EU-UKRAINE ENERGY COOPERATION

EIGHT JOINT EU-UKRAINE REPORT

Implementation of the EU-Ukraine Memorandum of Understanding on Energy Cooperation during 2013

CONTEXT

Energy sector co-operation continues to be a key element in EU-Ukraine relations.

The Memorandum of Understanding (MoU) on co-operation in the field of energy between the EU and Ukraine1 was signed on 1 December 2005 within the context of implementation of the EU-Ukraine Action Plan. It sets out how the two sides plan to organise their work to bring their energy markets closer together. The implementation of the MoU continues to be an important part of the EU-Ukraine Association Agenda2.

The MoU establishes a joint strategy towards the progressive integration of the Ukrainian energy market with that of the EU and consists of road maps covering (1) nuclear safety; (2) the integration of electricity and gas markets; (3) security of energy supplies and the transit of hydrocarbons; and (4) the coal sector. The MoU also envisaged a fifth roadmap which was agreed in March 2008 with the aim to increase co-operation in energy efficiency and the promotion of renewable energies.

Joint progress reports have since been signed on an annual basis, the first of which covered 2006. This eighth Joint Report highlights progress which has been achieved during 2013.

KEY PROGRESS SINCE DECEMBER 2012

During 2013 Ukraine worked on finalising its updated version of its Energy Strategy to 2030 that had been originally adopted in 2006. On 24 July 2013, the Cabinet of Ministers of Ukraine approved by Decree reference No. 1071-p an updated version of the Energy Strategy. The text of the Strategy is available at the web-site of the Ministry of Energy and Coal Industry of Ukraine3. Following the adoption and official publication of the Energy Strategy to 2030 the Ministry of Energy and Coal Industry of Ukraine is developing an Action Plan on the implementation of the Strategy. The Action Plan will, in particular, cover detailed measures to fulfil of Ukraine's commitments taken in the framework of the treaty establishing the Energy Community4. It is very important that the relevant stakeholders, also on the side of donor community and the non-state actors, are involved in the preparation of this document which should be consulted with the Energy Community Secretariat.

http://ec.euroDa.eu/energv/international/bilateral cooperation/doc/ukraine/2010 Ukraine mou.pdf 2 Reference: http://eeas.europa.eu/ukraine/docs/index en.htm J http://mpe.kmu.gov.ua/fuel/doccatalog/document?id=260994 4 http://www.energy-communitv.org/portal/page/portal/ENC HOME/ENERGY COMMUNITY/Lesal

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September 2013 also saw the publication of the "Annual Implementation Report"5 by the Energy Community Secretariat on the implementation of the acquis under the Treaty establishing the Energy Community" which, for the second time, included Ukraine. This Report draws attention to the need for further work in the Contracting Parties to open energy markets which are dominated by the involvement of the State through control over incumbent utilities, granting of subsidies and regulating energy prices with a few exceptions.

It should be recalled that, in 2014, Ukraine holds the Presidency of the Energy Community.

1. ROAD MAP ON NUCLEAR SAFETY

Ukraine has participated fully in the nuclear stress tests based on the EU specifications. The Ukrainian stress test reports have been submitted to the Commission and have been peer reviewed. The main results were included in the Commission's October 2012 Staff Working Document "Technical Summary on the implementation of comprehensive risk and safety assessments of nuclear power plants in the European Union"6.

In April 2013, a peer review workshop on the National Action Plans in April 2013 organised by the Member States (ENSREG7) noted that the Ukrainian National Action Plan indicates clearly how nuclear power plants in Ukraine are improving in the aftermath of the Fukushima accident according to national assessments, recommendations and suggestions from the European Stress Tests and the conclusions of the process of revising the IAEA Convention on Nuclear Safety.

The National Action Plan contains clear actions, regularly checked for implementation by the regulator. Many individual improvement measures, planned for the period 2013-2017, are under implementation. According to ENSREG, there is good practice in the implementation: measures are first implemented at a pilot plant of a certain type, and then checked for possible implementation at all other NPPs of this type.

A number of safety improving measures were defined before the Fukushima event and are subject to the on-going "Comprehensive (Integrated) Safety Improvement Programme" (for operating plants) and under the "Safety Improvement Plan for Chernobyl NPP Nuclear Installations". The scope and priorities of these measures were revised with due consideration of their relevance in the light of the Fukushima accident.

Loans of EUR 600 million (split 50/50) from the EBRD and Euratom each for safety upgrades were signed on 12a1 March 2013 and 7lh August 2013 respectively. The works related to the upgrading of the safety systems are scheduled for completion by the end of 2017.

The Chernobyl Shelter Fund (CSF) continues to make good overall progress with three lifts of the east section structure of the New Safe Confinement (NSC) constructed to the final height and work on the assembly of the west section started. However the completion of the project is over one year late and a cost increase of €300 - €500 million was announced. There is now a serious concern that the funds currently available in the Chernobyl Shelter Fund for the project will not be sufficient to complete it.

With respect to the Nuclear Safety Account, progress on the Interim Spent Fuel Storage Facility (ISF2) remains very slow, with the current delay in completion estimated at some

5 2013 Annual Implementation Report on the of the Acquis under the Treaty Establishing the Energy Community: http://www.energv-communitv.org/pls/Dortal/docs/2304177.PDF

6 http://ec.euroDa.eu/energy/nuclear/safetv/doc/swd 2012 0287 en.pdf 7 European Nuclear Safety Regulators Group (ENSREG).

64 weeks. This situation gives cause for concern as it could result in cost increases or an incomplete project.

2. ROAD MAP ON THE INTEGRATION OF ELECTRICITY AND GAS MARKETS

Ukraine made some progress on the transposition and the implementation of the Energy Community acquis in the course of 2013, notably with the new electricity market law8

which came into effect on 1st January 2014. However there remains an urgent need to accelerate the fulfilment of commitments undertaken by Ukraine upon joining the Energy Community where implementation deadlines have already passed. This relates in particular to strengthening the independence of the energy regulator, unbundling, transparency, market opening and some aspects of third party access.

In this context, the 2013 Annual Report on the implementation of the acquis under the treaty establishing the Energy Community, published by the Energy Community Secretariat in September 2013, provided a detailed analysis of the progress achieved by Ukraine and listed priority steps ahead. It is important that an Action Plan and a Roadmap for the implementation of the EU energy legislation under the Energy Community Treaty is agreed between Ukraine and the Energy Community Secretariat within the shortest possible time and with due account of the deadlines missed.

It is also important that Ukraine expedites its internal procedures for the adoption and implementation of the 6 October 2011 decision of the Energy Community Ministerial Council on the implementation of the 3rd Package for an internal EU gas and electricity market9. On this point, the meeting of the Ministerial Council which took place in Serbia on 24 October 2013 confirmed the importance of the transposition and the implementation of the 3rd Package in the context of providing security of supply and adequate conditions for investments.

Ukraine should use its forthcoming chairmanship in the Energy Community in 2014 to accelerate the process of implementation of its commitments as well as to improve the coordination of this process inside Ukraine. In addition, better coordination with the Energy Community Secretariat, the non-state actors as well as donor community should be foreseen.

On 16th August 2013 a draft law "On state regulation in energy sector" was registered in the Parliament. This law should clarify and strengthen the role of the regulator and remove any legal uncertainties. The draft, which has been under preparation since 2007, is currently being examined by the Energy Community Secretariat.

In addition, on 24 October 2013 the electricity market law was approved. While it is not fully compliant with the provisions of the Energy Community acquis, it is a step forward as its adoption should open a way for the further development and improvement of the legal framework in the electricity sector. It is important that further steps on improving the legislative and regulatory framework in the electricity sector, including preparing and implementing the necessary secondary legislation, are pursued without delay and in close coordination with the Energy Community Secretariat to ensure full compliance of the market conditions with Ukraine's obligations in the framework of the Energy Community Treaty. The establishment of the Coordination Centre on the implementation of the law as foreseen by the instructions of the President of Ukraine in December 2013, within one month of the entry into force of the law, could facilitate and accelerate the reform process as this also foresees the involvement of representatives of the Energy Community Secretariat alongside the international financial institutions.

8 Law No 663-VII "On the Main Principles of the Functioning of the Electricity Market" of 24 October 2013 9 Details on the third package: http://ec.europa.eu/energy/gas electricitv/legislation/legislation en.htm

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The privatisation of electricity generation assets continued in 2013. On 21 August, the State Property Fund sold a majority stake (60.77%) in thermal power generator Donbasenergo. As a next step, the State Property Fund also plans to offer a broad range of state-owned assets for privatization in 2014, including 25% stakes in thermal power generators DTEK-Dniproenergo, DTEK Zakhidenergo and Donbasenergo and the largest domestic combined heat and power (CHP) plant Kyivenergo; 70% stakes in regional power distributing companies Mykolayivoblenergo and Khmelnytskoblenergo as well as 65% of Kharkivoblenergo, 60% of Zaporizhyaoblenergo and Ternopiloblenergo, 46% of Cherkasyoblenergo, and 25% of DTEK-Krymenergo, DTEK-Donetskoblenergo, Vinnytsiaoblenergo, Zakarpattyaoblenergo, Odesaoblenergo and Chernivtsioblenergo. The State Property Fund also plans to offer stakes in 40 gas distributing companies. It is important to ensure that the process goes in line with Ukraine's international commitments in the area of competition, transparency and market opening.

On 7 October 2013, a contract for the feasibility study on the synchronous interconnection of Ukrainian and Moldovan power systems to ENTSO-E Continental European Power System under the framework of the "Joint Operational Programme Romania-Ukraine-Republic of Moldova 2007-2013" was signed by the government of Ukraine and the governments of Moldova and Romania. It is expected that the contract, with an overall duration of 22 months, should result in a comprehensive analysis of the existing technical, organisational and legal obstacles for interconnection of Ukraine and Moldova with the European electricity grid and provide a roadmap and a timeline for their solution. It will be important to ensure, for the success of this project, a close and active co-ordination between all the parties concerned, including the Ministry of Energy and Coal Industry and Ukrenergo.

Ukraine became a Candidate country for the Extractive Industries Transparency Initiative (ЕГП)10. Since the process has moved to the implementation phase, Ukraine now needs to undertake a number of steps to meet the deadline of 17 October 2015 when the first ΕΓΤΊ report should be published. In particular, the work plan needs to be revised in accordance with the new ΕΠΊ standards, an ΕΠΊ national secretariat should be established, training and capacity building should be undertaken for the government authorities as well as for the civil societies and private sector representatives, and the structure and the scope of the first EITI report should be defined.

On 24 October 2013, at a meeting of the General Assembly of the European Network of Transmission Systems Operators for Gas (ENTSOG) held in Brussels, it was decided to grant PJSC "Ukrtransgaz" the status of observer in the context of Ukraine's membership of the Energy Community. This is a step towards meeting the requirements of the second and third package for an internal EU gas market, on implementing EU standardised operating procedures of gas transmission system operators, which will improve the quality of the interactions between PJSC "Ukrtransgaz" and the EU gas operators.

10 http://eiti.org/

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3. ROAD MAP ON THE SECURITY OF ENERGY SUPPLIES AND THE TRANSIT OF HYDROCARBONS

The European Union, the International Financial Institutions (EBRD, ЕГВ and World Bank) and Ukraine remain fully engaged in the initiative to modernise the Ukrainian Gas Transit System (GTS), which was launched in the framework of the Joint Statement of 23 March 2009 following the Joint EU-Ukraine Conference on modernisation of the Ukrainian GTS. Progress has been made on the unbundling of "NJSC Naftogaz of Ukraine" (separation of the functions related to transportation, extraction, distribution and supply of natural gas) as well as on third party access to the gas network. Further work is urgently needed. Both the EBRD and EBB have sent their loan conditionalities to the Ministry of Energy and Coal Industry of Ukraine, which has allowed the concrete negotiations to begin towards the preparation of the Loan Agreements for the project "Reconstruction, overhaul and technical upgrade of the main gas pipeline Urengoi-Pomaru-Uzhhorod".

The Taist Fund agreement which was concluded between the European Commission (EC) and the World Bank (WB) at the end of 2012 covers two components, namely consultancy on the restructuring and market reform of "NJSC Naftogaz of Ukraine" and the establishment of a Project Implementation Unit (PIU) within "NJSC Naftogaz of Ukraine"/Ukrtansgaz.

The initial version of the Terms of Reference (ToR) for the Trust Fund was endorsed by the Ministry of Energy and Coal Industry of Ukraine on 17 August 2012. However, shortly afterwards NJSC "Naftogaz of Ukraine" launched a short term project on "The development of the NJSC "Naftogaz of Ukraine" Reform Programme". . In order to ensure the coherence between the two projects, the Ministry of Energy and Coal Industry issued Order 368 on 13 June 2013 to establish a Working Group consisting of representatives from the Ministry, NJSC "Naftogaz of Ukraine", the three International Financial Institutions (ЕЮ, EBRD and World Bank) and the EU Delegation. At the same time, the Commission and World Bank revised the initial Trust Fund ToR and this was submitted to the Ministry of Energy and Coal Industry of Ukraine on 12 June 2013 and endorsed on 11 November 2013.

It is important that all stakeholders may take account of the work carried out by other consultants in this area, to ensure the efficient use of this assistance. Availability of this information would help the Ministry of Energy and Coal Industry of Ukraine, NJSC «Naftogaz of Ukraine», the European Commission, EBRD, EIB and World Bank to coordinate and adjust the activities of the planned Trust Fund project in terms of implementation of the Ukrainian gas sector reforms programme.

On 3 May 2013, an EU-Ukraine High Level Roundtable was organised in Brussels on the initiative of the European Commissioner for Energy and Ukrainian Minister of Energy and Coal Industry. This brought together all relevant industry representatives from energy companies, private financial investors and International Financial Institutions as well as representatives from the Ukrainian Government, the EU Member States and European Commission as well as Russia and the United States. The event emphasised the real opportunities for Ukraine to increase its energy security provided that it develops an effective long-term strategy for the use of its gas transmission and storage assets involving all relevant stakeholders as well as a clear, non-discriminatory and stable legal and regulatory framework, in line with Energy Community commitments and improves the investment climate.11

As the outcome of the meeting, it was agreed that a consultative committee consisting of representatives of the European Commission, Ukrainian state authorities, the Energy Community Secretariat, the concerned EU Member States and interested companies and financial institutions would be established to provide a forum to support the continuing process

11 http://europa.eu/rapid/press-release MEMO-13-400 en.htm

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of gas sector reforms in Ukraine. It is intended that this consultative committee will meet on an ad hoc basis, jointly analyse developments on the Ukrainian gas market and, as appropriate, offer recommendations to the European Commissioner for Energy and the Ukrainian Minister for Energy and Coal Industry.

At the same time, the Ukrainian Government has signed a number of production sharing agreements (PSA) designed to reduce the country's dependence on energy imports in the longer term.

On 24 January 2013, a PSA was signed between Shell, Ukraine and Nadra Yuzivska on the Yuzivska block (7,886 square km in Kharkiv and Donetsk regions). Pursuant to this agreement, US$410 million is expected to be spent on a geological survey and exploration work, with the first results expected to be known before 2015. Confirmed reserves will give a real picture of the prospects for industrial scale production at this field. The optimistic scenario shows that output after 2020 could reach 20 billion cubic metres (bcm) annually, while the pessimistic scenario indicates an annual production of lObcm.

On 5 November 2013, Ukraine and Chevron signed a PSA for hydrocarbon extraction on the Oleske field (Lviv and Ivano-Frankivsk regions). This will allow for exploration and production of shale gas from the Oleske field, the projected reserves of which are estimated at 2.98 trillion cubic metres (tcm) of gas. Under the baseline scenario, the annual gas production on this field could be 10.8 bcm. According to the agreement, $350 million should be invested in exploration, with a total investment in gas production amounting to more than $10 billion.

On 27 November 2013, the Ukrainian government signed a PSA with a consortium including ENI and EDF, Chornomornaftogaz and Water of Ukraine LLC for the exploration and development of four shallow water gas fields in the Black Sea. ENI and EDF are expected to finance the entire exploration work and be entitled to 55% of prospective output, with the Ukrainian government to take the remaining 45%.

Another PSA with an Exxon-led group for the exploration of the Skifska field in the Black Sea is still under negotiation.

For all the PSA's, it is very important that Ukraine makes further efforts to put in place the appropriate regulatory framework. For unconventional gas production, it should be noted that in early 2014 the European Commission issued recommendations on the minimum principles for the exploration and production of hydrocarbons (such as shale gas) using high volume hydraulic fracturing12.

In addition to importing natural gas from Poland under agreements with RWE Supply & Trading GmbH (Germany) signed in November 2012 and updated in May 2013. Ukraine also started importing gas from Hungary on 28 March 2013 under an agreement between the Hungarian transmission system operator FGSZ (Foeldgazszallitasrol) and "Ukrtransgaz", with a maximum possible annualised capacity of 5.5 bcm. "Ukrtransgaz" has also discussed the possibility of arranging gas reverse flows from Romania to Ukraine with Romania's network operator, Transgaz and a memorandum of intent has been signed regarding the possible use of the gas metering stations at Tekove (Carpathian oblast) or Orlivka (Odessa oblast), both located on the Ukrainian side of the Ukrainian-Romanian border. The reverse-transmission capacity at Tekove is cited as 5 mem per day, implying 1.8 bcm if annualised.

Facilitated by the European Commission, "Ukrtransgaz" is also negotiating with the Slovak transit pipeline operator "Eustream" to initiate possible gas reverse flow from Slovakia to Ukraine.

Ukraine participated in the meeting of the EU's Gas Co-ordination Group on 24 September 2013 where it presented its plans for the development of its gas market and its gas

12 http://ec.europa.eu/environment/integratiori/energv/uncoriventional en.htm

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diversification strategy. The importance of enhancing the transparency concerning the level of natural gas in Ukraine's storage facilities was recognised and Ukraine was invited to examine the possibility of participating in Gas Storage Europe's transparency platform, namely the Aggregated Gas Storage Inventory (AGSI)13, which would help to increase market confidence.

Unfortunately, it should be noted that Boyarka Metrology Centre is still not operational and there is no clear deadline on the government side for its commissioning. The commissioning of the first "starting complex" of the Boyarka Metrology Centre is scheduled for August 2014. The acceptance of the unfinished construction of the second stage is scheduled for the end of 2014. The full acceptance of the second stage of the Centre, which includes the technical and economical evaluation (TEE), is fixed for the end of 2015.

With respect to oil stocks, Ukraine has confirmed its intention to implement the EU Directive14

within the deadline foreseen - by the end of 2022. It should be noted, however, that the transposition measures on this Directive need to be launched without delay and with due account of the timeline of 2013-2014 as discussed in the Energy Community foram. The EU remains ready to assist Ukraine with the development of the action plan regarding the implementation of the Directive.

At the same time, work is still required to ensure that the oil product quality standards in Ukraine are brought up to EU and international standards, and that the necessary quality controls with respect to oil products are carried out in line with those in the EU. In this context, the Cabinet of Ministers of Ukraine adopted the resolution № 927 dated August 1, 2013 On Approval of the Technical Regulation on the requirements to petrol, diesel fuel, ship and boiler fuels, which sets the timeline for relevant measures in the field. In particular, it foresees that the fuel of a quality lower than EURO-4 is not marketed as from 1 January 2016. In this context, Ukraine is expected to approve the necessary standards to ensure the timely implementation of the provisions of this technical regulation during 2014.

4. ROAD MAP ON THE COAL SECTOR

During 2013 the implementation of the "Master Plan for the Development of the Ukrainian Coal Industry'" elaborated in 2011 under the EU supported "Coal Sector Policy Support Programme" continued at a slower pace and was focussed mainly on the closure of lost making mines. This was due to the negative social consequences expected on local communities and also the shortage of financial resources.

The Ministry of Energy and Coal Industry of Ukraine has taken into account the recommendations of the Master Plan and continued to prepare a set of documents amending the existing privatisation law aiming at the practical implementation of structural reforms in the coal sector. Further work is expected during 2014.

As the draft updated Energy Strategy to 2030 foresees the further development of and efficiency improvements in the Ukrainian coal industry in order to reduce energy import dependency and to partly replace imported natural gas for heat generation and in industry, the Mnistry of Economy of Ukraine has asked the EU Delegation to Ukraine to further consider the previous requests of the Ministry of Energy and Coal Industry of Ukraine for EU assistance in the following fields. Joint proposal was elaborated for consideration within future EU UA technical assistance programming.

- modernization of the coal sector;

13 http .//transparency, gie.eu.com/ 14 Directive 2009/119/ EC imposing an obligation on Member States to maintain minimum stocks of crude oil

and/or petroleum products. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:265:0009:0023:EN:PDF

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- technical and legislative issues of closure of lost making mines;

- mitigation of social consequences of structural reforms;

- improvement of safety and health protection of miners;

- mitigation of negative impacts of mining on environment;

- liberalization of coal market, etc.

The draft updated Energy Strategy to 2030 also foresees the implementation of alternative coal utilisation technologies such as coal water slurry fuel and industrial and underground coal gasification.

Following the Resolution of President of Ukraine dated 23 May 2013, the Ministry of Energy and Coal Industry of Ukraine set up in June 2013 an interagency working group on substituting imported natural gas by domestic coal. The main objectives of the group are to organize work, meetings and the signature of the necessary agreements (protocols, memoranda) on the implementation of projects on natural gas substitution for domestic coal and the implementation of alternative coal utilisation technologies.

With respect to Ukraine's membership of the Extractive Industries Transparency Initiative (EITI), the coal and iron ore sectors are planned to be included in the Ukraine's second report before commencing a validation which is foreseen to be completed in 2016.

In September 2013, a TAIEX study visit on the "Restructuring the coal sector and closing of mines of Ukraine with experience of the leading EU countries" took place to LMBV mbh (the Lusatian and Central German Mining Administration Company) in Germany. The focus of the study visit was the social programmes linked to the closure of mines.

In addition to implementation of the Coal Sector Policy Support Programme outputs, two projects under the EU's Thematic Programme for Environment and sustainable management of Natural Resources including Energy (ENRTP) continued in 2013.

Firstly, the "Demonstration, dissemination and deployment of Clean Coal Technologies (CCT) and Carbon Capture and Storage (CCS) in Ukraine" project is focused on clean coal technologies development and dissemination in Ukraine as well as an inventory of large carbon dioxide emissions sources and possible sinks linked to them, in relation to the implementation of Directive 80/2001/EC. Dissemination of the project results has been carried out in the framework of two international conferences organised in October 2013, namely "Introduction of clean coal technologies in the power sector of Ukraine" and "Prospects for implementation of carbon dioxide capture and storage in the power industry of Ukraine" and further as a monograph distributed in hard copy and electronically. The project will continue to 30 June 2014.

Secondly, the project on "Low carbon technologies for industrial regions of Ukraine" has focused mainly on Carbon Capture and Storage (CCS) technologies dissemination and a potential CCS sites inventory in Ukraine. The final conference of this project was held in October 2013 with media participation, with the final report due in January 2014.

In order to implement the decisions of the 11th Ministerial Council of the Energy Community on the implementation of Directive 2001/80/EC and Directive 2010/75/EC by the Contracting Parties, the work on preparation, development and approval of the National Plan to reduce the polluting emissions from large combustion plants is currently ongoing. The submission to the Energy Community Secretariat is foreseen by 31 December 2015. The National Plan will define the goals, objectives, measures and timetables for their implementation for the gradual and steady reduction of pollutant emissions from large combustion plants, especially coal-fired power plants in Ukraine.

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5. ROAD MAP ON ENERGY EFFICIENCY AND RENEWABLE ENERGIES

In order to tackle the crucial issue of energy efficiency in the heating sector, the Cabinet of Ministers of Ukraine approved in July 2012 an Action Plan "On the Regulatory Support for the Implementation of the Energy Efficient Heat Consumption Policy and Modernisation of the Heat Supply Sector". This plan also addresses some of the provisions of the Energy Services Directive in particular those related to energy performance contracting. However, since the government reshuffle in December 2012, there appears to have been little follow-up on the implementation of this action plan by the new Cabinet of Ministers.

In line with the Ukraine's commitments in the context of the Energy Community Treaty which Ukraine acceded to in February 2011, the State Agency for Energy Efficiency (SAEE) has prepared a draft National Energy Efficiency Action Plan till 2020 (hereinafter EE NAP), stipulated by Directive 2006/32/EC of the European Parliament and EU Council of 5 April 2006. In February 2013, this draft EE NAP received the official support of the Energy Community Secretariat. Due to changes in the Government of Ukraine, the EE NAP draft was consulted several times with the Ministry of Economic Development and Trade of Ukraine and other ministries concerned during 2013.

Furthermore, the SAEE has elaborated a draft law on the efficient use of energy resources. This law should replace the 1994 Law on Energy Conservation that is unanimously recognised as obsolete. It was finally submitted to Parliament for approval in August 2013 and it is still awaiting its first reading. This law should make a considerable positive change in energy efficiency legislation, in particular as regards energy audit and energy management, and was consulted with the Energy Community secretariat.

While a draft law "on energy efficiency of buildings" passed its first reading in 2012, it was rejected in the second reading in October 2013. As a result, the Ministry of Regional Development, Construction and Housing and Communal Services is revising the draft law, as well as preparing the related secondary legislation. Some related regulations, for instance the method of calculation of energy performance of buildings, have already been adopted. It is important that this law reflect the main provisions of the EU's Energy Performance in Buildings Directive15 as required by the Energy Community Treaty.

The current statistics on energy efficiency indicators generally do not provide evidence of a significant positive evolution, with the exception of those related to large industrial plants that face international competition.

The International Energy Agency's (ŒA) in-depth review of Ukraine's energy sector16, that was co-financed by the EU and published in October 2012, put a special emphasis on the need to vigorously address the energy efficiency challenge that Ukraine is facing. The recommendations were generally well accepted by the Ukrainian authorities and the Minister for Energy and Coal Industry acknowledged the need to incorporate the conclusions of the ША review in the revised Energy Strategy to 2030. For a successful implementation of the main provisions of the Strategy approved by the Government of Ukraine on 24 July 2013, the programme documents as foreseen in the Strategy itself will be prepared and adopted.

At the end of 2012, the SAEE initiated an in-depth review of energy efficiency policy and programmes in Ukraine by the Energy Charter Secretariat experts in 2013. The recommendations point to the need to accelerate reforms in this sector to improve the prospects for investment and to take steps to ensure that there is the appropriately structured institutional capacity to effectively formulate, monitor, analyse and review

15 Directive 2010/31/EU of 19 May 2010 on the energy performance of buildings. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ :L:2010:153:0013:0035 :EN :PDF

16 http://www.iea.org/publications/freepublications/publication/Ukraine2012 free.pdf

energy efficiency policies and their implementation and enforcement. They re-confirm the need for cost-reflective energy pricing while ensuring energy affordability, to ensure multi-annual state budget planning and improve municipal budgeting.In October 2012, Ukraine supported the decision of the Energy Community Ministerial Council on the implementation of the EU's current renewable energy directive17 by the Contracting Parties. Ukraine's target for the share of renewable energy in final energy consumption was set at 11% by 2020, as compared to a share of 5.5% in the base year of 2009. While the new draft Energy Strategy foresees a very significant increase in the use of renewable sources, further efforts will be required to meet this ambitious target by 2020.

In addition, in accordance with this decision and Articles 4 and 27 of the EU's renewables directive, Ukraine has elaborated a draft National Renewable Energy Action Plan. While the deadline of June 2013 for the approval of the National Renewable Energy Action Plan was not met, the plan was submitted for consultation to the Energy Community secretariat in September 2013. In parallel to the discussions on this action plan with the Energy Community secretariat, the SAEE has also launched the consultation process with the Ministry of Economic Development and Trade of Ukraine in order to speed up its approval.

In 2012, the Parliament of Ukraine adopted the law 4970-17 "On introduction of changes to certain laws of Ukraine regarding the production and use of motor fuels containing bio-components", amending the law 1391 "On alternative fuels", with regard to gradual increase of the statutory share of production and use of biofuel and motor fuel mix. The law foresees that the recommended rate of bioethanol in motor fuels manufactured and/or sold in Ukraine shall be not less than 5 % (by volume) in 2013, the mandatory rate not less than 5 % (by volume) in 2014-2015, and to be at least 7% (by volume) in 2016.

With a view to addressing problematic issues as regards the use of bioethanol blends in gasoline for a part of the existing vehicle fleet, the Ministry of Energy and Coal Industry of Ukraine prepared a new draft law «On changes to the article 2 of the Law "On Alternative Fuels". It foresees that a recommended rate of bioethanol and/or bioethanol-based components in gasoline sold at the customs territory of Ukraine, shall be by 1 July 2014 at least 5 % (by volume) in bioethanol equivalent, as of 1 July 2014 - mandatory rate shall be not less than 3 and not exceeding 5 % (by volume), and as of 2016 - mandatory rate shall be not less than 5 and not exceeding 10 % (by volume).

With a view to fulfilling Ukraine's Energy Community commitments, Ukraine is in the process of introducing of a system of energy labelling of energy-related products designed to be in compliance with the updated EU legislation.

In the context of implementation of the Energy Community commitments, the Cabinet of Ministers of Ukraine with its resolution of 07 August 2013 Reference No. 702 adopted technical regulations on energy labelling prepared by the State Agency for Energy Efficiency of Ukraine, in particular:

- Technical Regulation on energy labelling of energy-related products;

- Technical Regulation on energy labelling of household electric refrigerators;

- Technical Regulation on energy labelling of household washing machines.

The mentioned technical regulations on energy labelling are designed to comply with updated European legislation, in particular:

17 Directive 2009/28/EC on the promotion of the use of energy from renewable sources. http://eur-lex.europa.eu/Lex.UriServ/LexUriServ.do?uri=Oi:L:2009:140:0016:0062:en:PDF

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- Directive 2010/30/EU of the European Parliament and of the Council of 19 May 2010 on the indication by labelling and standard product information of the consumption of energy and other resources by energy-related products.

- Commission Delegated Regulation (EU) No 1060/2010 of 28 September 2010 supplementing Directive 2010/30/EU of the European Parliament and of the Council with regard to energy labelling of household refrigerating appliances.

- Commission Delegated Regulation (EU) No 1061/2010 of 28 September 2010 supplementing Directive 2010/30/EU of the European Parliament and of the Council with regard to energy labelling of household washing machines.

The SAEE activities in this area takes account of national interests in issues such as enhanceing the energy efficiency of Ukrainian industry through the use of energy efficient equipment and with due consideration to the key interests from the point of view of Ukrainian manufacturers in the context of establishment of the EU-Ukraine free trade area.

It should be noted that the consequences conditioned by the approximation of Ukrainian legislation on energy labelling to the norms of the one of the EU are:

- Promotion of the trade exchange between the EU and Ukraine through establishment of a harmonized legal grounds for activities of economic operators;

- Enhanced competitiveness of Ukrainian enterprises;

- Enhance competitive environment as key economic factor;

- Enhanced products quality requirements and standards;

- Higher consumer rights protection level;

- Ensured fulfilment of Ukraine's international commitments.

6. COMMISSION SUPPORT

a) Budget support.

Under the ENPI Ukraine Annual Action Programme 2008, an energy sector support programme worth €70 million (€63 million budget support and €7 million complementary support) was established to support the Government reforms addressing energy efficiency and the use of renewable energy sources. The financing agreement for this programme was signed in November 2009 and the fixed tranche of € 31 million was disbursed in September 2011. The payment of the first variable tranche was requested in September 2011 and was put on hold as well as the payment of the second variable tranche, which was requested in 28 February 2013. Since during 2013 progress was observed in the field of public finance management, the European Commission authorised on 11 November 2013 the disbursement of €10 million and €5.6 million respectively for the two tranches (out of €16 million maximum each). While the progress made on sector policy and strategy implementation in 2013 was generally considered adequate.

Under the ENPI Ukraine Annual Action Programme 2012, on 20 December 2013 the EU and the government of Ukraine jointly developed and signed the Financing Agreement for a €45 million budget support operation on "Continued support for the implementation of Ukraine's energy strategy". This additional funding will continue EU support for Ukraine's reforms in the sector and facilitate the alignment with EU norms and commitments taken by Ukraine on joining the Energy Community. The programme establishes three variable tranches to be disbursed upon achievement of a list of perfonnance indicators in 2014, 2015 and 2016. The specific objectives of the programme are:

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(i) reduction of the environmental pollution related to the electricity sector and in particular progress towards the implementation of the EU's Large Combustion Plants Directive18;

(ii) improvement of oil products quality and introduction of a system for quality checks with a view of adoption of EURO-4 and EURO-5 standards; and

(iii) improvement of energy security through set up of the system of oil and oil products stocks.

In addition to the list of performance indicators and general conditions, the Financing Agreement for this budget support operation also covers an extensive list of specific conditions for the disbursement of each tranche. The disbursement of the first variable tranche, for example, is conditional upon the adoption and official publication of the revised Energy Strategy for Ukraine until 2030 as well as the adoption of the Action plan for the implementation of the Strategy.

b) Technical assistance.

In 2013 there were two projects ongoing with the State Agency for Energy Efficiency (SAEE), namely a twinning project which was focused on the implementation of the EU acquis in the sphere of Energy Efficiency, which was completed at the end of 2013 with fairly good results, and a technical assistance project designed at building the capacity of the staff of the SAEE which is continuing into 2014.

On 10 December 2013, the final conference summarising the results of the Twinning technical assistance projects of the European Union « Improvement of the legal framework in the field of energy efficiency and its convergence with the EU legislation" took place. The event was attended by the representatives of the embassies of France and Germany in Ukraine, the EU Delegation to Ukraine, and Ukrainian central executives' authorities. One of the major achievements of the two years of work was considered to be the approval of three regulations on energy labelling that correspond to the updated European legislation (Decree of the Cabinet of Ministers of Ukraine from 07 August 2013 № 702).

The EBRD-managed E5P19 Fund, a facility based on a blending mechanism targeting energy efficiency and environmental projects in Ukrainian municipalities, has proven to be able to develop a significant number of projects in the sector, reflecting the genuine interest of the local authorities to invest in energy efficiency projects. By December 2013, 9 projects were approved for the total investment of over EUR 160 million, of which E5P grants account for approximately 20%.

Ukraine also continued receiving assistance through regional technical cooperation for energy, the INOGATE programme, which provides technical assistance to the eleven countries of the Baku Initiative. In 2013, two projects of the INOGATE Programme were supporting Ukraine, namely the INOGATE Technical Secretariat (ITS) and Energy Efficiency in Buildings (ESIB) project. The Technical Secretariat is located in Kiev, with offices in Tbilisi and Tashkent. In 2013 Ukraine continued participating in the INOGATE Technical Secretariat regional technical assistance conferences, trainings and workshops. Registration of the project in Ukraine, which is a condition for having Ukraine specific activities to start, was delayed, but by the end of the year the INOGATE Technical Secretariat was registered in Ukraine and discussions on Memorandum of Intent on the implementation of European Union assistance to Ukraine within the INOGATE Programme were close to finalization. The INOGATE

1X Directive 2001/80/EC on the limitation of emissions of certain pollutants into the air from large combustion plants. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?iiri=OJ:L:2001:309:0001:0001 :EN:PDF

19 The Eastern European Energy Efficiency and Environment Partnership was launched within the framework of the Eastern Partnership at a conference in Stockholm on 26th November 2009

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Technical Secretariat will start providing demand driven technical assistance as requested by Ukrainian beneficiaries and defined in the protocols.

Ukraine is also an active participant in the Covenant of Mayors20 launched by the European Commission and which involves local and regional authorities voluntarily committing to increasing energy efficiency and using renewable energy sources in their territories. By their commitment, Covenant signatories aim to meet and exceed the European Union's 20% C02 reduction objective by 2020. In 2011, the Covenant of Mayors was extended to the Eastern Partnership countries and Central Asia. The Covenant now has offices in Brussels, Lviv in Ukraine and Tbilisi in Georgia. To date, 45 cities in Ukraine have signed up to the Covenant of Mayors, including 16 during 2013. Ukrainian signatories include large big cities such as Kyiv and Lviv, but also a number of the smaller cities.

Done in Brussels on 19 March 2014 in four originals, two in the English and two in the Ukrainian languages.

FOR THE EUROPEAN UNION FOR UKRAINE

YuriyPRODAN Minister of Energy and Coal Industry

20 http://www.covenantofmavors.eu/about/covenant-Qf-mavors en.html.

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