalized

gas sector, an unresolved issue is the removal of regulatory and economic barriers to attract new players. At

the meeting with the Minister of Energy I. Nasalyk organized by DiXi Group102, the German Advisory Group

experts presented the results of research on such barriers, the most important of which was the lack of

monetization of government support to the most vulnerable consumers (public subsidies), tax regulations

flaws of gas trade, incomplete process of Naftogaz unbundling, the need for introduction of “gas release”

system and other issues. Subject to the principle solution of at least key problems of these ones, gas

consumers in Ukraine will get much better service as a result of the destruction of actual regional gas

monopoly and the emergence of real competition among numerous market participants. The special working

group under the Ministry of Energy and Coal Mining chaired by the Director of the Oil and Gas Department

will be engaged in coordination of further work. It should be noted, however, that most of the identified

issues are complex and can be resolved only at the level higher than the Ministry of Energy.

102 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article;jsessionid=D06DF6742305457E6870EB6F6B718775.app1?art_id=245175928&cat_id=35109

Environment and Renewable Energy Sources

The issue of implementation in Ukraine of European models of environmental impact assessment and strategic environmental assessment is still not been resolved. The Energy Community Secretariat made the next step in the case on violation by Ukraine of its commitments as to the implementation of the Directive on the assessment of the impact of certain public and private projects on the environment - has sent a reasoned opinion and expects a response within two months.

The Verkhovna Rada of Ukraine failed to return for revision the veto draft Law on Strategic Environmental Assessment. Therefore, the implementation of the mechanism of strategic environmental assessment in Ukraine should be started anew. Rejection of the Law “On Strategic Environmental Assessment” has caused frustration in the EU and among environmental NGOs which were awaiting adoption of the law in the context of the Association Agreement.

In the field of alternative energy, Ukraine continues to look for ways of establishing cooperation with other countries, attraction of their experience and investments, but all the progresses in this area are still only “on paper”.

Directive 2011/92/EU on the assessment of the effects of certain public and private projects on the environment (codification) (Article 363 AA): On 12 January 2017, the Energy Community Secretariat sent a reasoned opinion to Ukraine in the case on violation of obligations as to the implementation of the Directive on the assessment of the effects of certain public and private projects on the environment. According to the procedure, Ukraine has two months to respond to the accusation of non-compliance with the EU laws. According to the response of Ukraine or in the absence of such a response, the Secretariat may draw the attention of the Council of Ministers to the fact of violation under the Article 29 of the Rules of Procedure for Dispute Resolution103. The issue of sending the Law “On Environmental Impact Assessment” (according to the draft Resolution, registered on 8 December 2016)104 for completion was included in the agenda of the session of the Parliament on 17 January 2017, but was never put to a vote because of the risk not to get enough votes. Directive 2001/42/EU on the assessment of the effects of certain plans and programs on the environment (Article 363 of the Association Agreement): On 8 December 2016, the Verkhovna Rada registered the draft Resolution on sending the Law of Ukraine “On Strategic Environmental Assessment” for completion105. During the vote on the present draft Resolution on 17 January 2017, the Verkhovna Rada rejected the Law “On Strategic Environmental Assessment”, which was vetoed by the President. Before that, the deputies made several unsuccessful attempts to return the law for revision, but lacked a few votes. Thus, at present, there are no laws on introducing a mechanism of strategic environmental assessment in Ukraine in the Verkhovna Rada. Rejection of the Law “On Strategic Environmental Assessment” has caused frustration in the EU and among environmental NGOs which were awaiting adoption of the law in the context of the Association Agreement. Directive 2003/35/EU on providing for public participation in respect of the drawing up of certain plans and programmes relating to the environment and amending with regard to public participation and access to justice Directives 85/337/ EEC and 96/61/EC (Article 363 AA): On 17 January 2017, the Verkhovna Rada of Ukraine supported in the second reading and as a whole the

103 https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement/2016/13 104 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=60688 105 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=60689

Environment and Renewable Energy Sources

draft law on amendments to some legislative acts on improvement of urban development (# 4733-1)106. This draft law aims to simplify licensing procedures in the construction by introduction of construction depending on the category of complexity under the declarative principle or under the permit for performing construction works. The alternative draft law (# 4733-2), which was rejected, proposed to expand the rights of communities in urban planning, in particular as to the public hearings, which would have a positive impact on the implementation of the directive. There were similar proposals as to the draft law, but they were not supported by deputies. That is, the new law will not contribute to the implementation of the directive in terms of public participation. Directive 2009/28/EC on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC (Article 338 of the Association Agreement) In late January, during the official visit of the President P. Poroshenko to Finland, the Memorandum of Understanding in the areas of energy efficiency, renewable energy and alternative fuels between State Agency on Energy Efficiency and Energy Saving and the Ministry of Foreign Affairs of Finland was signed107. It is expected that future cooperation and exchange of experience between countries will contribute to improvement of Ukrainian legislation and activate business processes in the field of “green” energy. Ukraine is also planning to strengthen cooperation in this sphere with Denmark108: especially since this state begins the fourth stage of the Danish Neighborhood Programme, which is provided for Ukraine and Georgia for the period from 2017 till 2021 and one of the objectives of which is precisely the promotion of the use of RES. Meanwhile, investors continue to be interested in construction of “green” energy facilities in the area of the Chernobyl NPP – in particular, at present the Ministry of Environment received 39 investment projects from companies around the world. However, the State Agency on Energy Efficiency and Energy Saving considers “reserving” capacities and delaying the process of construction of renewable energy facilities one of the key problems of the slow pace of development of alternative energy. It is proposed to solve this problem by adopting the draft law to limit the term of the technical specifications for renewable energy facilities, according to which specifications should be issued for 2 years with the possibility of extension up to 5 years109. This should encourage companies that obtained them to complete construction in a specified period.

106 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=59319 107 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249679827&cat_id=244277212 108 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249670303&cat_id=244276429

109 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249675703&cat_id=244277212

Oil

During the reporting period, acceleration of implementation by public authorities of Ukraine’s international obligations in the oil sector has not happened. Without any justification, terms for performing tasks, in particular in the formation of minimum stocks of oil and petroleum products, the adoption of the new Code on Mineral Resources, approving the Technical Regulation on the requirements for storage, transportation and refueling, the corresponding equipment and service stations, as well as the approval of the Energy Strategy Ukraine till 2035, were extended. In addition to that, the reasons for non-fulfillment of international obligations are not analyzed, persons responsible for the failure to meet the set terms are not identified and the fact that the resources for implementation of the postponed tasks in 2017 are not provided. Directive 2009/119/EC imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products (Art. 338 AA) According to the paragraph 1.1.2 of the Implementation Plan for the Directive 2009/119/EC, the Ministry of Energy and Coal Mining was to draft a law on maintaining minimum stocks of oil and petroleum products110, and the Verkhovna Rada - to adopt the act as a whole in December 2016. However, as of 5 February 2017, we only know of the draft law “On the Strategic Reserves”, prepared and presented by the State Reserve Agency on 15 March 2016, which, according to independent experts, is imperfect and contains “a large number of conceptual errors”111. There is no information on the implementation of the paragraph 1.2.2 of the Implementation Plan, under which the Ministry of Energy and Coal Mining undertook to submit the statistics on stocks of oil and petroleum products to the Secretariat of the Energy Community monthly, as provided for in Article 4 (a) and (b) of the Regulation ( EC) 1099/2008 and clause 1.2.5, which provides for the beginning of the full-scale operation of the system of minimum stocks of oil and petroleum products and reporting to the European Commission and the Energy Community Secretariat from January 2017. As of 5 February 2017, fulfillment of these requirements is not provided by any normative document of the Ministry of Energy and Coal Mining. Directive 2009/28/EC on the promotion of the use of energy produced from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC On 13 January 2017, the State Agency on Energy Efficiency and Energy Saving held discussion of the draft law “On Amendments to Some Legislative Acts of Ukraine concerning the Development of the Production of Liquid Biofuels”. It provides for obligatory addition of bioethanol and biodiesel in petroleum products sold within the customs territory of Ukraine and introduction of administrative liability for failure to do so. The developers of the draft law state that such steps are aimed at implementing the Directive 2009/28/EC, although preserving traditional petroleum products supplies to non-adaptive vehicles is guaranteed to all consumers in EU Member States. In addition, forced, under penalty, addition of bio-components discriminates not only market participants, but 60% of Ukrainian motorists whose vehicles are not adapted to the use of mixed fuel. It should be emphasized that the requirements of the draft law developed in the State Agency on Energy Efficiency and Energy Saving are contrary to the Article 18-3 of the Commercial Code, which prohibits public authorities “to take actions that eliminate competition or unreasonably promote certain competitors in business” and subject to the Article 166-3 of the Code of Ukraine on Administrative Infractions as they set limitations on “production of certain products in order to limit competition”; limit “the rights of entrepreneurs to purchase and sale of goods”; set “prohibitions or restrictions on individual entrepreneurs or groups of entrepreneurs”. Although the Ministry of Energy and Coal Mining, Ministry of Economic Development and State Regulatory did not approve the draft law, the State Agency on Energy Efficiency and Energy Saving continues to insist on the necessity of its adoption. This raises concerns that independent experts, petroleum products producers, market operators and representatives of organizations that protect the rights of consumers were not invited to the meeting held on 13 January 2017.

110 http://www.kmu.gov.ua/document/248091904/Dir_2009_119.pdf 111 http://agroportal.ua/publishing/lichnyi-vzglyad/mnimaya-borba-s-korruptsiei-otsutstvie-reform-pri-pustykh-skladakh-gosrezerva/

Oil

Directive 2003/96/EC on restructuring the Community framework for the taxation of energy products and electricity (Annex XXVIII, Art. 353 AA) From 1 January 2017, the excise tax rates on motor petrol, middle distillates (diesel fuel) and liquefied petroleum gas are increased to 213.50; 139.50 and 52 euros/1000 liters respectively while the simultaneous abolition of the tax on the retail sale of these goods in the amount of 0.042 euros/liter112. Thus, the excise tax rates are drawn closer to the minimum stipulated by the Directive (respectively 359 and 330 euro per 1,000 liters or 125 euros for 1,000 kg), although these changes were justified not so much the need to implement international obligations of Ukraine, as the need to increase budget revenues. Directive 99/32/EC on the reduction in the sulfur content of certain liquid fuels and amending Directive 93/12/EC, as amended by Regulation (EC) 1882/2003 and Directive 2005/33/EC From 1 January 2017, the excise tax rates on middle distillates (diesel fuel) of Euro 4 and 5 ecological classes are unified at a level that meets Euro-3113. This will increase the consumption of cheaper diesel fuel of lower environmental classes, postponing implementation of the requirements of Directive 99/32/EC by Ukraine. Council Directive 98/70/EC on the quality of petrol and diesel fuels and amending Directive 93/12/EEC, as amended by Directives 2000/71/EC, 2003/17/EC and 2009/30/EC and Regulation (EC) 1882/2003 (Annex XXX, Art. 360-363, 365, 366 AA) According to the Directive 98/70/EC (Articles 7 and 8; paragraph 1.3) Implementation Plan, the Ministry of Energy and Coal Mining undertook to report on the operation of the monitoring system of petroleum products quality and safety of Ukraine from December 2015114. As of 5 February 2017, no document was provided. In addition, after the liquidation of the State Enterprise Research Institute of Oil Refining and Petrochemical Industry MASMA, main contractor of all tasks stipulated by the plan, further works on the implementation of the Directive 98/70/EC in Ukraine are stopped. Directive 94/63/EC on the control of volatile organic compound emissions resulting from the storage of petrol and its distribution from terminals to service stations, as amended by Regulation (EC) 1882/2003 (Annex XXX, Art. 360-363, 365, 366 AA): In November 2016, the term for performing the tasks provided for in the paragraphs 1.1.1, 1.1.2 and 1.2.1 of the plan implementation of Directive 94/63/EC expired115. Nevertheless, as of 5 February 2017, the Cabinet of Ministers has not adopted the resolution “On approval of the Technical Regulation on the requirements for storage, transportation and refueling, corresponding equipment and service stations” and the Ministry of Environment has not approved recommendations on the control of gas stations and has not made an inventory of oil terminals. Directive 94/22/EC on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons (Annex XXVII, Art. 279, 280, 341 AA) According to the Implementation Plan for the Directive 94/22/EC, by the end of 2016, a new version of the Code of Ukraine on Mineral Resources was to be adopted116. It provides for determining the terms “operator’s functions”, “contractual joint venture”, “special permits transmission mechanism”, “concept of the minimum work program and minimum work commitments”, “obligation of regulating the specificity of extraction of unconventional hydrocarbons” and regulating the issue of publication of geological information on strategic resources such as oil and gas, to the extent provided by law. According to the Cabinet of Ministers, as of 20 January 2016, “a draft Code of Ukraine on Mineral Resources is processed by interested agencies”117. At the same time, on 12 January 2017, the State Service of Geology and Mineral Resources of

112 http://zakon4.rada.gov.ua/laws/show/1791-viii 113 http://zakon4.rada.gov.ua/laws/show/1791-viii 114 http://www.kmu.gov.ua/document/248091869/Dir_98_70.pdf

115 http://www.kmu.gov.ua/document/248091862/Dir_94_63.pdf 116 http://www.kmu.gov.ua/document/248102926/Dir_94_22.pdf 117 http://www.drs.gov.ua/deregulation/plan-deregulyatsiyi-2016-2017-rr/

Oil

Ukraine informed that the geological industry of Ukraine will receive a new Code on Mineral Resources in the second quarter of 2017. However, it is stated in the text of the relevant notification that “in the second quarter”, the State Service of Geology and Mineral Resources of Ukraine will only “complete the process of preparation” of the document “in accordance with the plan of legislative initiatives”118. Practically, this means that the new edition of the Code of Ukraine on Mineral Resources will take effect no earlier than in 2018, as the project developed by the State Service of Geology and Mineral Resources of Ukraine should be also agreed by the concerned authorities, it must be approved by the Cabinet of Ministers, submitted to the Ukrainian parliament, adopted for consideration, considered in two readings, passed by the Verkhovna Rada and signed by the President. As of 5 February 2017, the regulations for development of oil and gas fields have not been adopted and harmonized with EU norms, although on 12 January 2017, the State Service of Geology and Mineral Resources reported on the preparation of the relevant project. Allegedly, “order “On approval of the Rules for development of oil and gas fields” has been already signed by the Minister of Environment and Natural Resources”119. Nevertheless, as of 5 February 2017, information on the signing of the said order on the official website of the Ministry of Environment was absent120. There is only a notification of the preparation of its project, dated 30 December 2016121. Meanwhile, in the report on the implementation of the Action Plan for Deregulation of Economic Activity, dated 20 January 2017, approved by the decree of the Cabinet of Ministers of 23 August 2016 under # 615-p, concerns only the referral of the revised draft regulations “to the interested state authorities” by a letter of the Ministry of Environment of 22 November 2016122. On 3 January 2017, on the official website of the Ministry of Environment, the information on the publication of the draft resolution of the Cabinet of Ministers “On Amendments to the Procedure for Granting Special Permits for Subsoil Use” dated 30 December 2017 (approved by the Resolution of the Cabinet of Ministers of 30 May 2011 # 615)123. The relevant resolution proposes: - to return the clause of the Regulations, under which subsoil users shall be entitled to use the subsoil without an auction if under the laws they own the entire property complex built (reconstructed) to extract and process minerals from the subsoil, to the use of which a permission shall be granted, or such property complex is leased (granted to concession) to subsoil users; - to establish availability of subsoil user’s rental debt for use of subsoil (instead of the availability of his “arrears of taxes and mandatory payments” or “national taxes and duties”) as a ground for refusal or extension, or loss of effect of the permit to use the subsoil. As stated in the accompanying documents, such changes will allow “resolving some problematic aspects of granting, refusal to grant or renewal, or loss of effect of special permits to use subsoil and resolve the issue of granting special permits to use subsoil upon carrying out activities by integral property complexes”124. Article 279 of the Association Agreement as regards providing equality of access and exercise of activities of prospecting, extraction and production of hydrocarbons Pursuant to the Article 279 (4), under which all entities that are authorized to exercise activities of prospecting, extraction and production of hydrocarbons must pay a fee, the procedure of which should be properly recorded, and from 1 January 2017 in Ukraine, the rates of rent for oil extraction are reduced:

- from 45 to 29% of the value of commodity production for deposits located at the depth of up to 5 thousand m;

- from 21 to 14% - for deposits located at the depth of more than 5 thousand m.

118 http://geo.gov.ua/novyna/geologichna-galuz-ukrayiny-otrymaye-novyy-kodeks-pro-nadra-u-drugomu-kvartali-2017-roku 119 http://geo.gov.ua/novyna/derzhgeonadra-rozrobyla-novi-pravyla-rozrobky-naftovyh-i-gazovyh-rodovyshch 120 http://www.menr.gov.ua/normakty 121 http://www.menr.gov.ua/normbaza/regulatory/554-proekty-rehuliatornykh-aktiv 122 http://www.drs.gov.ua/deregulation/plan-deregulyatsiyi-2016-2017-rr/ 123 http://www.menr.gov.ua/normbaza/regulatory/555-povidomlennia-pro-opryliudnennia 124 http://www.menr.gov.ua/docs/normbaza/regulatory/proekty%20rehuliatornykh%20aktiv/proekt_nakazu_30122016.rar

Oil

Article 338 of the Association Agreement as regards continuation and intensification of cooperation in the energy sector Pursuant to the Article 338 (a) as to the implementing energy strategies and policies, development/formulization of corresponding forecasts and scenarios, the draft Energy Strategy of Ukraine till 2035125 was discussed at the meeting of the Committee of the Verkhovna Rada on Fuel and Energy Complex, Nuclear Policy and Nuclear Safety on 18 January 2017. As the First Deputy Chairman of the Committee Oleksandr Dombrovskyi noted summing up the discussion, “We are entering the final 100 meters from the point of view of preparation of the strategy for its approval and introduction to the Cabinet of Ministers”. There will be a planned “special meeting to clearly understand what we agree with, what we implement, what we disagree with. Only after this debate, we can get the complete document”. These plans somewhat contradict previous government plans, according to which the said document had to be approved in the fourth quarter of 2016126. The fact that the development of oil and petroleum refining industries, as well as the Ukrainian market of motor fuel are paid minor attention in the draft Energy Strategy worries too.

125 http://kompek.rada.gov.ua/documents/zasid/73049.html 126http://www.kmu.gov.ua/document/249113344/R0418-00.doc

Business Climate

The process of reforming NEPURC actually started: the Resolution as regards determining the contributions to the Regulation was published for discussion. This is the first step towards the formation of the independent budget of the Commission, which is one of the main requirements of the Law on NEPURC. In addition, the draft resolution as regards license conditions for the production and supply of electricity are provided for discussion. Discussion of several resolutions was also completed in January, although comments were published not to all of them and none of them has entered into force. A new procedure for VAT refund, which was approved by the Cabinet of Ministers, can be considered a significant achievement in January. This is another step towards the prevention of corruption, increase of transparency and improvement of conditions for doing business in Ukraine. A new problem around subthreshold public procurement, which the public began to discuss actively, appeared in the agenda of the reform of public procurement. Current regulations make it possible to plunder public funds, which is confirmed by specific cases. At present, there is no decision reached. AMCU has identified development of the electricity distribution market, namely promoting its competitiveness, as the key priority of its work for 2017. Furthermore, the first meeting of the working group on monitoring of oil and petroleum products markets was held, where the relevant indicators for monitoring and their sources were discussed.

Article 277 Regulatory Authority Directives 2009/72/EC and 2009/73/EC concerning common rules for the internal market in electricity and natural gas (as regards regulatory authority) NEPURC published the Resolution on the procedure for calculating and setting rates of contributions for regulation for discussion until February 25127. The financial independence of the Regulator at the expense of contributions from companies, whose activities are regulated by NEPURC is one of the main changes provided for by the new Law of Ukraine on NEPURC. The draft resolution contains information on determining the amount of payment, terms of payment, what business entities shall pay it, as well sanctions in case of non-payment or late payment of contributions. Comments on the draft Resolution on NEPURC as regards the control over licensees’ compliance with the laws in the relevant areas and license conditions will be accepted by February 25128. The procedure for carrying out scheduled and unscheduled inspections and schedule of their carrying out, rights and obligations of the parties, procedure for presentation of results of inspections are established. The procedure for elimination of violations, which the licensee should follow, with the defined terms, timing and sanctions in case of nonfulfillment, are also described in details. Draft regulations on license conditions for the business in production129 and supply130 of electricity will be discussed by March 3. The first one applies only to plants with capacity over 5 MW, the second one sets the formula for calculating electricity upon retail trade. Both acts include requirements which licensees should adhere while producing and supplying electricity and contain standard forms to fill accompanying documentation. During January, NEPURC published results of the discussion of draft resolutions made public in December 2016:

- licensing conditions for conducting business in the natural gas market131;

127 http://www.nerc.gov.ua/?id=23365 128 http://www.nerc.gov.ua/?id=23368 129 http://www.nerc.gov.ua/?id=23483 130 http://www.nerc.gov.ua/?id=23485 131 http://www.nerc.gov.ua/index.php?news=5666

Business Climate

- licensing conditions for conducting business in transporting oil, petroleum products by trunk pipelines132; and

- as to introducing the use of energy units in the natural gas market133. However, results of the discussion of the following draft resolutions were not made public:

- as regards commercial metering of electricity produced from renewable energy sources (till January 20);

- on the approval, adjustment and withdrawal of investment component in the tariff for electricity (till January 30);

- licensing conditions in the field of heat supply (till January 31); and - on the approval of the Procedure for electronic auctions for distribution of capability of interstate

electrical networks (till January 31); From January 1, the Resolution as regards ensuring quality standards of energy supply services adopted in October 2016 entered into force134. Read more about it in the Monitoring Report for October 2016135. On January 18, NEPURC published the schedule of presentation of investment programs of licensees of the regulated tariff for approval for 2018. The terms for providing information, depending on the company, are ranging from 1 September to 25 September 2017136. The approved schedule of public consultations in NEPURC for 2017 was also published137. Articles 255-256 Anticompetitive Activities and Merger AMCU has identified the development of competition in the field of distribution of electricity among the priorities for 2017. 26 checks of electricity organizations of Ukraine in the second quarter of 2017 are planned for this purpose138. AMCU has added to its website the presentation, which shows how to file an application for obtaining a prior permit for coordinated actions in details. The presentation itself is interactive, with reference to draft laws to determine the necessity of obtaining permission of concentration by an applicant, making it easy to understand the process139. On January 24, AMCU recommended NEPURC to reverse its protocol decision # 5, inform estimators of the cancellation of this decision and to report on the implementation of the AMCU recommendations within 30 days140. Accordingly, the regulator’s decision has signs of violation of economic competition, as it defines only four consulting companies entitled to assess the assets of licensees of NEPURC. This limits the access and opportunity to assess by other companies that have relevant experience in this area. AMCU noted that as of 1 December 2016, the State Property Fund issued 828 certificates of estimators. This means that 828 different companies may carry out such assessment of assets141. The working group on monitoring the oil and petroleum products markets, formed in late December, held its first meeting. It discussed the list of indicators that will be used to monitor the markets of oil and petroleum

132 http://www.nerc.gov.ua/index.php?news=5697 133 http://www.nerc.gov.ua/index.php?news=5655 134 http://www.nerc.gov.ua/?news=5661 135 http://dixigroup.org/publications/energetichni-reformi-oglyad-zhovtnya-2016-roku/ 136 http://www.nerc.gov.ua/?id=23361 137 http://www.nerc.gov.ua/?id=23404 138 http://www.amc.gov.ua/amku/control/main/uk/publish/article/132788 139 http://www.amc.gov.ua/amku/control/main/uk/publish/article/132767 140 http://www.amc.gov.ua/amku/doccatalog/document?id=132945&schema=main 141 http://www.amc.gov.ua/amku/control/main/uk/publish/article/132872

Business Climate

products, as well as their sources and frequency. The application of price quotations on exchanges of Ukraine as an indicator of the state of the retail market of petroleum products was discussed142. Article 379 On January 11, the government approved the draft law on ratification of intergovernmental agreement on Ukraine’s participation in the EU program “Competitiveness of Small and Medium Enterprises (COSME) (2014-2020)”143 and it has been already registered in the VRU on January 18144. Ukraine officially joined the program in 2016, so see more details in the Annual Monitoring Report. On January 16, the Ministry of Economic Development has published an updated draft SME Development Strategy by 2020145. The document is under public discussion, see details about its contents in the Annual Monitoring Report for 2016. On January 17, the draft law # 2302а-д146 on the improvement of corporate governance in joint stock companies was adopted in the first reading. This draft law plans to regulate the mechanisms of acquisition of shares after the acquisition of a majority holding and to establish mandatory of sale of shares of minority shareholders (less than 5% of shares) to majority shareholders (more than 95% of shares) at fair value. At the same meeting, the draft law # 4470147, which amends the legislative acts regarding the right of concluding corporate contracts in joint stock companies and limited liability companies, was adopted in the first reading. This draft law permits the above companies to take internal decisions through concluding by members of corporate contracts. Full adoption of this law will not only promote the development of corporate governance, but will also create appropriate conditions for the protection of investors. On January 19, the draft law on transparency in the extractive industries was put on the agenda, but its actual consideration did not take place. In general, the draft law provides for disclosing by mining companies of information on their activities. A more detailed description is in the June 2016 Monitoring Report148. Pursuant to the Law on Amendments to the Tax Code of Ukraine on Improving the Investment Climate in Ukraine signed by the President P. Poroshenko on 30 December 2016 (for details, see the Annual Monitoring Report for 2016), the Cabinet approved a new procedure for VAT refunds149. The resolution was adopted on 25 January and was developed jointly with the Ministry of Finance, representatives of the public and businesses. The automation of compensation process and its transparency that is a key to reducing corruption in this matter and, consequently, facilitation for running business became the main change150. Articles 148-156 as regards public procurement and Directive 2014/25/EC In January, activists discussed the problem of subthreshold procurement where the value of the item of procurement of goods, service(s) is less than UAH 200 thousand and works – UAH 1.5 million. In such cases the use of the ProZorro system is optional, which enables plundering the funds while conducting subthreshold procurement. The activists appealed to the government with a proposal to use ProZorro at all

142 http://www.amc.gov.ua/amku/control/main/uk/publish/article/132938 143 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249649469&cat_id=244274160 144 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=60935 145 http://www.me.gov.ua/Documents/Detail?lang=uk-UA&id=6b237e21-1d83-41af-a03a-9fe25be93530&title=ProektRozporiadzhenniaKabinetuMinistrivUkrainiproSkhvalenniaStrategiiRozvitkuMalogoISerednogoPidprimnitstvaVUkrainiNaPeriodDo2020-Roku 146 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_2?id=&pf3516=2302%D0%B0-%D0%B4&skl=9 147 http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_2?id=&pf3516=4470&skl=9 148 http://dixigroup.org/publications/-energetichni-reformi-oglyad-chervnya-2016-roku/ 149 http://zakon2.rada.gov.ua/laws/show/26-2017-%D0%BF 150 http://www.kmu.gov.ua/control/uk/publish/article?art_id=249682916&cat_id=244274160

Business Climate

levels of procurement151. At the same time, the Opora Social Network analyzed the way the procurement at the unprofitable SE Selydivvuhillia took place. By the results, during 2016, the state enterprise carried out subthreshold procurement 339 times, often using price UAH 199,999 thousand. It also appears that lots at the tenders were deliberately broke to carry out subthreshold procurement, which violated the Law “On Public Procurement”152. In turn, the Ministry of Energy and Coal Mining formed a working group to check the relevant procurement for the violations associated with the procurement of works and goods that are needed to put new faces into operation153. Articles 25-39 as regards access of products to the market On 19 January, SFS issued an order on approving the SFS classifier, its customs and their departments. The use of T type transit declaration containing the data of customs office of departure, transit and customs office of destination is provided for. All information on the customs offices is displayed on europa.eu, in the special form of customs list. Such information is necessary for transit participants while filling in and verifying a declaration, as well as to determine the customs office of final destination. The new classifier will be filled in all customs declarations from 1 February 2017154. Articles 104 and 105 To improve electronic licensing procedures, the Ministry of Economic Development has prepared a corresponding draft Resolution of the Cabinet of Ministers155. The project defined the procedure for filing documents by a licensee and the procedure for registration, processing and storing documents by a state body. Remarkable is that it is enough to file the documents to the required CEB enough in PDF format with electronic signature through the Unified State Portal of Administrative Services156 and it is not necessary to send a paper version. The results are reported remotely on the same site.

151 http://uacrisis.org/ua/51432-zakupivli-2 152 http://zhytlo.in.ua/ua/novini/osbb1/selidvvugllya_za_rk_ponad_100_razv_porushiv_zakon_pro_publchn_zakupvl.html 153 http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245174536&cat_id=35109 154 http://sfs.gov.ua/media-tsentr/novini/282983.html 155 http://www.me.gov.ua/Documents/Detail?lang=uk-UA&id=1f3286b3-9f38-4cc1-8894-57feb97315be&title=ProektPostanoviKabinetuMinistrivUkrainiproZatverdzhenniaPoriadkuPodanniaOrganuLitsenzuvanniaDokumentivVElektronniiFormiTaInformuvanniaZdobuvachaLitsenzii-LitsenziataProRezultatiRozgliaduTakikhDokumentivVElektronniiFormiIProViznanniaTakoiu-SchoVtratilaChinnistPostanoviKabinetuMinistrivUkrainiVid23-Serpnia2016-R-561- 156 https://poslugy.gov.ua/

Methodology

The Project is being implemented by five partners and two invited permanent experts. The Project is being

implemented by the following five partners: NGO “DIXI GROUP”, Resource & Analysis Center “Society and

Environment”, Civil Network “OPORA”, Association “European-Ukrainian Energy Agency”, and All-Ukrainian

NGO “Energy Association of Ukraine”. Among the project permanent members are L. Unigovskyi, General

Director of Naftogazbudinformatyka LLC, and G. Riabtsev, Social Program Director of Psycheа Scientific and

Technical Centre.

For the purpose of monitoring the implementation of the Association Agreement, the project participants

have been divided into six working groups. These are, in particular, Gas group: L. Unigovskyi and

R. Nitsovych (DiXi Group); Electricity group: S. Golikova (Energy Association of Ukraine) and O. Shumilo;

Energy Efficiency and Social Issues group: T. Boyko (OPORA) and D. Nazarenko (DiXi Group); Environment and

Renewable Energy Sources group: N. Andrusevych (Society and Environment) and N. Yermakova (DiXi Group);

Business Climate and Investments group: V. Beliakova (European-Ukrainian Energy Agency) and A. Bilous

(DiXi Group), Oil group: G. Riabtsev (Psychea) and T. Tkachuk (DiXi Group).

The Project participants identified the monitoring framework for each working group based on the results

of their analysis of the Association Agreement. This framework is described in Annex 1.

The main source of information for monitoring purposes is official information provided by public

authorities. These include, in particular, adopted regulatory and legal acts, statements by top officials,

information about meetings and events with the participation of representatives of public authorities. Also,

monitoring could be based on messages by key energy market players, their decisions and initiatives. Other

sources of information can include published articles, interviews, news, as well as results of bilateral meetings

between experts and energy market players.

The subject of monitoring is transposition and, if appropriate, implementation of Directives. The groups

and experts monitor, first of all, transposition of acquis into the Ukrainian legislation and compliance

therewith. If appropriate, but only as an option, the quality of implementation of acquis and the effect of

their implementation on the market and/or consumers can be subject to monitoring.

Methodology

ANNEX 1.

List of Articles of the Association Agreement and Acquis Subject to Monitoring

The group Electricity and Nuclear Security conducts monitoring and assessment of issues relating to electricity, nuclear energy, coal and elimination of consequences of the Chornobyl accident. Acquis concerned:

Article 269, Chapter 11, Title IV, Directive 2009/72/EC (market-related provisions)

Article 270, Chapter 11, Title IV, Regulation (EC) 714/2009

Article 271, Chapter 11, Title IV, Regulation (EC) 714/2009

Article 273, Chapter 11, Title IV, Regulation (EC) 714/2009, Directive 2009/72/EC

Article 274, Chapter 11, Title IV, Regulation (EC) 714/2009, Directive 2009/72/EC

Article 305, Chapter 14, Title IV, Directive 2009/72/EC, Directive 2005/89/EC

Article 338, Chapter 1, Title V

Article 338, Chapter 1, Title V, Cooperation Agreements with IFIs

Article 339, Chapter 1, Title V, coal market

Article 342, Chapter 1, Title V, cooperation in the nuclear safety sector, Council Directive 2014/87/Euratom, Council Directive 2013/59/Euratom, Council Directive 2006/117/Euratom

Article 342, Chapter 1, Title V, cooperation in the nuclear safety sector

The group Gas conducts monitoring and assessment of issues relating to gas, in particular, the implementation of the following acquis:

Articles 338, 341, Directive 2009/73/EC (market-related provisions)

Articles 338, 341, Regulation (EC) 715/2009

Articles 338, 341, Directive 2004/67/EC + Annex XXVI (Early Warning Mechanism), Articles 275 (Unauthorised taking of energy goods), 276 (Interruption), 309 and 314 (resolution of disputes) of the

Association Agreement

Chapter 11 Trade-related energy, in particular Articles 269 (Domestic regulated prices), 270 (Prohibition of dual pricing), 271 (Customs duties and quantitative restrictions), 272 (Transit) and 273–274 (Transport,

cooperation on infrastructure)

Annex XXVII to Chapter 1 Energy cooperation, including nuclear issues — Directive 94/22/EC + Articles 279–280 (Access to and exercise of the activities of prospecting, exploring for and producing hydrocarbons, and

licensing conditions)

The group Energy Efficiency and Social Issues conducts monitoring and assessment of the implementation of the following acquis:

Directive 2010/30/EU

Directive 2010/31/EU

Directive 2006/32/EU

Directive 2012/27/EU

Directive 2009/72/EC (social issues)

Articles 338, 341 of the Association Agreement

Directive 2009/73/EC (social issues)

Articles 338, 341 of the Association Agreement

Methodology

The group Environment and Renewable Energy Sources conducts monitoring and assessment of the implementation of the following acquis:

Article 363, Directive 2011/92/EU

Article 363, Directive 2001/42/EC

Article 363, Directive 2003/42/EC

Article 363, Directive 2003/35/EC

Directives 85/337/EEC and 96/61/EC

Article 363, Directive 2008/50/EC

Article 363, Directive 1999/32/EC

Article 363, Directive 94/63/EC

Article 363, Directive 2009/147/EC

Article 363, Directive 2010/75/EU

Article 338, Directive 2009/28/EC

The group Oil conducts monitoring and assessment of the implementation of the following acquis:

Directive 2009/119/EC

Directive 94/22/EC

Directive 98/70/EC

Articles 274, Chapter 11 of the Association Agreement (Trade-related energy)

Articles 275, Chapter 11 of the Association Agreement (Trade-related energy)

Articles 276, Chapter 11 of the Association Agreement (Trade-related energy)

Articles 279, Chapter 11 of the Association Agreement (Trade-related energy)

Articles 280, Chapter 11 of the Association Agreement (Trade-related energy)

Article 337 of the Association Agreement

Article 338 of the Association Agreement

Article 339 of the Association Agreement

The group Business Climate conducts monitoring and assessment of the implementation of the following acquis:

Article 27, Chapter 11 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 28, Chapter 11 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 29, Chapter 11 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 88, Chapter 6 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 93, Chapter 6 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Articles 97-102, Chapter 6 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 104, Chapter 6 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 105, Chapter 6 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 107, Chapter 6 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Articles 144-147, Chapter 7 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Chapter 8 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement and the Directive 2014/25/EU

Article 255, Chapter 10 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 256, Chapter 10 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 258, Chapter 10 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Methodology

Article 263, Chapter 10 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 267, Chapter 10 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement

Article 277, Chapter 11 (Title IV TRADE AND TRADE-RELATED MATTERS) of the Association Agreement and Directives 2003/54/EC and 2003/55/EC (as regards the regulatory authority)

Articles 355-359, Chapter 5, (Title V ECONOMIC AND SECTOR COOPERATION) of the Association Agreement and Directive 2008/92/EC

Article 379, Chapter 10 (Title V ECONOMIC AND SECTOR COOPERATION) of the Association Agreement

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