Ukraine has liberalized its gas market, but subsidies are still necessary, says ALEKSEY YIZHAK.

Aleksey Yizhak is senior researcher at the government think-tank National Institute of Strategic Studies and Deputy Director of its Regional Branch in Dnipro. He spoke at SET Plan 2016 - CEEC X.

Gas consumption in Ukraine has significantly decreased in the recent years. How can it be explained?

Before the Russian aggression, Ukraine reduced its gas consumption from roughly 60 BCM in 2011 to 50 BCM in 2013. It can be explained by initial attempts to reform the gas market. Implementation of some parts of the European legislation resulted in better planning, more transparency and efficiency.

As of 2014, the reforms intensified as drastic reduction of consumption became an issue of survival during the Russian aggression. Internal gas prices multiplied and in two years they reached the level of European hubs. Households and heating providers were forced to severely economize. Ukraine consumed about 42 BCM in 2014 and 33 BCM of gas in 2015. Apart from the natural factor of gas market reform, an unnatural factor played the role: GDP decrease due to Russian occupation of Crimea and military destruction of Ukrainian population and economic assets in Donbass.

In 2016, Ukraine consumed roughly the same amount of gas as the year before. Naftogaz expected further decrease, but it turned out that subsidies to households for buying gas and heating slowed down the trend. Certainly, it did not happen only because of subsidies. Last winter (2016/2017) started earlier and was colder than the previous one.

But the Ukrainian government wanted to liberalize the gas market, which would have led to a price increase. How come subsidies incited consumption?

The subsidies to households were absolutely necessary and they were introduced parallel to market liberalization. Multiplication of internal gas prices during such a short time period was just unbearable for households.

Subsidies did not stop or reverse the reform. The situation now is completely different than several years ago, when the government kept artificially low prices while subsidizing the Naftogaz through opaque financial mechanisms with consequent problems for macroeconomic stability. Now the subsidies are funded from land use taxes on gas production and they go directly to families with low income. The mechanism is more transparent, even though it still requires improvements.

How much gas does Ukraine still buy from Russia?

None. Physically, all imported gas in 2016 came from the Western direction via three routes and predominantly from Slovakia.

Energy security remains a big issue for Ukraine. Slovakia helped with the reverse flow. But what can the EU do to further increase energy security for Ukraine?

The first the EU as an entity can do is to be cautious about projects like Nord Stream 2. The pipeline project is not commercial, but political. It’s cheaper to transit gas through Ukraine than to build another pipeline, whose capacity will be, moreover, excessive.

The other thing EU can do is not to lose interest in Ukraine’s gas transit system.

Are you talking about the EU or European companies?

I am talking about the European Commission. Companies look, first of all, on the position of the European Commission and, second, on the position of banks and financial institutions.

Is the EU doing enough to support Ukraine’s energy security?

People in Ukraine may feel it is not enough. But in my view, the support is big and valuable. Until now, the support has been important enough for Ukraine to solve the basic issues of energy security caused, among other, by an active war with Russia. It was unclear. But the European Commission helped to solve the problem. Last winter, Ukraine managed to supply its market without any imports from Russia.

Daily consumption of gas in Ukraine from June 2014 to April 2017

Source: NISS

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The project has received funding from the European Union’s Horizon 2020 research and innovation program under grant agreement No 730882.

Supported by a grant from Norway. Co-financed from the Slovak State Budget. Program SK08 – CBC – Slovakia – Ukraine: Cooperation across the Border.