5. SPARC Amendment 3 DEC redacted reports Nov 17 FINAL.pdf

Amendment Issuance Date: November 17, 2023

Subject: Amendment 02 to Request for Proposal (RFP) No. 72012124R00004

Reference: SPARC Activity, USAID/Ukraine

Dear Offerors, The purpose of Amendment 03 is to add Attachment 3 ESP redacted reports.

All other terms of the RFP remain unchanged.

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

Sincerely, _________ /S/__________

Craig Riegler, Supervisory Contracting Officer

USAID/Ukraine

5. PROJECT NO.

CODE

7. ADMINISTERED BY

2. AMENDMENT/MODIFICATION NO.

CODE

6. ISSUED BY

8. NAME AND ADDRESS OF CONTRACTOR

4. REQUISITION/PURCHASE REQ. NO. 3. EFFECTIVE DATE

9B. DATED

PAGE OF PAGES

10A. MODIFICATION OF CONTRACT/ORDER NO.

10B. DATED

1. CONTRACT ID CODE

FACILITY CODE CODE

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:

The above numbered solicitation is amended as set forth in Item 14. The hour and date specified for receipt of Offers

E. IMPORTANT:

is extended,

(a) By completing Items 8 and 15, and returning __________ copies of the amendment; (b) By acknowledging receipt of this amendment of each copy of the offer submitted; or (c) By separate letter or telegram which includes a reference to the solicitation and amendment numbers. FAILURE OF YOUR AC- KNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND DATE SPECIFIED MAY is not extended.

12. ACCOUNTING AND APPROPRIATION DATA

(REV. 10-83)

is required to sign this document and return ___________ copies to the issuing office. is not, A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.

15C. DATE SIGNED

B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE CHANGES SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b).

RESULT IN REJECTION OF YOUR OFFER. If by virtue of this amendment you desire to change an offer already submitted, such change may be made by telegram or letter, provided each telegram or letter makes reference to the solicitation and this amendment, and is received prior to the opening hour and date specified.

C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:

D. OTHER

Contractor

16C. DATE SIGNED

14. DESCRIPTION OF AMENDMENT/MODIFICATION

16B. UNITED STATES OF AMERICA

Except as provided herein, all terms and conditions of the document referenced in Item 9A or 10A, as heretofore changed, remains unchanged and in full force and effect.

15A. NAME AND TITLE OF SIGNER 16A. NAME AND TITLE OF CONTRACTING OFFICER

15B. CONTRACTOR/OFFEROR

STANDARD FORM 30 STANDARD FORM 30

(Type or print) (Type or print)

(Organized by UCF section headings, including solicitation/contract subject matter where feasible.)

(No., street, county, State and ZIP Code)

(If other than Item 6)

(Specify type of modification and authority)

(such as changes in paying office, appropriation date, etc.)

(If required)

(If applicable)

(SEE ITEM 11)

(SEE ITEM 13)

(X)

(X)

13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS,

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

11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT

(Signature of person authorized to sign) (Signature of Contracting Officer)

03 See Block 16 C.

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

1 1

9A. AMENDMENT OF SOLICITATION NO.

72012124R00004 TO ALL OFFERORS x

X

October 30, 2023

The purpose of this Amendment No. 03 is to:

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

Craig Riegler Supervisory Contracting Officer

BY 11/17/2023

X

/s/

REQ-121-24-0000XX

720121

This plan is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Tetra Tech, Inc., and do not necessarily reflect the views of USAID or the United States Government.

ENERGY SECURITY PROJECT

ANNUAL PROGRESS REPORT

October 1, 2018 – September 30, 2019

Photo: EnergoBusiness

FOREWORD

The Energy Security Project (ESP), implemented under USAID Contract No. 72012118C00003, is required to produce an annual report for each fiscal year. This is the first ESP annual report since the inception of the program in July 2018.

This annual report highlights the results achieved in FY 2019 (October 1, 2018 to September 30, 2019) by the ESP team. The focus of this report is to document progress toward programmatic goals.

Additionally, this report summarizes accomplishments, challenges faced, and lessons learned.

This report was made possible through the support of the American people through USAID. Its contents are the sole responsibility of Tetra Tech ES, Inc., and do not necessarily reflect the views of USAID or the United States Government.

CONTENTS

EXECUTIVE SUMMARY 11.

2. 4

3. 9

4. 215.

23ANNEX A: LIST OF MEMORANDUMS OF UNDERSTANDING (MOUS) SIGNED WITH

COUNTERPARTS & BENEFICIARIES

Error! Bookmark not defined.ANNEX B: LIST OF COUNTERPARTS & BENEFICIARIES

ANNEX C: REPORTS AND OTHER PROGRAMMATIC DOCUMENTS 61

ANNEX D: MONITORING, EVALUATION & LEARNING PLAN REFLECTING ACTUALS VERSUS TARGETS 69

ANNEX E: PUBLIC OUTREACH DOCUMENTS 91

ANNEX F: BUDGET EXECUTION 105

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EXECUTIVE SUMMARY

The U.S. Agency for International Development (USAID)/Ukraine Energy Security Project (ESP) is a five-year initiative (2018-2023) to enhance Ukraine’s energy security by improving the energy policy, legal and regulatory environment and increasing energy supply to achieve broad-based, resilient economic development as a means to sustain Ukrainian democracy. This is the first annual report for ESP, and details key ESP activities, achievements and progress during the 2019 fiscal year (October 1, 2018 – September 30, 2019).

The first year of the project was a period of challenge given program start-up, immense growth, learning and opportunity, as well as adapting to the major political change associated with the election of a new president, formation of a new government, and one-party majority rule in the Verkhovna Rada.

During this first year, the ESP team achieved several notable results while laying the foundation for the future years of the ESP. The following provides some of the highlights of the first year of the ESP.

● Memorandums of Understanding (MOUs). Thirteen MOUs were signed, reflecting the depth and breadth of partnerships established across the public and private sectors. A comprehensive list is provided in Annex A. This accomplishment is especially significant considering the highly charged political climate. The ESP is now implementing six-month action plans with more than 20 organizations.

● Launch of the Wholesale Electricity Market (WEM). The ESP led the donor community in supporting the Government of Ukraine in achieving the launch of the WEM. The market launched on July 1 in what is known as “Safe Mode” – a concept developed by the ESP – to smooth the market opening by constraining possible price abuse due to insufficient competition in the WEM. Continued successful operation of the market is a testament to ESP’s development and implementation of the model for market operation. Of course, that is not to say that the WEM launch was perfect;

there were challenges with transmission tariffs (due primarily to a change in renewable energy sources’ (RES’) cost recovery). Problems still persist with non-payment in key market segments (e.g., supplier of last resort), and market abuse issues, such as imbalance pricing and supply being withheld from the day-ahead market (DAM). These are examples of the type of ongoing issues being addressed by the ESP.

● Energy, Regulatory, Business & Tariff Models. The ESP developed a set of models to support reform efforts. For instance, the ESP is recognized as the ‘go to’ source for modeling of the financial impact of the market rules associated with the WEM and the Public Service Obligation, able to forecast the specific impact on major market participants and end consumers. The ESP also developed a tariff model for the electricity enterprises, primarily distribution system operators (DSOs), that is helping drive the discussion on tariff reform including a regulated asset base (RAB) approach.

A similar model was also established for district heating, and efforts are now underway to finalize a

KEY RESULTS

Launch of Wholesale

Electricity Market

Memorandums of Understanding

Energy, Regulatory, Business & Tariff Models

Laws, Policies, Regulations, Standards

Utility Employees Trained on Gender and Energy

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similar model for natural gas DSOs. These models have provided useful insight into tariff reform and the financial performance of the sector enterprises.

● Regulatory Reform. The ESP developed extensive relationships with the National Energy and Utilities Regulatory Commission (NEURC) during Year One. Late in the year, the ESP was confronted with a fundamental challenge to the independence of the regulator, due to a Constitutional Court decision that declared several elements of NEURC’s enabling legislation to be unconstitutional. This ruling led to extensive dialogue, still ongoing, to ensure NEURC is able to function until such time as the relevant law is amended and amendments to the constitution are enacted. Additionally, the ESP provided a proposal for the creation of an upstream regulator, which received initial signs of support from, for instance, Geonadra.

● Enterprise Level Support, Including Leveraging Financing. During the first year, the ESP initiated efforts to address the needs of specific enterprises. For example, the ESP ‘blitzed’ Kyivteploenergo (KTE) with a wide-range of support, with a goal to gain approval of a €140 million EBRD loan for KTE. The ESP remains confident that the EBRD will approve the loan in 2020.

● European Energy Market Integration. During this first year, the ESP made progress on defining and agreeing with counterparts (primarily Ukrenergo) on various technical assistance activities to support European electricity integration through ENTSO-E. For example, the ESP defined a so-called ‘island mode’ study to model how the Ukraine Integrated Power System (IPS) will function if separated (islanded) from Russia. Additionally, the ESP worked with Ukrenergo to define a plan for generating unit testing and certification, an activity now underway as part of the second year.

● Production Sharing Agreements for Upstream Natural Gas and Oil. During Year One, the Government of Ukraine launched a tender for nine blocks using a production sharing agreement (PSA) approach. This was not originally intended as an activity area for the ESP, but given its potential significance, the ESP responded by providing recommendations on the evaluation of proposed bids, as well as suggestions for how to improve future tendering. The ESP also drafted a model PSA for the Government of Ukraine to use as a type of ‘checklist’ to assess the adequacy of the PSAs proposed by each winning bidder.

● Grants Program Launched. The ESP issued its Annual Program Statement and issued its first grants under the program. This included, for instance, a grant to support a local conference of the Society of Petroleum Engineers.

● Performance Improvement Projects Identified and Procurement Commenced. The ESP designed the first and second tranches of several performance improvement projects (PIPs), recommending 28 specific PIPs, the majority of which were approved by USAID for implementation (16 approved, others pending review).1

1 The second tranche of recommended projects were expanded at the beginning of Year Two. As of October 30, 2019, 16 projects are with USAID for consideration.

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● Capacity Building. Building on the ESP’s gender strategy, the ESP trained 87 KTE and Ukrenergo employees on gender and energy issues through the gender training program for power companies (see Annex C). The ESP also delivered the first training on energy trading, just ahead of the launch of the WEM. Additionally, the ESP provided significant capacity building through the involvement of ESP specialists in various counterpart working groups.

Throughout the first year, there were other ad hoc issues that the ESP addressed, such as a report and note on the Voda Donbasu utility, a large electricity debtor in the east of Ukraine.

In addition to the accomplishments outlined above and elaborated in this report, there were also challenges. The ESP faced delays in mobilization of resources and experienced a changeover in the majority of key personnel, including the Chief of Party (COP) and Deputy Chief of Party. Certain key strategy elements that were planned to address during the first year, such as the renewable energy strategy, were only confirmed early in year two. In the past six months, the ESP more than doubled in size (in terms of staff) and a new leadership team is embedded, including COP, Deputy COP and operations manager, to ensure continued expansion to deliver across all of the varied workstreams.

In this second year, ESP is accelerating activities to capitalize on the momentum of the 2019 change of government and launch of the WEM to continue sectoral transformation. ESP will provide strategy support, training, analyses, and promotion of reforms through outreach and demonstration of innovation through pilots and models. Priorities during Year Two include addressing NEURC independence and functionality; helping to resolve the current challenges around RES; expanding the enterprise-level activities for district heating utilities; defining and implementing at least 12 pre-feasibility studies (and feasibility studies, as appropriate) to design unique projects able to achieve financing during the ESP;

advancing the performance improvement projects to ensure benefits are captured as planned;

supporting the electricity and natural gas transmission system operators through development of 10-year network development plans; dealing with further reform of the WEM, including introduction of an ancillary services market/administrative approach, as well as addressing market abuse and the need for improved market monitoring; advocating reform of the PSO for electricity, in coordination with the Energy Community Secretariat; and advancing on clearing, settlement and exchange platforms for electricity and natural gas. These are only a few of the priorities for the second year, but demonstrate the extensive range of activities and outcomes intended for the ESP.

In the end, the ESP is a complex program offering a high potential for impact. The success of the ESP is not only important for Ukraine, but the comprehensive approach to energy reform embodied in the design of the ESP, across all major subsectors, will also impact European energy markets and help secure the energy future for Ukraine as well as the larger region.

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1. INTRODUCTION

THE PROGRAM

Tetra Tech ES, Inc. (Tetra Tech) is pleased to present to the United States Agency for International Development (USAID) the first annual report for the Energy Security Project (ESP), USAID Contract 72012118C00003.

The ESP is an $85 million, five-year activity (2018-2023), funded by USAID and the American people, and implemented by Tetra Tech ES, Inc. Through the ESP, USAID is 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.

Energy security is critical to Ukraine’s independence and sovereignty. USAID’s ESP works with the Ukrainian government, the Verkhovna Rada, 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, district heating and renewable energy sectors.

To enhance Ukraine’s energy security, the ESP is focusing on improving the energy sector’s policy, legal and regulatory environment; increasing the resilience and affordability of energy supply; and integrating into European energy markets to promote competition and efficiency, all of which will help Ukraine achieve broad-based, resilient economic growth and counter the malign foreign influence. Specifically, the ESP is focusing on, and shall significantly contribute to, achievement of the following goals:

● Help the Government of Ukraine (GoU) provide affordable, reliable, resilient and secure energy to its citizens;

● Assist the GoU to integrate into European energy markets by helping key government agencies and the energy regulator meet EU energy acquis requirements, including the Third Energy Package;

● Improve energy security through competitive market reforms by unbundling transmission and distribution from generation and supply in both the natural gas and electricity sectors;

● Strengthen regulatory processes and procedures to ensure transparency, sound decision-making and enforcement of decisions;

● Introduce competition in the energy commodity markets to facilitate reliable supply and market-based demand and pricing;

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● Support implementation of competitive energy markets in electricity, natural gas and district heating sectors; and,

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

OVERVIEW OF ACTIVITIES

The ESP’s scope covers two major activity areas, as outlined below. In general, the first area, Competitive Energy Markets, aims to achieve benefits for the Ukrainian people in terms of market-based secure energy sources, while also striving to reduce corruption. The second area, Energy Supply Security, focuses on promoting the security of supply and mitigating the impact of Russian aggression on the Ukrainian energy sector.

ACTIVITY 1. COMPETITIVE ENERGY MARKETS REFORM AND DEVELOPMENT ACTIVITY 2. ENERGY SUPPLY SECURITY

1.1 Development of Energy Market Models for Gas, Electricity, and Heating Markets and 6-Month Action Plans

1.2 Developing Enabling Legislative and Policy Environment

1.3 Technical Capacity Building

1.4 Market Coupling with Moldova

1.5 Public-Private Dialogue and Outreach

1.6 Human and Institutional Capacity Development

1.7 Energy Education

2.1 Development of Tools, Briefs, and Updates to Ukraine

Energy Policy and Strategy

2.2 Development of Incentives for Renewable Energy

Generation

2.3 Developing Least-Cost Energy Generation Models

2.4 Lower Emission Power Generation Policy and Strategy

Development

2.5 Key Performance Improvement Projects

The ESP is positioned to build on the technical assistance provided by USAID and other donors and provide practical support for implementing the new energy laws and regulations to lead to the desired competition-based energy market reforms. The ESP’s implementation strategy is centered on delivering tangible results, such as minimizing supply interruptions; decreasing dependence on Russia for power system balancing; modernization of inefficient generating capacity through leveraged investments;

growing the volume of cross-border trade with European neighbors; bolstering competition in electricity, natural gas, and heating markets; and ultimately improving customers’ access to reliable energy services at fair and affordable prices.

The ESP is working to promote energy security and an improved investment climate across Ukraine, and to increase cooperation with Moldova, especially in electricity market development. An important target is providing conditions to synchronize the power system with the European Network of Transmission System Operators (ENTSO-E). The ESP also is devoting particular attention to activities that can help develop and secure the energy sector in the eastern part of Ukraine.

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THE REPORT

This report is structured to correspond directly to the tasks and results listed in the contract Statement of Work (SOW), and provides an overview of the project, the current status of affairs, key achievements to date, and progress towards achieving targets.

Following this introduction to ESP and overview of the current status of affairs, Section 1 describes the summary of accomplishments and results, Section 2 presents the key achievements by tasks and sub-tasks, Section 3 presents an overview of the administration and project management, including budget execution and cross-cutting components such as grants, communications and gender, and Section 4 offers lessons learned and conclusions. Annexes provide greater detail on the work accomplished in Year One: Annex A is a list of counterparts and beneficiaries, and memorandums of understanding (MOUs) signed. Annex B is a list of deliverables, reports and other relevant documents prepared during the year, which can be found on the USAID Client Share folder. Annex C provides the comprehensive Performance Indicator Table reflecting actual results versus targets, and narrative on achievement or failure to meet the targets. Annex D and Annex E provide additional public outreach documents and training and instructional materials developed by the ESP.

CURRENT STATUS OF AFFAIRS

The fiscal year (FY 2019) was shaped in large part by changes within the Ukrainian political landscape.

Political novice Volodymyr Zelenskyy won a landslide presidential election victory in April 2019; his Servant of the People party holds a majority in the Verkhovna Rada (the Rada). The election period created some challenges: Government officials took leaves of absence to participate in campaigning.

High-level decisions were slowed during this transition, or in some cases, accelerated allegedly to ‘lock in’ the new government to decisions of the past government (e.g., PSA tendering and announcement of winning bidders). Members of the Rada were focused on elections, affecting the pace of legislative work.

This single-party majority is unprecedented in modern Ukraine and may allow the party to implement its agenda with relative efficiency. A new Cabinet of Ministers was formed on August 29, 2019, with some reorganization of the government bodies that deal with energy security. The legislature formed a Committee on Energy, Housing and Utility Services and consolidated 19 ministries to 15, which led to the creation of a Ministry of Energy and Environmental Protection (MEEP) (as successor to the Ministry of Energy and Coal Industry), and a Ministry of Local Community Development (MLCD) (as a successor to the Ministry of Regional Development) that is expected to have responsibilities for regional development issues, including some aspects of district heating. The scope of responsibilities of the ministries are still not yet solidified. During this period of change, the ESP is working with government partners to ensure the ESP and USG positions are heard and adopted as changes take place affecting the energy landscape in Ukraine.

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2. SUMMARY OF ACCOMPLISHMENTS & RESULTS

The first year of the USAID Energy Security Program (ESP) was one of significant success, despite some early and ongoing challenges. Highlights of the first year of the ESP include:

100% 18 16 Bilateral Trade Market

Established for Electricity Markets2

Action Plans Agreed With Relevant GOU Partners

Market Models Prepared/Revised

Laws, Policies, Regulations, or Standards to Enhance Energy Sector Governance formally proposed, adopted, or implemented with USG assistance

Laws, Policies, Regulations, or Standards to

Enhance Energy Sector Governance formally proposed, adopted, and implemented in compliance with

EU directives as supported by USG assistance3

Persons Trained with USG Assistance to Advance Gender Equality or Female Empowerment

50% Steering Committee Members who are Women or Youth

100% Targeted

Organizations Represented on

Steering Committee

Documents/Reports/ Capacity-building

Activities to reduce

Opportunities for Energy Sector Corruption

2 Volume of bilateral trade is estimated at 70% of the maximum volume.

3 This indicator monitors the project’s efforts to support Ukraine’s compliance with the requirements set in the EU Third Energy Package.

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● Opening of the Wholesale Electricity Market: Although the ESP, like other organizations, suggested a delay of a few months, the WEM opened on July 1. The ESP prepared for opening with counterparts like the Market Operator, NEURC and Ukrenergo, to support the opening of the market in a ‘Safe Mode’ that deployed price caps to ensure that the ownership concentration seen in the generator sector did not lead to the abuse of market-dominant positions. The few associated hiccups were less the result of the market opening and more the result of legacy challenges in the sector (such as non-payment for electricity supply by certain Universal Services Suppliers).

The ESP is seen as the authoritative source for modeling the market rules and their impact on each major market participant. This capability has been used repeatedly to respond to queries from NEURC, MEEP, and key parliamentarians as changes to the market rules and design of the Public Service Obligation have been considered.

● Kyivteploenergo (KTE) Support. The ESP provided extensive support to KTE to improve internal operations, audit, governance and pre-feasibility work to position KTE for a €140 million loan from the EBRD. The loan is expected to be finalized and approved in spring 2020.

● Regulatory Asset Base Models and Promotion. The ESP developed an electricity model for distribution system operators (DSOs) to guide tariff methodology development. The models for electricity and district heating can project tariffs based on cost-plus and regulated asset base methods. (Development of a similar natural gas model was completed early in the second year.)

● Design and Advocacy of Specific Reforms. The ESP proposed modifications and amendments to several key pieces of legislation and regulation, including:

o Draft of CMU Resolution "On Adoption of a Regulation on Imposing Public Service Obligations in the Electricity Market on Electricity Market Participants o Draft of CMU Resolution "On Approval of the Procedure for conducting electronic auctions for the sale of electric energy by manufacturers under bilateral agreements" o NEURC – recommended changes to the rules of the market "one day in advance" and the internal market o NEURC – changes to the Market Rules o NEURC – changes in 5 NEURC Decrees for RAB regulation for DSOs o NEURC – changes to Decree on Guaranteed Buyer (GB) budget o NEURC – changes to State Entities Regulation Law on dividends of GB o Upstream Regulator position paper o PSA Gap Analysis o Regulatory Asset Base (RAB) models

● Performance Improvement Project (PIP) program design. The ESP designed over two dozen

PIPs for USAID approval.

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● Capacity Development and Support for Counterpart Priorities. The ESP established numerous working groups that are supporting counterparts across a host of subject areas. Some of the working groups set up by the ESP and counterparts include:

o MEEP (three groups, on electricity market reform including wholesale/retail market issues and tariffs; and a working group on conversion from metric units to kWh for natural gas) o Guaranteed Buyer (on PSO and RES management) o Market Operator (on DAM & IDM) o NEURC (on electricity market reform) o Ukrenergo (3 main streams: system planning, generator testing and ENTSO-E integration, balancing market and settlement-3 subgroups are agreed to be established soon) o Supplier of Last Resort (on retail electricity supply, debt/non-payment issues) o Ukrhydroenergo (on hybrid solar and battery project) o Oshchadbank (on settlement and clearing) o NSSMCC (on establishment of exchange and clearing) o Settlement Center (on establishment of clearing) o National Depository (on establishment of clearing) o Geonadra (on data warehousing and upstream issues) o Gas TSO LLC (on SCADA specification and a second group on the development of a 10-year network development plan)

Going forward into the second year, these working groups will be an important focal point for reform efforts, as well as capacity development of each counterpart organization.

Another method for reform promotion and capacity development is the series of roundtables on specific subjects that were organized by the ESP. These roundtables addressed topics such as regulatory reform and independence, PSAs, RES issues, and WEM design, among others.

● Development of a Gender Strategy and Rollout to Ukrenergo and KTE. The gender strategy was well received by both organizations, with 87 employees participating in the extensive gender awareness and energy training.

Another important accomplishment during the first year was the establishment of relationships with 20 counterpart organizations. Many of these relationships are covered through 13 executed Memorandums of Understanding. The relationship with some of these counterpart organizations is quite ‘deep’ and extensive. Perhaps the best example of this is the relationship between the ESP and the NEURC, in which the ESP is frequently consulted by the NEURC for support across a range of reform topics including the WEM, the impact of RES, tariff reform, and market monitoring (such as the Regulation on Wholesale Energy Market Integrity and Transparency, or REMIT). The depth of relations between the ESP and counterpart institutions is an important foundational element that will yield benefits for future years of the program.

ESP also faced challenges in the external counterpart environment, as well as in internal program management and administration.

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In the external environment, the first year was characterized by considerable political uncertainty.

Although Ukraine is quite complex politically, the first year raised the bar given the ascendancy of a new president, new government, and new majority in the Verkhovna Rada. During the year, counterpart distraction was high, due to the election season and its impact on priorities. For the ESP, political uncertainty led to certain workstreams being somewhat deemphasized while others continued unabated.

For instance, the Human and Institutional Capacity Development (HICD) task did not progress at the pace assumed due to what was expected to be a possible significant shake-up in counterpart institutions (such as occurred with the Ministry of Energy and Coal Industries, which was folded into the new Ministry of Energy and Environmental Protection). Conversely, the electricity market reform activities and opening of the new wholesale electricity market advanced relatively quickly. Although many parties, both in Ukraine and outside, advocated for delay (as did the ESP), the WEM still opened on July 1, in the ESP-promoted ‘Safe Mode.’

Some challenges that arose during the first year that have impacted program activities (and remain priorities to address during the second year) include:

● Direct Threat to Independence of the NEURC. Shortly after the election of the new president, the Constitutional Court of Ukraine issued a decision that several articles of the enabling legislation that established NEURC were unconstitutional. The CCU permitted NEURC to keep its present functional responsibilities through December 31, 2019. This was a major and unexpected development. In addition to putting NEURC into a crisis of uncertainty, it also undercut a donor community priority, and was a violation of agreements such as the EU Association Agreement with Ukraine. Dealing with this issue remains a priority, to ensure the NEURC remains reasonably independent and functionally able to fulfill the needs for sector regulation.

● Expansion of RES Obligations. The feed-in tariff program, in place since 2008, has yielded over 5,000 MW of installed capacity at some of the highest tariffs seen globally. The impact has led to the Guaranteed Buyer and Ukrenergo being unable to ensure full payment for RES obligations later this year. This situation has created serious concern among investors, and the solutions are not yet evident. Some of the solutions posed are potentially quite serious and would have an adverse impact (such as the proposal to allow curtailment of large renewable energy projects without compensation). The ESP is modeling various suggested proposals to quantify the financial impact and seek some solutions for how to cover the RES cost burden.

● RES Impact on the Transmission and Dispatch Operator. In the first year of the program, the ESP prepared an analysis of the impact of RES integration and noted that grid operational problems could begin to be witnessed once more than 4,400 MW of intermittent RES resources are installed and operational. The system has now exceeded this amount and operational problems are being reported by Ukrenergo. In response, the ESP is proposing an emergency working group to identify on an urgent basis particular measures that could be put in place to deal with grid integration issues.

● Demonopolization of the Energy System is now on the Government’s ‘Radar.’ The fact that demonopolizing the energy sector is now being discussed openly by key government and Rada

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officials is a major new development that appears to be growing in significance. During the first year, there were theoretical discussions about possible ways to boost competition in some energy subsectors, but this now seems to be a priority that could influence significantly the ESP’s second year activities.

● Rapid Legislative Action Could Impact ESP Considerably. There has been legislation of importance to the energy sector that was launched officially and passed within a single day, with limited to no donor or embassy engagement or warning. For instance, the change to allow imported electricity from Belarus and Russia to be sold bilaterally and not be traded on the day-ahead market was not supported by the ESP. The speed with which this legislation was passed, as well as its impact, implies that the ESP needs to increase its level of dialogue with key parliamentarians and maintain heightened engagement with the Verkhovna Rada.

● Upstream Gas became an Unexpected Priority. The Government of Ukraine undertook a tender of nine blocks using a production sharing agreement (PSA) approach. The ESP responded by reviewing the tender conditions and advising with recommendations on evaluation criteria, but the ESP ability to impact progress was limited. Tenders were awarded and the transparency was not apparent. The ESP is now trying to further influence progress through preparation of a model PSA, proposed changes to the PSA law, and through the development of an upstream regulator, all of which will be pursued during the program’s second year.

Internally, Year One experienced relatively slow mobilization and start-up, which led to extensive changes in ESP personnel. The majority of key personnel were replaced during the first year, and some resource shifting will continue in early year two. The ESP now has new leadership and an extensive project team, with about 60 staff now engaged in the Kyiv operation. The ESP is poised to build on the first year’s progress and further accelerate activities to ensure the program remains on track going forward.

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3. KEY ACHIEVEMENTS BY TASKS AND SUB-TASKS

In this section, specific achievements and milestones are identified for each task and sub-task of the ESP.

TASK 1.1 DEVELOPMENT OF ENERGY MARKET MODELS FOR GAS AND ELECTRICITY AND

HEATING MARKETS AND SIX-MONTH IMPLEMENTING PARTY ACTION PLANS

This task, covering three markets (natural gas, electricity, heat) and related action plans with the various counterparts supporting this work, includes the largest number of activities under the ESP. This task seeks to provide coordinated support to the various stakeholders to advance development of frameworks for electricity, gas and district heating to be in line with EU directives.

SUB-TASK 1.1.1 ELECTRICITY MARKET MODELS

Wholesale Electricity Market Opening and Operation. The ESP supported the GoU in opening and operating the wholesale electricity market, a key milestone in the liberalization of Ukraine’s energy market and in support of the EU’s Third Energy Package. The market launched on July 1 in what is known as “Safe Mode” – a concept developed by ESP to help smooth the market opening while avoiding potential crashes due to unreadiness of the system and market players, as well as due to the existing market concentration. The Safe Mode stipulated various mechanisms and safeguards to ensure that costs for end-consumers remained within tolerable limits without disrupting the financial stability of the wholesale segment through the introduction of price caps.

The ESP actively cooperated with local stakeholders and the donor community, as well as market players, and facilitated the market launch by supporting development of the regulatory framework, financial modeling and impact assessments, as well as, roundtables and trainings for market participants.

The ESP also analyzed the impediments to market opening by assessing 19 high-impact risks that, if materialized, could have handicapped effective market opening and operations. To effectively communicate the critical aspects of each risk, the ESP developed a one-page fact sheet for each potential impediment to use as guides for working with each stakeholder to reduce or eliminate the risk. The ESP also coordinated with donors including the EU Delegation, the Energy Community Secretariat, the EBRD, and the World Bank to align support for respective risks. Proposals were shared with decision-makers to help them address critical issues prior to the market opening.

The new wholesale electricity market introduced significant changes to wholesale electricity trading.

Specifically, new market segments were launched, including the day-ahead (DAM), intra-day (IDM) and balancing market (BPM) segments. New state-owned enterprises were also established, including the Market Operator (responsible for DAM/IDM operation) and the Guaranteed Buyer (fulfills public service obligations (PSO) and manages RES portfolio under the feed-in-tariff (FIT)).

The market’s anticipated operation in Safe Mode will continue for approximately nine months after opening. During this time, market segments will operate with reduced functionality, constrained bidding, restrictions on trading and product range, and additional rules for the market and system operators.

The Safe Mode does not limit participation in the market by interested parties.

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Since market launch, the ESP has monitored the wholesale market operation, analyzing its dynamics, and assessing the impact of the new market structure on market players and end-consumers. Consequently, the project shared recommendations for mitigating issues with decision-makers and other stakeholders.

Other steps the ESP took in preparation for the opening of the wholesale electricity market include:

● Proposed a mechanism for designing the PSO in the electricity market.

● Proposed a centralized bilateral market (CBM) conducted through electronic auctions.

Procedures for the auctions were adopted in a Cabinet of Minister’s (CMU’s) resolution (with the addition of the Guaranteed Buyer), amending a resolution first adopted by the CMU at its May 22 meeting.

● Analyzed market rules and pricing in the balancing market (BPM) and submitted concrete proposals to the NEURC for amendments to the market rules related to imbalance pricing.

Comprehensive Financial Model. To assess the impact of a wide range of factors on consumer prices and market players’ revenues, while ensuring sustainability of the wholesale market, the ESP developed a comprehensive financial model of the electricity market with a range of predefined scenarios for physical parameters and economic indicators (e.g., load forecast, increasing the RES share in generation, the PSO schemes, generation shares on markets, prices, etc.) to consolidate electricity market analysis in one tool and develop recommendations.

Bidding Price Caps in DAM, IDM and BPM. The ESP calculated market vulnerabilities and proposed specific bidding price caps to ensure smooth operation of the wholesale market, considering existing market concentration specifically in the generation segment.

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SUB-TASK 1.1.2 GAS MARKET MODELS

The ESP developed a roadmap (Gantt chart) that examines each step and the potential timing for the gas commodity market implementation. The natural gas roadmap was aligned with the implementation of the electricity exchange.

Regulatory Asset Base Tariff Model. The ESP introduced a RAB tariff model for electricity and trained the NEURC on its use. The RAB model helps the NEURC monitor and set transparent tariffs based on appropriate costs and investments. Using data from regulated DSO companies, the ESP updated the financial model according to changes in the PSO on technical losses; calculated tariffs for the first and second classes of consumers; and updated investment programs. The ESP presented the financial model results to NEURC and DSO and provided NEURC with recommendations on changes to the current RAB legislation.

Natural Gas Daily Balancing. One of the primary challenges faced by Ukraine’s gas industry is excessive system losses, which complicates reconciling natural gas balances and hinders efficient operation of the gas system. Simply put, the size, capacity and age of the grid infrastructure was built to meet much higher gas demands than exist today.

After being postponed twice in 2018, the gas transmission system operator, UTG, began daily gas balancing on March 1, 2019, using a gas platform developed by its in-house specialists. At the outset of the new balancing regime, the distribution system operators reported significant concerns with accuracy of the physical and financial balancing transactions and charges. Since then, however, the DSOs have reported significant improvement in the accuracy of the balancing process. In January 2019, the ESP gas team developed draft recommendations regarding TSO metering systems and balancing procedures.

SUB-TASK 1.1.3 DISTRICT HEATING MARKET MODELS

Top-Down and Bottom-Up Strategy for DH Reform. The ESP outlined a draft long-term development plan for the Zaporizhzhia heating networks and, in consultation with USAID, adopted a two-tier, top-down and bottom-up, strategy for DH reform.

Top-down strategy: The ESP developed a policy document to guide Ukraine towards the stable development of the DH sector. The document identifies the types of changes required, including coordinated national DH policy; tariffs and regulation;

network planning and asset strategies; energy efficiencies and renewables; governance and customer-focused management; investments; and moving from subsidies to social support. Additionally, the ESP completed legal reviews to identify gaps and challenges to existing laws that prevent the long-term financial stability of the DH sector. Stakeholders and vendors were consulted on these proposed changes, and detailed changes to the wording of key laws are being proposed for the first quarter of FY 2020.

Credit: EnergoBusiness

Heating pipe infrastructure (Photo: Stock)

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Bottom-up strategy: The ESP developed political, operational, and technical criteria to select municipal partners for future work. The ESP additionally continued geospatial software implementation work with three municipalities that began under the MERP. The primary purpose of the software is for DH companies to conduct network planning and maintenance more effectively.

The ESP also continued analyses of other municipalities to pre-qualify other types of assistance. To this end, the ESP held meetings with mayors, deputy mayors, and the heads of DH organizations in Slavutych, Chernihiv, and Zaporizhzhia. The ESP held negotiations at the project office with the deputy mayors of Kropyvnytskyi, Chuhuiv and Odesa. At the scientific-practical conference – sponsored by the Ukrteplokomunenergo Association and with participation from the DH organizations heads – the ESP presented key project activities related to DH development. The final list of cities to receive technical assistance will likely be determined on a competitive basis with the involvement of the Ukrteplokomunenergo Association and the Ministry of Regional Development.

DH Tariff Model. The ESP developed a comprehensive financial model for Zaporizhzhia’s DH company, Miski Teplovi Merezhi, and included economically justified cost-plus tariffs for production, transportation and supply activities and an additional scenario for the RAB tariff. Naftogaz is interested in developing the model from the perspective of changes to the PSO (subsidized/capped gas price to DH companies) and the potential attraction of private investors to combined heat and power (CHP) plant development.

SUB-TASK 1.1.4 SIX-MONTH IMPLEMENTING PARTY ACTION PLANS (6MIPAP)

The ESP has six-month action plans with 21 counterparts. The ESP has identified and/or is working on180 activities under the three components of technical assistance, HICD and gender with 21 counterparts. The six-month action plans are the primary mechanism for coordinating work with counterparts across the electricity, gas and district heating sectors.

During the year, the ESP worked with counterparts to draft the initial 6MIPAP, and then update the plans every six months. The ESP expanded the plans from MECI, the NEURC and Energorynok to also include partners covering all key markets: policy (MECI, now MEEP), regulation (NEURC, State Regulatory Services), the electricity market (Energorynok, NSSMC, Ukrhydroenergo, Ukrenergo, Settlement Center, Oshchadbank), natural gas market (UTG, MGU, Geonadra), district heating (former MinRegion, SAEE, KTE), State Statistics Service and civil society organizations (Women’s Energy Club, DiXi Group).

TASK 1.2 DEVELOPING ENABLING LEGISLATIVE AND POLICY ENVIRONMENT

The ESP initiated several successful activities within the fiscal year aimed at developing the enabling legislative and policy environment. For example, ESP drafted a resolution on implementation of the PSO that was adopted by the CMU on June 5, 2019. ESP also proposed regulatory amendments for the safe opening and operation of the day-ahead and intra-day markets and balancing market, including financial settlement—all of which were adopted by NEURC.

In addition, the ESP analyzed the Electricity Market Law, the related market rules, and the progress associated with the financial settlement and clearing in the electricity market and provided technical

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assistance. The ESP also prepared position papers about the NEURC law and potential regulatory models for an upstream oil and gas regulator.

Below are additional examples of relevant activities and results.

Ancillary Services. When the ESP proposed to enable existing service providers to continue providing ancillary services until they are certified, the regulator adopted the necessary changes in the grid code for the provision of ancillary services.

Commercial Metering. The ESP proposed the use of proper commercial metering, which requires changing the balancing market settlement period from daily to monthly because of unreliable metering data. The regulator endorsed this proposal but decided to use a 10-day settlement period due to technical limitations of the balancing software being installed at the TSO.

Pricing in the Balancing Market. The ESP analyzed market rules and pricing in the balancing market (BPM) and submitted to the NEURC specific proposals for amendments to the market rules related to imbalance pricing and outlined them during a public consultation process. The market rules amendments are designed to: avoid artificial deficits in the day-ahead and intra-day markets; motivate market participants to balance themselves; and reduce total balancing market costs. The ESP also analyzed price formation and settlement in the BPM and shared results of the analysis with Ukrenergo.

Prevention of Price Increase for Consumers. After the launch of the WEM, the transmission tariff, applied to all consumers, was adjusted to include renewable FIT compensation. This approach led to a significant increase in electricity prices for all consumers, especially for the large industrial ones directly connected to the TSO grid. To prevent price increases, the ESP proposed to transfer this cost responsibility partly to the Guaranteed Buyer in addition to the PSO for households for a transitional period. Based on the ESP’s recommendations, the CMU adopted amendments to the PSO providing for the reduction of the TSO payment to the Guaranteed Buyer and compensating for renewable energy production through the profits received by the Guaranteed Buyer from its WEM trading activities.

Production Sharing…