Green Energy Transition in Ukraine: Communal Level

Decen­tral­izing Ukrainian energy supply

The adoption by the Verkhovna Rada of the Law “On Amend­ments to Certain Laws of Ukraine on the Restoration and Green Trans­for­mation of the Energy System” No. 3220 of 30.06.2023 was a welcome and long-awaited step towards the adaptation of Ukrainian legis­lation to the EU Fourth Energy Package. The law holds many innova­tions for renewable energy sources, which have signif­i­cantly expanded the scope of involvement of consumers wishing to install power gener­ating facil­ities (also known as active consumers or prosumers). Municipal owned entities (MOEs) can become prosumers too, which allows for more active involvement of commu­nities in the energy sector.

Currently, commu­nities do not use the active consumer model, and each individual MOE purchases its entire electricity volume on the market through market mecha­nisms and under the restric­tions estab­lished by public procurement legislation.

We discussed the benefits of the active consumer model, appli­cation options and regional challenges. Andriy Gerus (Chairman, Verkhovna Rada Committee on Energy, Housing and Utilities), Oleksandr Vizir (head, NGO Associ­ation on energy efficiency and energy saving, author of “Small Distributed Gener­ation. A Window of Oppor­tunity for Ukraine: Focus on Commu­nities”), Rouven Stubbe (Consultant, Energy and Climate Policy team, Berlin Economics), and Andriy Martyniuk (Executive Director, Ukrainian NGO Ecoclub Rivne joined as speakers in the discussion moderated by Daria Malling (LibMod).

Municipal Owned enter­prises as Active Consumers

We discussed how the new law can be imple­mented in Ukrainian commu­nities and what role it plays in promoting the green energy transition. The creation of prosumers by commu­nities can positively effect commu­nities in three ways:

• security (strength­ening the system’s resilience in the event of a power outage);
• economy (reduction of electricity costs for community entities);
• investment (the possi­bility of attracting investment in relevant community programmes).

Option 1 to create active consumers is to install power gener­ation facil­ities at the expense of the community, or by using donor funds. Such MOEs can install renewable gener­ation units that are directly connected to their internal power grids and consume most of the electricity produced at the point of production (directly by the facility on the roof of which the gener­ating unit is located) or close to it, thus creating a classic distributed generation.

This will reduce the cost of purchasing electricity and makes it possible to create energy islands in the future, making the community’s energy system more resilient to security risks.

Option 2 is to compile a register of locations where the investor has the right to install power gener­ation units and connect them to the MOE’s internal networks, which will allow such MOEs to obtain the status of active consumer.

The community may hold open tenders (e.g. on the Prozorro platform) for investors, offering to build a regional power gener­ation facility, poten­tially guaran­teeing investors that the MOE will buy the electricity produced at a certain price.

Option 3, the most efficient one, is a combi­nation of the two. To further develop this logic, it is important that the surplus electricity produced but not consumed by MOEs is sold to other MOEs in the community. For this purpose, several signif­icant changes should be made to the model of electricity procurement by munic­i­pal­ities as suggested by Oleksandr Vizir.

Firstly, it is necessary to reduce the population threshold to establish a central procurement organi­zation (CPO), or to use the existing CPOs. Currently, only hromadas (Ukrainian for “commu­nities”) with a population of over 1 million residents can do this, and therefore most hromadas cannot use this framework. Another possi­bility would be for associ­a­tions of munic­i­pal­ities to have one central purchasing organisation.

Secondly, commu­nities must be allowed to create their own balancing group and join another, so that they can maximise the economic effect of these groups and use the available electricity resource to cover their own needs. It should also be possible for community entities to quickly move from one balancing group to another — in fact, the terri­torial hromada’s party that is respon­sible for the balance will be moving. Balancing groups can be formed within but also across communities.

Benefits and practical aspects of the energy transition at the communal level

The practical benefits that can be achieved for commu­nities by using the active consumer model are diverse:

• Electricity can become 5–10% cheaper, if 20–30% of annual consumption is covered by the installed power units.
• Municipal owned entities can acquire electricity from one supplier though one entity. They can achieve signif­icant economic benefits as prices will be lower for large volumes of electricity.
• Less bureau­cracy and people involved in the proce­dures and better procurement specialists.
• Overcoming the bottleneck of financing RES-projects. Creation of investment possi­bil­ities for business in communities.

According to Andriy Martyniuk, who works on promoting renewable energy and imple­menting RES in commu­nities, the main motivation of municipal decision makers is the cost efficiency of using renew­ables and an alter­native energy supply in case of a black out. Since the beginning of the full-scale invasion, local author­ities signif­i­cantly changed the attitude towards renew­ables as they realised that they can be a back-up power source for critical infra­structure. At the same time, the payback period for the on-grid solar power plants in hospitals and water utilities is only around 3–5 years.

While working with munic­i­pal­ities some typical challenges should be considered:

• Lack of capac­ities and the need for training the staff respon­sible for the mainte­nance of power units and energy management.
• The condition of roofs, buildings, electrical wiring or water utility infra­structure can be a major limiting factor.
• It is unreal­istic for MOEs to supply electricity to the grid under current regulations.
• Energy use schedules of hospitals, schools, kinder­gartens, etc. do not coincide with the gener­ation schedules of solar power plants and installing storage capac­ities is not econom­i­cally advan­ta­geous. The main motivation for installing batteries is providing security of supply and stability of perfor­mance on cloudy days.

Even though renewable energy started playing an important role in securing power supply since the energy system is under Russian attack, there is still a need for raising awareness and helping commu­nities under­stand the benefits of the green energy transition. High-quality calcu­la­tions and clear under­standing of the new regulatory framework might be helpful. It is also crucial that munic­i­pal­ities actively partic­ipate in obtaining financing outside or inside their community and develop a sense of ownership.

The challenges listed above and the sugges­tions for the regulatory framework are applicable for the municipal owned enter­prises, while the situation in the residential sector is different. The classic feed-in-tariff (“green tariff”) remains much more attractive for residential consumers than the net billing scheme. And with very low prices for electricity there are currently no incen­tives for self-consumption for residential consumers. The system is not functioning efficiently as it incen­tivizes consumption in the peak hours thus increasing balancing costs and the system’s peak load. Rouven Stubbe from Berlin Economics suggested that a solution would be to phase out residential subsidies gradually while supporting vulnerable house­holds (using independent support schemes, which offer a budget neutral way or budget positive way and are far fairer).