Initiative S2I

Energy efficient Ukraine

Project Goal

The overarching goal of the project is the gradual reorientation of massive subsidies in the communal gas and heating areas in Ukraine towards the promotion of investment in energy efficiency in building stock. This way it should be possible to reduce energy consumption and household costs sustainably.

This goal should be achievable through the “Subsidies to Investments” program (S2I), which is being developed with the support of foreign donors.

Berlin Economics supports development and implementation of the reform initiative, and is responsible for technical support.

Background

Compared to the economies of other countries, the Ukrainian economy is characterized by a very high energy intensity. Gas imports in particular contributed to high current account deficits in the past, which negatively affect the country’s macroeconomic stability. The federal budget is also massively burdened by subsidies it provides to certain consumer groups.

To reform this longstanding subsidy system, the Ukrainian government developed an extensive reform agenda. In cooperation with the International Monetary Fund (IMF), this reform plan is one of the country’s highest priorities. The reform agenda entails the gradual increase of energy prices to a cost-covering level, complemented by direct transfers to households that cannot afford the new price levels.

At the same time, energy efficiency in housing units has to be improved to reduce energy consumption, relieving both private energy bills and the burden on the federal budget.

Berlin Economics’ Contribution

Taskforce mit Hroysman

Work meeting with government representatives, 2014

 – Supporting management of reform processes

The initiative was developed and expanded in working groups with stakeholders. Through regular meetings with high-level representatives of the government, the project team is also in constant contact with relevant political actors. Relevant knowledge was widely disseminated, in particular through a working group led by the vice prime minister.

In Germany, our clients are regularly informed about the project’s progress and the reform initiative, and information material is collected and distributed.

 – Concrete conceptual support

Assessment of reform agenda

The broadly designed reform agenda was evaluated by Berlin Economics in terms of its economic, financial, and ecological consequences for the Ukrainian state and the economy. Current economic developments and reform obligations with the IMF were considered in this evaluation.

… for different scenarios

Going one step further, Berlin Economics uses finance and economic models to calculate the:

  • Total investments
  • Energy savings
  • Energy cost reductions
  • Savings through social transfers
  • Trade balance deficit

of the program under different scenarios. First, Berlin Economics conducted a cost-benefit analysis of the energy efficiency measures. Based on that, the most effective measures and investment plans were identified.

This analysis was then used to make political decisions concerning energy reforms, to inform the public on energy policy questions, and to improve political interest representation.

Identification of Incentive Structures

A key task of our analytical work was the identification of financial structures that would create incentives for subsidy receivers to invest in  energy efficiency. To do that, we first created a medium-term prognosis of energy-related social transfer costs, allowing us to determine what portion of the energy costs the subsidies made up. Then we could determine the amount of potential cost savings that could be achieved through higher energy efficiency.

The challenge of this task was to determine an amount of financial support for households that would result in energy savings and readiness to invest, while saving money on social transfers – and therefore achieving the desired results of the S2I program.

Evaluation and Consultation

The consultation team provided specific recommendations for changes to the existing system of subsidies to incentivize subsidy receivers to invest in energy saving measures.

Additionally, the team advises on questions on the institutional design of the S2I program, especially on the planned domestic financing. This includes the question of achieving sustainable financing through various domestic and foreign public donors, as well as possible private donors.

For Berlin Economics, future project work will focus on the design and institutional framework conditions of the initiative. The goal is a common concept which is supported by both donors and the cabinet of ministers of the Ukrainian government.

Partners

  • Minister of Regional Development, Construction and Housing and Communal Services
  • Ministry of Finance of Ukraine
  • Ministry of Social Policy of Ukraine
  • Federal Agency on Energy Efficiency and Energy Saving (SAEE)
  • EEuropean Delegation to Ukraine
  • International financial institutions like the EBRD and IFC