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April 26, 2007

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Reference ID Created Released Classification Origin
07KYIV993 2007-04-26 12:36 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

DE RUEHKV #0993/01 1161236
R 261236Z APR 07

E.O. 12958: N/A 
KYIV 00000993  001.2 OF 003 
Treat as Sensitive but Unclassified.  Not for Internet. 
1. (U) Summary:  Many GOU agencies and international development 
organizations agree on the urgency of improving reliability and 
efficiency in the municipal heating and combined heat and power 
(CHP) sector, which accounts for about 16% of Ukraine's total 
natural gas consumption.  Despite the clear need to modernize a 
sector where Soviet-era equipment is the rule, the GOU has long 
ignored this task, claiming it lacked the funds to take it on.  End 
Alchevsk - Lessons Not Learned 
2. (U) The most striking illustration of the problems of the 
Ukrainian heating sector was provided by the southeastern city of 
Alchevsk.  In January 2006, Alchevsk experienced the worst heat 
supply system shortage in Ukraine since the breakup of the Soviet 
Union.  The 2006 winter was one of the harshest in recent memory, as 
outdoor temperatures plunged to -35 C (-31 F).  Due to multiple pipe 
breakages during the severe cold, 8 schools, 13 preschools, and 
apartment buildings that housed 67,000 people were cut off from 
heat.  Many of the 120,000 inhabitants had to be relocated to other 
cities.  It took more than a month to restore heat, and a thorough 
modernization has not yet been completed. 
3. (U) The crisis in Alchevsk revealed several problems endemic in 
-- The heating infrastructure was in a poor state of repair. 
Ukrainian energy experts stated the crisis could have been 
prevented, if the GOU had taken seriously warning signs that had 
been apparent for more than 15 years. 
-- The centralized nature of the municipal heating system 
exacerbated the situation.  Two, enormous, Soviet-built boilers 
serviced all of Alchevsk, and when access to both failed, it 
affected the entire city. 
-- Local leaders were not prepared to respond to the crisis.  Rather 
than seeking central government assistance, they hoped to resolve 
the situation on their own, and kept Kyiv uninformed. 
-- Even once the Minister of Emergencies was involved, authorities 
were unable to restore heat without the help of an international 
relief effort, including a Russian-donated boiler. 
4. (SBU) Although, the Alchevsk crisis triggered discussions on the 
necessity of reforms in this sector, almost no tangible 
accomplishments have been achieved so far.  The State 2007 Budget 
allocated 4 billion UAH for the communal services sector including 
district heating, but these funds will be made available to local 
budgets only on the condition of project co-financing and the 
introduction of energy-saving technologies in the housing and 
communal services arena.  The mild 2006-2007 winter both lessened 
the GOU's sense of urgency and averted a repeat of the crisis. 
During a March, 2007, visit by a US Agency for International 
Development (USAID) multi-donor municipal heating modernization 
assessment team, several government officials and energy experts 
admitted that the next severe winter could easily produce another 
Alchevsk.  They also conceded that there were no viable plans 
underway to address this risk. 
Soviet-Era Heating Equipment and Housing 
5. (U) The majority of Ukrainian municipalities receive heat from 
one or more Soviet-era heating systems.  Due to high costs, only a 
few municipalities have tried to replace this obsolete equipment. 
Rather than replacing the old systems with new ones, other 
municipalities have attempted to repair and modernize the existing 
systems, sometimes by using substandard materials and equipment. 
(Note: In 2006, 1649 boilers throughout Ukraine were replaced, or 
about 5 % of the total number of boilers; 663 boilers were repaired 
or about 2%.)  The first priority of all levels of Ukrainian 
government has been to keep utility rates low, rather than raise 
them in order to finance proper upkeep and replacement. 
Disappointed by unreliable services, some apartment building 
residents, especially those in smaller cities, have installed 
individual heating systems in their apartments.  If the number of 
such cases grows, it may undermine the viability of municipal 
heating companies in the future.  In fact, a few cities have 
completely replaced district heating with individual boilers and 
KYIV 00000993  002.2 OF 003 
shut down their district heating facilities.  The hard reality, 
however, is that few apartment buildings can be fitted with 
individual boilers, so for now the dependence upon municipal heating 
remains high. 
6. (U) Ukraine's poor heating infrastructure is not only unreliable, 
but is also inefficient.  Experts estimate that the 30 year-old and 
older ruste
d pipes, covered in tape, lose up to 30% of the heat they 
are meant to carry. Municipalities have tried to replace extremely 
worn-out pipes, but such replacements can take years due to lack of 
financing.  Moreover, inadequate housing insulation and low-quality 
construction materials, coupled with almost no regular maintenance, 
compounded this inefficiency. 
Uncertain Gas Prices 
7. (SBU).  Rising natural gas prices add urgency to Ukraine's need 
for improved energy efficiency in the heating sector, which depends 
on imported rather than domestically produced gas.  Gas Ukraine's 
Head of Natural Gas Sales Department Yuri Kardash told us that 100% 
of the gas used to fuel district heating plants is imported. 
Ukraine currently pays $130 per thousand cubic meters (tcm) for 
imported gas, and expects the price to increase to more than $180 
per tcm in 2008, according to Kardash.  Although determined to keep 
this price low, Minister of Fuel and Energy Yuriy Boiko, noting that 
Poland currently pays $300/tcm for imported gas, has acknowledged 
that Ukraine might only enjoy favored pricing over the short term. 
Present Situation Offers No Solutions 
8. (SBU) Local, regional, and national officials we spoke with in 
March agreed that the GOU lacked remedies for the problems of the 
heating sector.  Local officials told us their budgets were 
inadequate to fund major investments. National subsidies to local 
budgets were not targeted exclusively on energy investment and were, 
in any event, scarce and distributed unevenly from oblast to oblast. 
 (Comment: From our observations, the oblasts that were less 
dependent on central government budget subsidies seemed more likely 
to take the initiative in revising utility rates and implement 
reforms.  Those which relied heavily on such subsidies appeared to 
be awaiting direction from the center.  End Comment.) 
9. (U) According to these officials, the district heating companies 
were not in a position to finance investment themselves; most were 
in poor financial condition.  Many were in debt to the energy 
companies, just as their own customers were in arrears on their 
heating bills.  Although many cities reached collection levels of 
90-100% before the current winter, rate increases necessitated by 
the gas price spike resulted in collections as low as 30% in some 
cities, and even the best cities dropped to 70%.  Nonpayment was 
accelerated this winter when some national political leaders 
challenged those cities with cost-recovery rates to justify the new 
rate levels, and told consumers not to pay their bills. As a result, 
some cities were compelled to roll back their rates to 
below-recovery levels.  The issue became highly politicized, and the 
central government had not set a clear nationally unified rates 
10. (U) Some GOU entities, including local and oblast governments 
have sought help from donors such as the World Bank (WB) and the 
European Bank for Reconstruction and Development (EBRD).  USAID has 
brought government officials and donors together, and itself has 
considered offering technical assistance to improving municipal 
energy efficiency.  Donors' goals for Ukraine's heating sector 
include helping it become financially viable, adjust to rising gas 
prices, tackle the problem of debt within the system, and assist low 
income households in paying higher costs. 
Metering and Energy Accountability 
11. (U) The USAID assessment team noted that an effective way of 
improving energy efficiency would be the installation of proper 
metering and regulating systems for consumers of heat and other 
utilities.  It would also require significant adjustments to the 
regulatory and legal framework for effective meter usage.  Although 
all Ukrainian households are equipped with electricity meters, only 
60% have gas meters, some have water meters and almost none have 
KYIV 00000993  003.2 OF 003 
heat meters.  EU Commission Energy Efficiency Project Manager for 
Ukraine, David Ceschia, pointed to Poland and Romania as examples of 
European nations which had benefited greatly through programs to 
improve metering.  By forcing individuals to take fiscal 
responsibility for their own heat usage, the programs had 
significantly lowered overall consumption, he said. 
12. (U) A few cities and oblasts have, however, actually taken steps 
on their own to increase energy efficiency. USAID assessment team 
leader, Ira Birnbaum noted that leaders in Ivano-Frankivsk oblast 
and the city of Lviv, both in western Ukraine, had supported the 
creation of condominium associations that transfer the 
responsibility for building maintenance and improvements to the 
owners instead of the municipalities.  Leaders from these western 
areas have reported greater energy efficiency as condo owners took 
more responsibility for their buildings.  Even though local leaders 
in Lviv have had some energy efficiency success, they acknowledged 
that they still have many areas to improve, and they also underlined 
the real urgency for implementing change in the municipal heating 
sector immediately. 
Comment:  Consensus, But Little Action 
13. (SBU) Even though the GOU readily acknowledges the need to 
reform the municipal heating sector, signs of progress are few.  To 
try to address this long-term inactivity, USAID plans to encourage 
the formation of a regular roundtable of Ukrainian officials and 
international donors in order to begin implementing municipal 
heating development programs as soon as possible.  Without 
multilevel governmental and legislative support from Ukraine for 
such international projects, it is doubtful that the current 
municipal heating sector could become reliable, let alone 


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