10. SPARC RFP 72012124R00004 Amendment 7 Attachement J.3 Part 2 Dec 28 FINAL.pdf

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Offers must acknowledge receipt of this amendment prior to the hour and date specified in the solicitation or as amended, by one of the following methods:

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IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.

11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS

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07 See Block 16 C.

USAID/Ukraine USAID/Kyiv Regional Contract Office Dept. of State 5850 Kyiv Place Washington, D.C. 20521-5850 one

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9A. AMENDMENT OF SOLICITATION NO.

72012124R00004 TO ALL OFFERORS x

X

October 30, 2023

The purpose of this Amendment No. 07 is to:

Add Attachment J.3 Part 2 - ESP Redacted Reports. All other terms of the RFP remain unchanged.

Thank you for your interest in USAID/Ukraine SPARC RFP.

Carter Saunders Contracting Officer

BY 12/28/2023

X

/s/

REQ-121-24-0000XX

720121

X

CONTENTS

ACRONYMS 1

1. EXECUTIVE SUMMARY 1

2. THE PROGRAM 3

2.1. CURRENT STATE OF AFFAIRS 4

2.2. THE WAY FORWARD 4

3. SUMMARY OF ACCOMPLISHMENTS AND RESULTS 6

4. KEY ACHIEVEMENTS 6

4.1. REPAIR, RECOVERY, AND RECONSTRUCTION OF THE ENERGY SECTOR

RESULTING FROM RUSSIA’S INVASION 7

4.1.1. EMERGENCY SUPPORT FOR THE SYSTEM DUE TO THE WAR 7

4.2. SUPPORT THE ESTABLISHMENT OF COMPETITIVE ENERGY MARKETS 10

4.2.1. ELECTRICITY AND RENEWABLE ENERGY 10

4.2.2. GAS 12

4.2.3. HEATING 14

4.2.4. REGULATION, LEGISLATION, AND REMIT 16

4.2.5. MARKETS: STANDARDIZED TRADING AND CLEARING 17

4.3. SUPPORT EUROPEAN INTEGRATION 17

4.3.1. ELECTRICITY AND RENEWABLE ENERGY 17

4.3.2. GAS 18

4.3.3. REGULATION AND LEGISLATION 18

4.4. IMPROVE SECTOR STRATEGIES AND THEIR IMPLEMENTATION 19

4.4.1. ENERGY STRATEGY 19

4.4.2. REGULATORY STRATEGY 19

4.5. BUILD CAPACITY OF CIVIL SOCIETY AND EDUCATIONAL INSTITUTIONS 20

4.6. GRANTS 20

5. ADMINISTRATION AND PROJECT MANAGEMENT 20

5.1. CONTRACTUAL 20

5.2. STAFFING 20

5.3. MONITORING, EVALUATION AND LEARNING (MEL) PERFORMANCE

INDICATORS. GEOGRAPHIC INFORMATION 21

5.4. BUDGET EXECUTION 21

5.5. ENVIRONMENTAL MANAGEMENT 21

5.6. GENDER EQUALITY AND SOCIAL INCLUSION 21

ANNEXES 23

ENERGYSECURITYUA.ORG USAID/UKRAINE ESP FY 2023 ANNUAL REPORT | 2

ESP concluded contracts for 18 autotransformers with anticipated delivery in October 2023 (two units), February 2024 (six units), April 2024 (seven units), and May 2024 (three units). These are intended to help restore critical substations for electricity transmission to households and businesses.

Gas System Resilience and Recovery. ESP supplied 6,007 tons of methanol to Naftogaz, ensuring continuous domestic natural gas production in colder temperatures. This initiative also opened new supply routes and organized a market-access event to enable Naftogaz and other users of methanol to procure it directly from suppliers in Europe. To mitigate extensive blackouts and maintain operations, ESP promptly sourced 64 generators for several state-owned gas infrastructure firms. For the Gas Transmission System Operator of Ukraine (GTSOU), ESP provided new backup server infrastructure ($1 million) and a mobile data center ($420,000) to support backup dispatch and other functions during missile threats, preserving uninterrupted gas supply. Furthermore, ESP contracted for ten emergency shelters for GTSOU, safeguarding 400 field personnel at remote or frontline sites lacking protection.

ESP initiated and advanced procurements to bolster the gas sector’s resilience. This includes delivery of (anticipated to occur during winter 2023–2024) of pipes and related equipment as well as emergency vehicles with backhoe loaders (about $1.1 million and $1.2 million) for DSO and DSO restoring gas supply to over 20,000 households. ESP is procuring 1,800 m of pipes for GTSOU ($2.2 million) to restore gas transmission in vulnerable regions (expected in December 2023). From January to March 2024, ESP is set to obtain about 3,000 m of pipes and fittings ($9 million) for the crucial restoration of the compressor station, a vital asset for domestic and gas transit security.

Continued Provision of Heat Supply and Fast Resolution of Emergencies in District Heating (DH) Systems. ESP supported district heating companies (DHCs) for emergency heating system operations by initiating procurement and delivery of 88 cogeneration units to 32 locations in Ukraine. These cogeneration units will enable to keep heat supply systems running when there is no central grid power supply in a given location. ESP continued to supply equipment, materials and process chemicals to DHCs to enable repairs and the quick resumption of heat supply after emergencies. The project supplied stock reserves of power sources (generators), heat sources (mobile boiler houses, inflatable tents), emergency vehicles, excavators, spare equipment (pipes, valves, pumps), and process chemicals (salt). ESP procurements enabled DHCs to replace damaged network segments and connect consumers back to the DH system. ESP also supplied pre-insulated pipes and fittings for DHCs in and stationary boiler houses for two smaller cities in the region.

Contribution to European Network of Transmission System Operators for Electricity (ENTSO-E) Integration. ESP supported Ukrenergo to facilitate full synchronization and increase cross-border capacity allocation (and therefore, import and export capacity). As a result of ESP’s efforts and the commissioning of the transmission line between Ukraine and

ENTSO-E has expanded the available cross-border capacity for importing electricity to Ukraine to 1,200 MW. The steady increase from the June 2022 level of 100 MW confirms the impact of ESP’s ongoing support in this area, especially considering the lack of power in the system during peak load periods, which can now be mitigated through imports from ENTSO-E.

Support in transposing the European Union (EU) Regulation for Wholesale Energy Market Integrity and Transparency (REMIT). Law 3141-IX implementing REMIT entered into force on July 1, 2023. This marked the beginning of work on its implementation—specifically, on

ENERGYSECURITYUA.ORG USAID/UKRAINE ESP FY 2023 ANNUAL REPORT | 3

developing the secondary legislation needed to implement it. The most urgent regulations were adopted by the National Energy and Utilities Regulatory Commission (NEURC) by the end of September 2023. ESP successfully supported their development and adoption.

Wholesale Electricity Market Development and Integration with Europe. ESP completed the project on joint cross-border capacity allocation rules and delivered to NEURC and Ukrenergo the project report and recommendations for the draft rules. NEURC approved the joint capacity allocation rules for daily auctions in the Ukraine- Ukraine- and Ukraine-directions, which is critically important for the upcoming winter. To move market integration with Europe forward, Ukraine must transpose the following EU legislative acts: (i) the regulation on capacity allocation and congestion management (CACM) and (ii) the electricity balancing guideline (EBGL). ESP developed gap assessments for the Ministry of Energy (MoE) and NEURC with recommendations for CACM and EBGL implementation. In addition, ESP conducted training to give Ukrainian energy sector stakeholders the technical knowledge and tools to implement the market coupling.

2. THE PROGRAM

Tetra Tech ES, Inc. (Tetra Tech) is pleased to present the fifth annual progress report for the Energy Security Project (ESP), USAID Contract no. 72012118C00003. ESP began as an $85 million, five-year activity (2018–2023). ESP’s original focus was to helping Ukraine reduce dependence on Kremlin-controlled energy sources by opening markets to private sector investment, tackling corruption, and supporting integration with European energy markets and institutions. With the Russian invasion of February 2022 and the immense destruction it has caused, ESP’s scope expanded to include delivery of equipment and materials to help Ukraine restore infrastructure damaged by Russia’s aggression.

With this shift, the project grew to a $500 million, seven-year activity (2018–2025).

Energy security remains crucial to Ukraine’s independence and sovereignty, but this now extends beyond the project’s original focus on supply diversification to encompass keeping Ukraine’s energy infrastructure working along the way. ESP is procuring the necessary equipment and supplies and providing analytical support to speed up integration with Europe in both gas and electricity.

ESP works with the Ukrainian government, the Verkhovna Rada (VR), the president’s administration, energy enterprises, the private sector, and civil society to improve Ukraine’s energy security and transform Ukraine’s energy sector into a modern, market-oriented, EU-integrated, engine of growth.

The project strengthens Ukraine’s energy security through parallel investments and interventions in the electricity, gas, DH, and renewable energy sectors.

To enhance Ukraine’s energy security, ESP focuses on and is significantly contributing to the following goals: sustaining Ukraine’s gas, electricity, and heating sectors during Russia’s invasion; helping the government provide affordable, reliable, resilient, and secure energy to its citizens; assisting the government to integrate Ukraine into European energy markets by helping key government agencies and the energy regulator meet EU energy acquis requirements, including the Third and Fourth Energy Packages; improving energy security through competitive market reforms by unbundling transmission and distribution from generation and supply in both the natural gas and electricity sectors; strengthening regulatory processes and procedures to ensure transparency, sound decision-making, and enforcement; introducing greater market integrity and transparency, thereby improving competition in the energy commodity markets to facilitate reliable supply and market-based demand and pricing; supporting the implementation of competitive energy markets;

ENERGYSECURITYUA.ORG USAID/UKRAINE ESP FY 2023 ANNUAL REPORT | 4

and increasing energy supply in Ukraine by facilitating private sector-led energy investments in, and increasing production of, renewable energy, as warranted.

2.1. CURRENT STATE OF AFFAIRS

Russia’s invasion continues to create enormous challenges for Ukraine’s energy sector. Ukraine successfully navigated its first winter since Russia’s invasion, due in part to the warmer-than-expected winter, ESP emergency procurements, and the accelerated synchronization of the power system with the European synchronized grid (ENTSO-E) in March 2022. By the end of September 2022, modest export activity had materialized, with ENTSO-E limiting export volumes due to ostensible technical constraints in countries neighboring Ukraine. These constraints were gradually being addressed by the end of September, but Russia’s direct targeting of Ukraine’s energy infrastructure had severely constrained its available generation capacity. Ukraine can now import power from ENTSO-E countries to partially offset its capacity gap.

Despite the impressive accomplishments in the energy sector, challenges remain. Ukraine’s gas and power sector operators are enduring extreme financial hardship, with reduced consumption and revenue generation materializing immediately following Russia’s invasion. The government and regulator have issued moratoria on changes in tariffs and subsidy mechanisms until after the end of the war and ruled out any changes to existing public service obligations (PSOs), which imposed a sizeable financial burden on national gas and electricity operators even before the war and its impacts. Many of the country’s trained and experienced personnel are either in the army or have left the country, making operations more difficult for both the utilities and ESP.

The Government of Ukraine has strengthened its resolve to rapidly integrate with Europe and is making progress on addressing key legislative requirements.

2.2. THE WAY FORWARD

In response to the invasion, ESP’s scope has expanded to include substantial support for the procurement and delivery of urgently needed equipment and materials to repair damage caused by Russia’s deliberate targeting of Ukraine’s energy infrastructure. This will remain a core activity for ESP through the remainder of the project, complementing (not supplanting) ESP’s engagement on Ukraine’s ambitious reform agenda. ESP is in constant contact with sector operators in Ukraine, the MoE, and international partners to identify needs and coordinate the international community’s response.

Russia’s continued unwarranted aggression has not weakened Ukraine’s resolve to lean toward the West; Ukraine is now resolute in becoming fully integrated with Europe. ESP will continue providing technical assistance to support the reform of Ukraine’s energy market and the integration of its energy markets with Europe. In FY 2023, part of this effort included assistance to the energy regulator and Ukrenergo to implement joint cross-border capacity allocation rules for interconnectors and to streamline electricity trade with Europe. In addition, ESP is implementing follow-up technical assistance for a roadmap and regulatory framework development. This includes capacity-building efforts after the development and adoption of legislation for day-ahead and intraday market coupling and the integration of balancing and ancillary services markets with Europe. Going forward, the ESP team will also implement a project to improve the design of the Ukrainian market in line with European trends and to improve a risk assessment and financial guarantee mechanism for the balancing power market. These strategic activities aim for the full integration of the Ukrainian

ENERGYSECURITYUA.ORG USAID/UKRAINE ESP FY 2023 ANNUAL REPORT | 5

electricity market with Europe and will ensure security of supply and sustainable development in the future.

Despite the hardships that Ukraine is experiencing, ESP is confident that the postwar environment will be exceptionally conducive to implementing an accelerated, ambitious reform agenda. Ukraine’s achievement of EU accession candidate status in June 2022 provided much needed impetus for this effort. ESP’s original overarching objectives are as appropriate and relevant as they were when the project was initially designed (if not more so). ESP will continue supporting Ukraine to realize its key reform objectives in close collaboration with key Ukrainian and international stakeholders, including relevant Ukrainian ministries; the VR; NEURC; sector operating entities and other market participants in gas, electricity, and DH; the market and system operators for electricity; the European Commission’s Support Group for Ukraine (SGUA); the Energy Community Secretariat;

bilateral and multilateral development finance institutions; and civil society, mass media, and institutions of higher education.

ESP advises pursuing a balanced approach to postwar plans for the sector. Among other priorities, it is critical that Ukraine’s regulatory regime comply fully not only with the 2014 Association Agreement but also with the EU acquis. If this objective is lost in the immediate reconstruction needs, Ukraine’s system risks returning to its previous inefficient state after reconstruction is complete, wasting the resources that have already been invested in reform.

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3. SUMMARY OF ACCOMPLISHMENTS AND RESULTS

4. KEY ACHIEVEMENTS

This section provides a high-level summary of key achievements. Details as well as descriptions of lower-profile achievements are included as Annex A.

ENERGYSECURITYUA.ORG USAID/UKRAINE ESP FY 2023 ANNUAL REPORT | 10

all over Ukraine, including 30 district heating entities and two universities. The units vary from 50 kilowatts electric (kWe) to 1500 kWe, contributing to a total capacity of approximately 54.7 MWe when all the units are installed. The cogeneration units delivered by USAID ESP are gas piston (reciprocating) engines, whose primary purpose is to serve as a reliable backup source of electricity for boiler houses operated by District Heating Companies (DHCs). Power interruptions, both scheduled and emergency-based, prevent normal operation of the heating system. Cogeneration units will secure uninterrupted heat supply to local communities during power outages:

approximately 1 million people, and 960 social facilities, such as schools and hospitals, are served by the boiler houses intended to be supplemented with cogeneration units.

4.2. SUPPORT THE ESTABLISHMENT OF COMPETITIVE ENERGY MARKETS

ESP supported competitive energy markets through capacity-building and technical assistance activities to enhance market monitoring and market conditions for participants, improve the legislative framework, and build confidence in market operations. These interventions are described below:

4.2.1. ELECTRICITY AND RENEWABLE ENERGY

Capacity Remuneration Mechanism. ESP presented to NEURC an overview of EU capacity remuneration mechanism practices, covering issues such as renewable energy producers’ participation, competitive procedures for strategic reserves, demand response, legal aspects of guaranteeing capacity commissioning, approaches to a marginal price based on the net cost of new entry calculation, etc.

Resource Adequacy Assessment. ESP launched this activity to give the government global best practices and guidance to meet the energy sector’s immediate and long-term strategic development needs. In the short term, the assessment will determine the urgent power grid needs for the 2023– 2024 and 2024–2025 heating seasons. In the long term, it will include the development of a “Build Back Better Action Plan” for the Ukrainian Power System that aligns with European rules and processes as well as Ukraine’s Energy Strategy and its decarbonization targets.

Network Development Plans for DSOs. ESP started work on the distribution network development plan for the state-owned DSO. This work will involve creating a scheme for the development of the 20(35) kV and above distribution network for a ten-year horizon. The plan will employ both near-term and long-term grid assessments and enable effective decision-making related to distribution grid needs and expenditures. It is also important for the regulatory asset base tariff.

Distributed Energy Resources and Microgrids. ESP presented proposals to improve power supply resilience with distributed generation and microgrids. Using microgrids and their different operating modes is an alternative to deploying distributed energy resources effectively into the distribution grid, increasing the reliability of power supply in critical loads and the flexibility of the network to continue operating under different topological conditions. DSO was nominated by the MoE and the Ministry of Communities, Territories and Infrastructure Development (MIU) for the first project. The tendering process is complete, and contracting is underway.

Development of a Demand-Response Management Mechanism. ESP will conduct a household survey and research to create incentives to reduce consumption during peak hours. This

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for direct lines, then shared and discussed it with policymakers, resulting in the adoption of the provision in a law and paving the way for a regulatory-normative concept of direct lines in Ukraine.

ESP established the Technical Consultations Forum with Ukrainian DHCs and other heat sector experts to discuss technical specifics, exchange views on regulatory changes, and share information.

Active policy and regulatory work by the ESP team resulted in an entire package of regulatory framework under consultation or at the adoption stage as of the reporting date:

• Environmental Impact Assessment: ESP proposed that the MIU exclude heat sources from the requirement to conduct an additional environmental impact assessment to install cogeneration units if they have earlier environmental impact assessments that are still valid. The draft amendment is under institutional consultation.

• Procedure on Connection to Heat Networks. A resolution by NEURC titled “On Approval of the Procedure for Connection to the Heat Networks” contains essential revisions to the previous framework and incorporates all ESP’s suggestions and comments. The resolution is expected to be adopted in early October.

• Licensing rules. A draft resolution by NEURC titled “On Amendments to the Licensing Conditions for the Conduct of Economic Activities for the Production of Thermal Energy” introduces exemption from licensing a cogeneration unit, up to 5 MW, if the entity already has a license for a heat activity. NEURC accepted ESP team’s proposals regarding the capacity threshold, requirement to have a valid license already, and other.

• ESP continues to support NEURC in finalizing the drafts of a resolution amending the Code of Commercial Metering, drafted the Resolution on Code of Distribution Systems (on the functioning of small distribution systems), and drafted the Resolution on Rules of the Retail Market. The draft resolutions are expected to enable the rollout of cogeneration units and the creation of clear and transparent rules and procedures to switch to isolated islands in communities in emergency cases.

Adjustment of Legislation and Regulations to Martial Law Conditions. ESP provided support to draft the Law on Amendments to the Customs Code of Ukraine to simplify imports of international aid to Ukrainian recipients. The project proposed provisions abolishing customs duties for essential materials and equipment for DH entities.

RAB Framework in DH. In Q3, ESP resumed developing the RAB framework. The team drafted two reports, one on establishing asset value and one on improving the regulatory framework for investments by DHCs; next quarter, the respective normative acts will be drafted.

KyivTeploEnergo (KTE) Support. In June 2022, the Kyiv City Council completed the formalities on the €140 million ($139 million) loan from the European Bank for Reconstruction and Development (EBRD) to KTE to modernize the capital’s DH system. ESP resumed developing project documentation for the KTE dispatch control system, one of the modernization projects under the loan. In Q2, ESP resumed other related project designs to optimize the system, which are to be financed by the EBRD. In 2023, ESP also completed the task of supporting KTE’s comprehensive automated utility financial management system, which is now incorporated into KTE’s financial IT architecture.

Municipal Partnership for Heat Supply Scheme (HSS) Development. Six HSSes were resumed at the beginning of the year. As of the reporting date, two have been adopted. One has

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analyses for the reformation of HUS and the removal of the PSOs in electricity and gas during the first half of 2023; these analyses have now been integrated into the overall PSO removal program.

Support to Regulatory Audits. ESP successfully completed two activities related to improving NEURC’s regulatory audit activities, namely:

• “Report on Best Practices in Regulatory Audits of Natural Monopolies in Electricity and Gas Markets” was presented to NEURC, including proposals to improve the regulatory audit process in line with best practices.

• A penalty methodology for violation of license terms was developed and submitted to NEURC.

The regulator fully supported the approach ESP suggested to penalty calculation and adopted the penalty methodology on September 29.

ESP recommendations on adjusting the revenue of the electricity TSO and DSOs were considered when NEURC was conducting regulatory audits of 16 DSOs and the TSO and approving the 2023 tariffs. The team reviewed regulatory audit reports of all Universal Service Suppliers and provided recommendations on proper monitoring procedures.

4.2.5. MARKETS: STANDARDIZED TRADING AND CLEARING

ESP continues to engage with stakeholders on its market activities, including the establishment of and support to transparent and competitive energy exchange(s) and a clearinghouse (central counterparty) for electricity and gas markets. ESP finished researching best practices in energy trading supervision and over-the-counter trading. The team’s recommendations covered specific actions to normalize energy trading and empower key regulatory stakeholders, such as NEURC and the MoE. They also identified problems and gaps that became the basis of a market survey conducted in June 2023. The key finding of the survey was that market participants need standardized products and trading as well as additional services provided by trading platforms.

ESP formulated a plan for the comprehensive development of energy trading in Ukraine, termed the Four Pillars of comprehensive energy trading—the key anticorruption initiative to stabilize energy markets and to support upcoming REMIT implementation. The pillars are 1) legislative harmonization, 2) product standardization, 3) trade rules unification, and 4) regulatory empowerment. Work has begun on the Four Pillars and will continue into next year.

4.3. SUPPORT EUROPEAN INTEGRATION

4.3.1. ELECTRICITY AND RENEWABLE ENERGY

Contribution to ENTSO-E Integration. After ENTSO-E synchronization, ESP continued to support Ukrenergo toward extending power energy imports/exports with Europe. This support included implementing countermeasures that successfully damp low-frequency inter-area oscillations that can occur during synchronous operation with ENTSO-E; conducting and submitting to Ukrenergo a steady state and voltage stability analysis of the Ukrainian power system that considers current generation and grid conditions; and analyzing contingency scenarios for the power grid to seek solutions to mitigate critical grid concerns.

As a result of ESP’s efforts and given the commissioning of the transmission line between Ukraine the ENTSO-E Regional Group Continental Europe expanded the

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available cross-border capacity for importing electricity to Ukraine to 1,200 MW. Cross-border capacity for exports has been made possible at the 400 MW level.

Preparation for Winter Heating Seasons. ESP prepared the electricity demand-supply and voltage stability analyses for the 2022–2023 winter heating season to evaluate different scenarios and to identify risks and threats to the Ukrainian power system and its ability to meet electricity demand.

The team shared the findings and recommendations with USAID and Ukrenergo to manage the power system and maintain a reliable electricity supply during the winter season in wartime.

Currently, ESP is helping energy sector partners prepare for the 2023–2024 winter heating season by conducting a flexibility assessment to measure the energy system’s needs.

Market Integration and Coupling. ESP has continued to support full market integration with neighboring countries. The immediate objective is cross-border capacity allocation auctions and commercial electricity flow after synchronization with ENTSO-E. ESP has completed work on joint cross-border capacity allocation rules and related procedures analysis. Based on this, NEURC approved the joint capacity allocation rules for daily auctions in the Ukraine- Ukraine-and Ukraine- directions, which is critically important for the upcoming winter.

ESP analyzed the MoE’s draft law to implement CACM and electricity market coupling and prepared a detailed analysis and a gap assessment with comments, recommendations, and examples of EU best practices for the MoE and NEURC. ESP developed a regulatory gap assessment for EBGL implementation toward the integration of balancing and ancillary services with Europe and drafted amendments to the Electricity Market Law and the Tax Code. The work continues, as ESP is developing secondary legislation with NEURC and Ukrenergo to implement the draft law (also prepared by ESP).

4.3.2. GAS

Enhancing EU Integration through Closer Participation in ENTSO-G. ESP explored opportunities to enhance cooperation between GTSOU and the European Network of Transmission System Operators for Gas (ENTSO-G), considering the limitations imposed by GTSOU’s observer status in the organization. ESP updated the paper based on stakeholder comments and developed a roadmap for GTSOU’s integration into ENTSO-G until Ukraine’s accession to the EU. The paper received highly positive feedback, and ESP submitted it and the study’s findings to USAID. This completed the activity to identify possible ways for GTSOU to integrate into ENTSO-G, and additional activities to support closer integration with ENTSO-G are expected to be added to ESP’s scope based on these findings.

Regional Gas Investment Modeling to Improve Integration with EU Gas Markets. ESP worked with the EE-NGP to bring Ukrainian stakeholders into the EE-NGP project to provide an analytical basis for unbiased cross-border infrastructure investment decisions. The team is helping prepare nondisclosure agreements and initiating modeling projects. The modeling work is anticipated to commence in Q4. The involvement of GTSOU will support the high-level modeling of system development, enabling informed investment decisions that prioritize cost-efficiency and security in achieving optimal solutions.

4.3.3. REGULATION AND LEGISLATION

4.3.3.1. SUPPORT IN TRANSLATION AND IMPLEMENTATION OF THE EU ACQUIS

Implementation of the Clean Energy Package: Electricity Market. ESP successfully translated the EU Electricity Market Directive 944/2019 and EU Electricity Regulation 2019/943, ENERGYSECURITYUA.ORG USAID/UKRAINE ESP FY 2023 ANNUAL REPORT | 19 critical legislative acts concerning the electricity market. In response to a request from the MoE, ESP is in the process of drafting legislation for the market coupling aspect of EU Directive 944/2019.

Third Energy Package: Natural Gas Market. ESP has started translating the Gas Directive 73/2009 and the Gas Regulation 715/2009.

4.3.3.2. SUPPORT TO THE MINISTRY OF COMMUNITIES, TERRITORIES AND

INFRASTRUCTURE DEVELOPMENT (MIU)

Based on USAID’s request, ESP has formed a team to support the MIU in scaling up distributed cogeneration projects and addressing distributed generation and renewable energy at the municipal level. A memorandum of understanding defining the objectives of this technical assistance was prepared to be signed between ESP and MIU, along with a detailed work plan based on the overall ESP work plan for FY 2024 approved by USAID. This plan was discussed during ESP’s strategic work planning sessions. ESP will assist the MIU to modernize municipal-level energy infrastructure by implementing the following main tasks:

• Prioritize municipal-level projects concepts focused on economically justifiable and financially sustainable high-efficiency cogeneration and distributed energy generation.

• Consider diverse conventional technologies and renewable energy sources such as solar, biomass, and biogas.

• Carry out prefeasibility assessments of selected project concepts.

• Develop a pipeline of bankable investment projects.

• Build technical capacity.

ESP has begun working with the MIU on technical matters including an analysis of existing HSSes for further prioritization of municipalities and potential projects.

4.4. IMPROVE SECTOR STRATEGIES AND THEIR IMPLEMENTATION

4.4.1. ENERGY STRATEGY

Hydrogen and the National Hydrogen Strategy of Ukraine. Hydrogen is one of the most promising clean energy technologies and will play a key role in the energy transition. ESP’s recommendations to the MoE on Ukraine’s National Hydrogen Strategy were presented to the Prime Minister, and the MoE used the team’s materials to present Ukraine’s high-level hydrogen strategy. In FY 2023, ESP continued to engage with the MoE and NEURC to support the adoption and proper implementation of the strategy, although due to the war, formal publication of the national strategy was put on hold. ESP continues to discuss these issues with key stakeholders, as they will be important for Ukraine’s postwar reconstruction, and the topic will remain a priority in the years to come.

4.4.2. REGULATORY STRATEGY

In 2021, the Constitutional Court opened proceedings on the case questioning the NEURC’s independence that was initiated by a group of VR Deputies. The conflict with Russia has delayed the decision on the case. Should the delay, the wartime conditions, and martial law continue, it may

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policies on gender equality, nondiscrimination, and inclusion in the workplace; and form a gender-sensitive culture. This training program became the basis for the further integration of a policy of equal rights and opportunities for women and men in the MoE.

ESP discussed a draft Code of Ethics and Gender Principles of Business Conduct for its administrative office, which the Ministry’s team plans to implement, and initiated a survey on men’s and women’s access to energy. ESP joined the MoE in analyzing current forms of statistical, financial, and administrative reporting for the presence of disaggregated data and carried out a gender analysis of the Ministry’s budget programs. The team also initiated the establishment of a gender committee in the MoE and developed its regulations.

ESP has launched a collaborative effort with the State Emergency Service of Ukraine (SESU) to integrate the principles of gender equality and social inclusion into the security and civil defense sectors. These activities include a modular training program on gender equality, nondiscrimination, and social inclusion for employees; the development of the SESU gender action plan and establishment of a gender committee; a scientific and practical conference on gender equality with civil defense educational institutions; and sociological research on issues of gender equality and social inclusion in the SESU system.

ESP conducted the annual Women in Energy Roundtable, highlighting the tremendous role and importance of Ukrainian women in ensuring the stability of Ukraine’s energy sector and highlighting their role in the energy sector’s recovery. About 90 men and women from the energy and other sectors joined the event to hear about obstacles and challenges women in energy face in wartime and to develop joint actions to support and strengthen women’s potential.

ESP’s gender expert participated in the National Women’s Forum on the National Action Plan for the Implementation of UN Security Council Resolution 1325, which was organized by the Government Commissioner for Gender Policy, the Office of the Vice Prime Minister for European and Euro-Atlantic Integration, the Ministry of Social Policy, and UN Women.

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under the International Financial Reporting Standards. The results of the analysis were provided to the GB, which considered them while preparing its annual/quarterly financial statements.

Also, to keep software operating sustainably during hostilities, ESP assisted the GB in backing up servers. ESP is also supporting the GB in terms of reconciling and monitoring PSO results (including renewable energy, HH, and export PSOs) as well as assessing pending and new amendments to the PSO mechanisms, related legislation, and their implementation.

1.1.3. IMPROVE MARKET MONITORING

Wholesale Electricity Market Monitoring and Improvement of Secondary Legislation.

ESP continuously monitors the performance of all market segments, analyzing market trends, pricing, and settlements. Based on the results, the team develops proposals to improve secondary legislation (such as the day-ahead/intraday market rules, balancing market rules, and NEURC and CMU resolutions). The proposed amendments aim to achieve a more competitive market environment, avert manipulative behavior, reduce the total cost of electricity for consumers, and maintain the financial stability of the market.

ESP completed and presented to Ukrenergo, NEURC, the MoE, and EnCS a gap and compliance analysis between the Market Rules and relevant European legislation on balancing energy and ancillary services markets. The analysis features, among other things, a roadmap/action plan to implement cross-border balancing energy exchange and ancillary services exchange, including EU-wide best practices on bilateral arrangement options and proposed legislative amendments to enable balancing and ancillary services market coupling (hence, the transposition of the EBGL Regulation).

Following ESP’s recommendations under the Market Rules Compliance Analysis Project, Ukrenergo applied for observer status on the ENTSO-E balancing energy exchange platforms—

This was a first step toward integrating Ukraine into the EU-wide balancing energy exchange market.

ESP analyzed NEURC’s draft decree changing the GB imbalances settlement formula and renewable energy (renewable energy) service calculation, then sent NEURC a letter and comparative table with proposed amendments to the draft decree.

In Q2, ESP sent a letter to the Antimonopoly Committee of Ukraine and NEURC on the recently approved NEURC decree on financial guarantees, which was based on the Committee’s recommendations. Under the decree, market participants are obliged to keep 50 percent of the financial guarantee in cash. ESP expressed concern that this might impose an extra burden on market participants, and the team offered assistance to develop an alternative solution.

At USAID’s request, ESP provided monthly reports on the electricity sector. The reports included brief overviews of electricity market segments, the power system, major grid issues, export-import operations, results of auctions on access to cross-border interconnectors, and key regulatory changes.

In light of proposals from the European Commission to improve the design of the electricity market, ESP offered NEURC its assistance to analyze the main development trends and changes in the design of the EU market. The ESP team would also recommend ways to improve the design of the Ukrainian market in line with European trends, best practices, and case studies, including a proposal of the best European methods to improve liquidity and competition and to clarify and strengthen the roles of the key players. NEURC accepted ESP’s proposal and approved the ToR. ESP has started tender procedures.

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Also, NEURC and Ukrenergo approved ESP’s ToR to analyze and improve a risk assessment and financial guarantee mechanism for the balancing market to facilitate its integration into ENTSO-E by harmonizing the settlement mechanisms. These activities will start in Q1 2024 after the completion of tender procedures.

Ukrenergo requested ESP’s help to provide technical guidance on the operation of the electricity market with negative prices. Per the request, ESP analyzed the reasons for negative prices in the electricity market, their consequences, and the factors that determine the existence of negative prices. ESP prepared a study and presented it to Ukrenergo.

Tariff Analysis and Assessment of the War’s Impact on Ukrainian Electricity Market Liquidity. ESP controls and monitors all changes related to tariff-setting in the electricity sector and submits letters to NEURC with an analysis and recommendations (namely, tariffs for DSOs, USSs, and the TSO). In 2023, the NEURC approved tariffs for DSOs and the TSO with a gradual increase during the year. In addition, the NEURC separately sets tariffs for DSOs in occupied territories (close to active war areas), DSOs on the sanction list, and other DSOs. The NEURC considered ESP’s comments in the revenue adjustment included in the 2023 TSO tariff based on the regulatory audit report. As a result, the TSO’s revenue requirement was not decreased by UAH 8 billion, the revenue adjustment was properly reflected, and Ukrenergo remained able to partly repay its debts.

Also in Year 5, ESP continued updating the long-term energy market model to incorporate legislative changes and tariff updates and to properly reflect the war’s impact on key market participants. The model includes historical and forecasted data on the calculation of PSOs in the electricity market and balancing market, the financial position of Energoatom, Ukrhydroenergo, Ukrenergo, etc. The summary of debt accumulation in the market; the results of HH, renewable energy, and export PSOs; tariff analysis; and impact of legislative changes on market functioning was shared with USAID and the MoE and presented to other stakeholders. The modeling results were used for the green paper on the HH PSO phase-out in the electricity sector and will be added to the green paper on a renewable energy feed-in tariff remedy plan.

1.1.4. IMPROVE MARKET CONDITIONS FOR PARTICIPANTS

The Financial Situation in the Renewable Energy Sector. ESP continues monitoring the renewable energy PSO results and debt accumulation in the sector. As of September 18, 2023, the GB’s debt to renewable energy suppliers (RES) is UAH 36 billion. The average level of payment for 2023 is 52.3 percent of the feed-in-tariff cost. Ukrenergo’s debt to the GB for renewable energy service has also increased and reached UAH 30 billion. Also, the producers owe UAH 5.5 billion to the GB for imbalance compensation. This issue has remained unsolved since September 2022, when the Supreme Court canceled the imbalance compensation formula.

On June 30, the VR adopted Law no. 3022-IX “On Amendments to Some Laws of Ukraine Regarding the Restoration and Green Transformation of the Energy System of Ukraine.” ESP actively participated in discussions and provided recommendations, first to the draft law and, after its adoption, to the secondary legislation developed by NEURC. Some of ESP’s comments were included in the final version of the law (namely, the inclusion of received budget support in renewable energy service, exclusion of the GB’s supply activities, and proper adjustment of renewable energy service on the results of export activities and guarantees of origin, etc.). After the adoption of Law no. 3022-IX, ESP continued cooperation with the GB and NEURC and provided comments to draft NEURC Decree on renewable energy service calculation, GB’s balancing group, ESP ANNUAL REPORT – FY 23 – ANNEX A – DETAILED WORK PRODUCT DESCRIPTION | 6 formula of imbalance compensation, and netting procedure1. ESP will closely monitor the implementation of Law no.3022-IX, specifically in part of the imbalance compensation formula to ensure proper payment mechanism in the renewable energy sector.

Small Scale Renewable Energy (SSRE) Support and Net Billing. ESP provided comprehensive support to the MoE and the E&U Committee in the development of the draft law on net billing, which was integrated into Law no. 3022-IX “On Amendments to Some Laws of Ukraine Regarding the Restoration and Green Transformation of the Energy System of Ukraine.” Also, ESP prepared and shared with USAID a presentation on recommendations for implementing net billing for renewable energy in Ukraine. Following the adoption of the law, ESP prepared and aligned with NEURC and Ukrenergo on the ToR to develop secondary legislation for the net billing mechanism.

ESP initiated the procurement process, which is ongoing.

Energy Storage Technologies. After the Battery Energy Storage System Law that ESP worked on was adopted in 2022, ESP helped NEURC develop secondary legislation. The first result appeared in Q3 FY 2023: the regulator issued the first energy storage license to to carry out activities related to energy storage (1 MW of installed capacity). As an energy storage facility operator, the company will provide ancillary and balancing services to Ukrenergo.

Support to Commercial Metering. ESP initiated a tender procedure for the development of a concept and roadmap for implementing load profiles and drafting essential primary and secondary legislation according to a preliminary ToR approved by key beneficiaries—NEURC and Ukrenergo.

ESP plans to start the project after determining a winner and signing a contract.

1.1.5. IMPROVE THE LEGISLATIVE FRAMEWORK

Renewable Energy Development. On June 30, the VR adopted Law no. 3022-IX “On Amendments to Some Laws of Ukraine Regarding the Restoration and Green Transformation of the Energy System of Ukraine.” The law unifies four ministerial draft laws, developed with ESP assistance, and contains provisions to implement sustainable renewable support mechanisms, including guarantees of origin, contracts for difference and auctions, corporate power purchase agreement issues, a regulation for leaving the GB’s balancing group, the net billing model, aggregators, etc. ESP provided comprehensive analysis, comments, and recommendations on draft Law no. 9011-d (later renumbered as 3022-IX) and submitted them to the VR E&U Committee. ESP continues this activity with the development of secondary legislation. In FY 2024, ESP will also develop a green paper on renewable energy policy, which will propose a set of policy options promoting the further adoption of renewable energy, considering the specific needs and conditions of Ukraine’s economy.

Regulatory Asset Base (RAB) Regulation. ESP continued assisting NEURC with RAB support for electricity DSOs. In November–December 2022, ESP monitored the reform and assessed the war’s impact on the DSOs. The analysis covered 11 companies representing more than 50 percent of the total distributed volume of electricity. The analysis was shared with the DSO Association and NEURC. The war resulted in significant losses to DSOs due to a sharp decrease in consumption, lower payment discipline, and damage to infrastructure. No financial support for DSOs was included either in the State Budget 2023 or in the draft State Budget 2024.

The regulator adopted changes to its planned RAB parameters for 2023, such as decreasing the return for new assets (to 3 percent), choosing not to adjust revenue requirement for quality

1 The GB’s debt to renewable energy producers for renewable energy under the feed-in tariff can be netted with renewable energy producers’ debt to GB for imbalance compensation.

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parameters, leaving the depreciation of RAB unchanged, suspending efficiency coefficients, etc. ESP provided a detailed analysis of these changes and sent a letter to NEURC with recommendations.

NEURC considered ESP’s comments regarding a decrease in return on RAB when making a final decision. The team also analyzed similar changes planned for 2024. Starting from the next regulatory period in 2025, ESP recommends conducting a cost-benefit analysis for a five-year network development plan, which would consider the damages of assets due to war and the decrease in distribution volumes. The rate of return for “RAB new” should be calculated in line with best practices.

1.1.6. IMPROVE CONFIDENCE IN MARKET OPERATIONS

Household PSO Phase-out. Ukraine has been protecting vulnerable consumers with a variety of methods, including prices that are below the full cost of electricity supply at several levels and income subsidies. Unfortunately, the tools that Ukraine is using negatively impact the economy—the utilities are not financially solvent, and as a result, investment is suboptimal. Furthermore, consumers are using more energy than they otherwise would, and the impact on the state budget is greater than it could be with a better set of tools.