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DOCUMENT OF THE EUROPEAN BANK
FOR RECONSTRUCTION AND DEVELOPMENT
Approved by the Board of Directors on 21 July 20211
UKRAINE
GRCF2 W2 KYIV DISTRICT HEATING PROJECT
[Redacted in line with the EBRD’s Access to Information Policy]
[Information considered confidential has been removed from this document in
accordance with the EBRD’s Access to Information Policy (AIP). Such removed
information is considered confidential because it falls under one of the provisions
of Section III, paragraph 2 of the AIP]
1 As per section 1.4.8 of EBRD’s Directive on Access to Information (2019), the Bank shall disclose Board
reports for State Sector Projects within 30 calendar days of approval of the relevant Project by the Board of
Directors. Confidential information has been removed from the Board report.
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TABLE OF CONTENTS
Page
TABLE OF CONTENTS ............................................................................................ 2
ABBREVIATIONS / CURRENCY CONVERSIONS ............................................. 3 PRESIDENT’S RECOMMENDATION ................................................................... 4 BOARD DECISION SHEET ...................................................................................... 5 ADDITIONAL SUMMARY TERMS FACTSHEET .............................................. 6 1. Strategic Fit and Key Issues .............................................................................. 7
1.1 STRATEGIC CONTEXT ................................................................................ 8 1.2 TRANSITION IMPACT ................................................................................ 11 1.3 ADDITIONALITY ........................................................................................ 12 1.4 SOUND BANKING - KEY RISKS ................................................................. 13
2. Measuring / Monitoring Success ..................................................................... 15
3. KEY PARTIES ................................................................................................. 17 3.1 GUARANTOR ............................................................................................. 17
3.2 BORROWER ............................................................................................... 18 4. Market context.................................................................................................. 18 5. Financial / Economic Analysis ........................................................................ 19
5.1 FINANCIAL PROJECTIONS ........................................................................ 19
5.2 SENSITIVITY ANALYSIS ............................................................................ 19 5.3 PROJECTED PROFITABILITY FOR THE BANK ........................................... 19
6. Other Key Considerations ............................................................................... 19 6.1 ENVIRONMENT .......................................................................................... 19 6.2 INTEGRITY ................................................................................................ 20
6.3 ECONOMIC ANALYSIS ............................................................................... 20 6.4 AFFORDABILITY ....................................................................................... 20
ANNEXES TO OPERATION REPORT................................................................. 21 ANNEX I – SHAREHOLDING AND ORGANISATIONAL STRUCTURE ...... 22
ANNEX II - INVESTMENT PROGRAMME ........................................................ 23 ANNEX III – PROJECT IMPLEMENTATION AND PROCUREMENT PLAN31 ANNEX IV - IMPLEMENTATION PROGRESS OF GREEN CITIES FRAMEWORK
33
ANNEX V - HISTORICAL FINANCIAL STATEMENTS .................................. 34 ANNEX VI - DISTRICT HEATING AND ELECTRICITY MARKET ANALYSIS 35 ANNEX VII – ECONOMIC ASSESSMENT .......................................................... 41
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ABBREVIATIONS / CURRENCY CONVERSIONS
BAT Best Available Techniques
CDP Corporate Development Programme
CHS Central Heating Substation
CHP Combined Heat and Power Plant
City City of Kyiv
Company Communal Enterprise “Kyivteploenergo”
Consultant Ramboll, the feasibility study consulting company
DH District Heating
DSCR Debt Service Coverage Ratio
ELVs Emission Limit Values
ESAP Environmental and Social Action Plan
ESDD Environmental and Social Due Diligence
EUR Euro
Gcal Giga calorie – unit of heat
GCAP Green City Action Plan
GDP Gross Domestic Product
GHG Green House Gases
IFI International Financial Institutions
IFRS International Financial Reporting Standards
IHS Individual Heating Substation
IRR Internal Rate of Return
MW megawatt – unit of power
MWh megawatt hour – unit of energy
Nm3 cubic metre – unit of volume for natural gas
OHS Occupational Health and Safety
O&M Operations and Maintenance
PIP Priority Investment Programme
PIU Project Implementation Unit
PP&R Procurement Policies and Rules
PR Performance Requirements
PSC Public Service Contract
Regulator National Energy and Communal Services Regulatory Commission
SCADA Dispatch and monitoring system
SIDA Swedish International Development Cooperation Agency
TC Technical Cooperation
UAH Ukrainian Hryvnia
CURRENCY CONVERSION
(as of June 2, 2021 based on the National Bank data)
EUR 1 = UAH 33.5
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PRESIDENT’S RECOMMENDATION
This recommendation and the attached Report concerning an operation in favour of Communal
Enterprise “Kyivteploenergo” (the “Company”), a communal enterprise incorporated in
Ukraine, are submitted for consideration by the Board of Directors. The Company is wholly
owned by the City of Kyiv (the “City”).
The facility will consist of a loan to the Company in the amount of up to EUR 140 million
consisting of two tranches: i) the first tranche of up to EUR 70 million, will be committed at
signing (“Tranche 1”) and ii) the second tranche of up to EUR 70 million, will be committed
at the Bank’s discretion upon satisfactory progress with tendering and implementation
(“Tranche 2”). The investment will be guaranteed by the City.
The operation will enable the Company to rehabilitate and modernise the district heating
infrastructure in the City, decrease operating costs, reduce CO2 emissions and make the district
heating system more energy efficient. The operation is a ‘trigger’ project under the Green Cities
Framework 2 (“GrCF2”) Window 2 approved by the Board on 31 October 2018 and extended
on 28 October 2020. As part of the project, the City has undertaken development of a Green
City Action Plan (“GCAP”) with support from the TC–funded consultants. The project is 100%
GET eligible.
Through the GCAP and subsequent policy dialogue, the Bank will work closely with the City
of Kyiv to support its efforts to decarbonise its district heating sector. Given the size of the
sector, policy dialogue will have a staged approach, commencing with the adoption and
implementation of a 2030 District Heating Strategy, followed by the development and adoption
of a long-term decarbonisation plan and its subsequent implementation subject to affordability
and availability of financing. Both measures will be covenanted in the legal documentation.
Pre-signing Technical Cooperation (“TC”) support for this operation has been provided by the
Government of Sweden through SIDA-EBRD Ukraine Energy Efficiency and Environment
Cooperation Fund (“Sida”) to finance the feasibility study and GCAP preparation in addition
to a separate technical design preparation and financial audit prepared by USAID. Post-signing
TC support for project implementation for the Company is proposed [REDACTED]. Further
support will be provided by USAID in supporting the Company with corporate governance and
developing a decarbonisation pathway.
I am satisfied that the operation is consistent with the Bank’s Country Strategy for Ukraine, the
Municipal and Environmental Infrastructure Sector Strategy 2019 - 2024 and the Agreement
Establishing the Bank.
I recommend that the Board approve the proposed loan substantially on the terms of the attached
Report.
Odile Renaud-Basso
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BOARD DECISION SHEET
UKRAINE – GrCF2 W2 Kyiv District Heating- DTM 50839
Framework: REGIONAL – Green Cities 2 – Window 2 - DTM 50674
Transaction
/ Board
Decision
Board approval2 is sought for a senior loan of up to EUR 140 million in favour of Communal
Enterprise “Kyivteploenergo” (the “Company”), tranched into EUR 70 million committed
(Tranche I) and EUR 70 million uncommitted (Tranche II) financing. It is proposed that the
approval to commit Tranche II is delegated to Management. The Project is a “trigger” investment under the Green Cities Framework 2 in Kyiv.
Client Communal Enterprise “Kyivteploenergo”, a municipal district heating utility wholly owned by
the City of Kyiv (“City”).
Main
Elements of
the
Proposal
Transition impact: Green through (i) significantly contributing to climate change mitigation by
reduction of GHG emission (193,150 tonnes of CO2 per annum), (ii) introducing real-time heat
supply monitoring and dispatching system, which should also improve quality and reliability of
DH and hot water services for 2.7 million residents, and (iii) contributing to pollution prevention
and improved air quality [REDACTED]. The operation will also support the development and
implementation of a comprehensive Green City Action Plan (“GCAP”) that will require the City
to measure, identify, benchmark and prioritise environmental challenges and identify mitigation
actions and investments. Such a plan will set a vision and benchmarks for the City’s sustainable
development and will help the City and key stakeholders to prioritise and make informed
decisions regarding investment and reforms aimed at addressing identified challenges. The
GCAP will include measures that support decarbonisation of the energy sector including demand
side management and energy efficiency solutions.
Well-governed through promotion of good governance through the introduction of a public
service contract (“PSC”), which will support the client in the improvement of financial and
operational performance, commercialisation of operations, cost recovery tariff settings, quality
of management and institutional capacity building, including in the area of asset management.
The corporate development of KTE is also supported by a large-scale independent project
financed by USAID, which should provide further synergies along with the PSC.
Additionality: Financing Structure. The market for long-term municipal borrowing for
municipal infrastructure projects in Ukraine is very limited; local bond and loan markets offer
short maturities, other IFI facilities require sovereign backing.
Standard setting: Helping projects and clients achieve higher standards. The Project will be
the “trigger project” for the City under GrCF2, through which the Bank will support Kyiv in
developing its GCAP. The GCAP will help the City identify and prioritise the environmental
challenges to be addressed through long-term development goals. Moreover, the Project will
include further policy dialogue and will covenant a low carbon pathway for district heating. In
addition, the Project envisions additional gender-sensitive benchmarks, which will be monitored
throughout the project’s life cycle.
Knowledge, innovation and capacity-building. EBRD provides support to strengthen capacity
of the client with respect to procurement, implementation, corporate development.
Sound banking: The Project is designed to improve the creditworthiness of the Company. The
financial structure benefits from a full municipal guarantee by a financially strong guarantor with
strong operating performance and local economy base, moderate direct & guaranteed debt.
Key Risks - Credit risk of the Company and the City. [REDACTED]
- FX and interest rate risks. The financial forecasts demonstrate resilience [REDACTED].
- Implementation/ Operating risk. The risk will be mitigated through the appointment of
international procurement and implementation consultants
Strategic Fit
Summary
Country Strategy for Ukraine underlines promoting privatisation and commercialisation in the
public sector to increase competitiveness and foster good governance. Municipal and
Environmental Infrastructure Sector Strategy 2019 - 2024 lists as strategic priority scaling up
high GET-impact investments in district energy sector.
2 Article 27 of the AEB provides the basis for this decision.
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ADDITIONAL SUMMARY TERMS FACTSHEET
EBRD
Transaction
A senior loan of up to EUR 70 million committed (Tranche I) and EUR 70 million
uncommitted (Tranche II) financing to Communal Enterprise “Kyivteploenergo” (the
“Company” or “KTE”), a municipal company wholly-owned by the City, to finance
critical investments into district heating (“DH”) infrastructure in the capital of Ukraine.
The loan will be secured by full municipal guarantee from the City of Kyiv (the “City”).
Existing Exposure Company: none
Guarantor: EUR 52.6 million [REDACTED].
Maturity / Exit /
Repayment
A 13-year maturity [REDACTED].
Potential AMI
eligible financing
n/a
Use of Proceeds The proceeds of the loan and local contribution will be used to finance the priority
investments aimed at significantly improving the energy efficiency, reducing energy
losses, gas and electricity consumption and improving the quality of district heating
services in the City, and the implementation support consultancy services.
[REDACTED]
Investment Plan [REDACTED]
Financing Plan [REDACTED]
Key Parties
Involved
The Company as the borrower and operator;
The City as the Guarantor of the Loan.
Conditions to
subscription /
disbursement
[REDACTED] Procurement contracts procured in the manner satisfactory to the
Bank in line with the EBRD Procurement Policies and Rules (the “PP&R”).
Key Covenants [REDACTED]
Security /
Guarantees
Guarantee by the City.
Other material
agreements
Guarantee Agreement
Associated Donor
Funded TC and
co-investment
grants/concessiona
l finance
A. Technical Cooperation (TC)
Pre-signing:
TC 1: Feasibility Study . The cost of this TC assignment is EUR 450,000, financed
under Sida-financed Ukraine District Heating Project Preparation Framework.
TC 2: Green City Action Plan. The TC supports the development and
implementation of Green City Action Plan for the City of Kyiv. The cost of this TC
assignment is EUR 300,000, financed by Sida.
Post-signing:
TC3: Project Implementation Support. The TC will support the PIU with
preparing procurement documentation, carrying out the tender and contract
implementation. The estimated total cost of this assignment is up to EUR 7,200,000,
of which an estimated TC co-financing of up to EUR 400,000 is required
[REDACTED].
Cost sharing:
The Client will provide parallel contribution to the Project by co-financing the Project
Implementation Support assignment (TC3) in the amount of up to EUR 6.8 million from
the EBRD loan proceeds.
B. Co-investment grants / Concessional Finance (Non-TC) None.
[REDACTED]
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INVESTMENT PROPOSAL SUMMARY
1. STRATEGIC FIT AND KEY ISSUES
Recognising the transformative potential of long-term strategies and plans developed with the
assistance and expertise of the Bank and the need to improve its overall environmental
performance and to address climate change challenges, the City approached the Bank with a
request to join EBRD Green Cities. The proposed Project is a ‘trigger’ investment under the
Green Cities Framework 2 (“GrCF2”) and will enable the Bank to support the City in the
development of a Green City Action Plan (“GCAP”) to identify, prioritise and find ways to
address in a holistic manner its most pressing environmental challenges.
District heating is one of these challenges given historic underinvestment (see Section 1.1) and
the proposed project is the trigger project for Kyiv under Green Cities Framework.3 The
development of Kyiv’s GCAP has already been launched to ensure efficient use of time. The
GCAP will support identification of measures that support decarbonisation of the heating sector
in Kyiv, including demand side management solutions and introduction of renewable energy
heat sources such as heat pumps which will gradually decrease and cease the reliance on fossil
fuels in the system. In addition to the DH sector, the GCAP will focus on identifying investment
project opportunities in the following priority green infrastructure development areas: water
and wastewater, urban transport and sustainable urban mobility, public building energy
efficiency, solid waste, renewable energy, climate resilience, afforestation of abandoned green
areas, etc.
To deepen the City’s climate mitigation ambitions, the Bank will covenant in the financing
documents (i) the development, adoption and implementation of a DH Sector Strategy for the
City until 2030, which includes an additional 15% reduction of GHG emissions through energy
efficiency measures, DH network upgrades and introduction of the low-carbon heat generation
facilities; and (ii) the development and adoption of a Long-Term Decarbonisation Plan for DH
Sector of the City aimed at reaching full carbon neutrality of the DH services by 2060 and its
subsequent implementation subject to affordability and availability of financing. The latter will
be developed with USAID support.
Although, given sub-sovereign nature of the projects, the covenants referenced above are at the
City and/or Company level, this Project, along with other green Bank investments, underlies
the Bank’s ongoing policy dialogue with the Government with respect to NDC revision (in
close cooperation with the EU Delegation) and undertaking of more ambitious climate agenda.
Ukraine has expressed its commitment to address climate change and contribute to the Paris
Agreement through its draft second Nationally Determined Contribution (“NDC”). Ukraine
published the draft NDC update in April 2021, which increases its economy-wide target to
reduce GHG emissions by at least 65% below the 1990 level by 2030. The NDC is at final stage
of approval by the Government and is expected to be legally adopted by August 2021. One of
the priority areas of focus to achieve the new targets is the modernisation and efficiency increase
of district heating systems (with a priority focus on increasing heat supply from renewable
energy sources, energy efficiency improvements in networks and high-efficiency cogeneration
deployment). Recognising that heating is a hard to abate sector, energy efficiency measures
play the prominent role in how Ukraine will achieve its NDC target. While NDCs are typically
not granular to the level of individual installations, the Project is considered fully in line with
3 The Project is eligible under EBRD Green Cities due to its significant GHG savings (26% for the main
component).
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this objective because (a) the district heating network of Kyiv is by far the largest in the entire
country and (b) the proceeds are to be used specifically for energy efficiency and high efficiency
cogeneration upgrades.
1.1 STRATEGIC CONTEXT
District Heating (“DH”) is the most common form of heating for urban homes and businesses
in Ukraine. Around half the population of Ukraine uses DH services, and the DH market size
is estimated to be circa EUR 1.5 billion per annum. For more than 30 years, the DH sector has
suffered from [REDACTED] underinvestment, which led to the accumulation of technical,
financial and institutional problems. According to the National Regulator, 40% of the boilers
in operation require urgent replacement or modernisation. The majority of DH networks use
out of date pipeline technology with poor insulation; they have been in operation for more than
25 years, and leakages appear on a daily basis. The DH systems are supply-driven, where boiler
operators determine heat generation levels manually rather than follow actual customer
demand. Heat distribution is unbalanced, and the levels of DH system monitoring and metering
are not appropriate.
The combined energy losses in the worn-out and technologically obsolete DH systems can
reach a staggering 40-50% from generation to customers’ homes. Moreover, in contrast to DH
systems in Western Europe, the majority of DH systems in Ukraine are comprised of multiple
smaller, hydraulically separate networks with their own heat source. These systems require
greater interconnection and new operating modes to allow the use of multiple heat sources, also
known as “pooled operation”.
Multiple political disputes on the affordability of DH tariffs have resulted in below cost-
recovery tariffs, cross-subsidisation amid various categories of customers and growing payables
for fuel. In addition to the deteriorating asset base and poor liquidity, DH utilities experienced
decreasing demand caused by disconnections of unsatisfied customers. A number of towns and
even a couple of mid-sized cities in Ukraine were forced to abandon their DH systems due to
the degree of deterioration and the level of disconnections. In the absence of DH, most residents
switched to inexpensive individual fossil fuel based heating solutions, which are extremely
challenging to decarbonize and monitor. Natural gas remains the dominant fuel for the DH
sector in Ukraine, and DH utilities including combined heat and power plants (“CHPs”)
account for more than 25% of the Ukraine’s total natural gas consumption.
Recognising the social and economic importance of DH infrastructure for Ukraine, and the
immense potential of this “future proof” technology for decarbonisation of heating, the Bank,
together with other IFIs, has been widely involved in the financing of modernisation of
municipal DH facilities. To date, the portfolio of the Bank in Ukraine includes two completed
DH projects in the cities of Cherkasy and Ivano-Frankivsk, and five on-going DH projects in
the cities of Chernivtsi, Lutsk, Lviv, Ternopil, and Zhytomyr. The implementation of these
projects has resulted in significant reduction of natural gas, water and electricity consumption,
decreased CO2 and NOx emissions and the improved quality of DH services.
The Kyiv DH system is the third largest in Europe and one of the largest in the world. The total
length of the network is 2,721 km in two-pipe dimension. It supplies circa 12.7 TWh of heat to
almost 2.7 million residents as well as numerous commercial and public sector clients. Circa
46% of heat in the City is generated by the two largest CHPs in Ukraine (CHP No. 5 and 6),
which are also vitally important for the country’s electric grid stability due to their location,
grid connections and combined capacity of 1,200 MWe. With the exception of the waste
incineration plant “Energiya” and some small biomass plants, heat generation in Kyiv is almost
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entirely fossil fuel based.
KyivTeploEnergo (“KTE” or the “Company”), a 100% municipal utility that operates the Kyiv
DH system, burns over 2.3 billion Nm3 of natural gas per annum, i.e. more than 7.5% of
Ukraine’s total natural gas consumption or circa 30% of natural gas consumed by all DH
companies and CHPs in Ukraine. Both the CHPs and the majority of boiler houses were built
or reconstructed in the 1970-80s. They are inefficient, approaching the end of their operational
life and require modernisation or replacement to ensure sustainability of DH services.
The feasibility study consultant, together with the Company and the City, have developed
strategic and priority investment programmes for the Company. Their objectives are to increase
overall energy efficiency, reduce natural gas, electricity and water consumption per MWh unit
of heat supplied to a customer, decrease operating and maintenance costs, create favourable
conditions for the introduction of demand side measures and ensure integration of renewable
or waste heat based energy sources into the Kyiv DH system. The Priority Investment
Programme (“PIP”), which is to be co-financed from the Bank’s loan proceeds, focuses on
(i) critical modernisation of the Company’s CHPs, (ii) reconstruction of several boiler houses
and associated network interconnection, which will allow the closure of a number of small,
inefficient boiler houses, (iii) installation of a modern monitoring and dispatching system, and
(iv) replacement of selected DH networks and further interconnections. The modernisation of
the CHPs will include the installation of a new flue-gas heat recovery unit at CHP-5, and the
installation of new gas-fired cogeneration units with a large thermal storage at CHP-6. The
latter should eventually replace one of the two obsolete energy blocks, which currently operates
in the summer months to provide electricity to the local grid in extremely inefficient conditions.
The modernisation of the CHPs will not only improve efficiency and reliability of heat
generation, it will also contribute to the improvement of the stability and sustainability of the
electricity grid of Kyiv. This is especially important when the share of green energy in the
country’s generation mix is growing (almost 100% increase in 2020 versus 2019), and there is
a need for highly efficient balancing generating capacities to support greater integration of
intermittent renewable power technologies. Such balancing capacities are prerequisites for
synchronisation of the Ukrainian power grid with the European Network of Transmission
System Operator – Electricity (“ENTSO-E”).
There is also a particular grid balancing need at the City level. The districts connected to the
CHP-6 substation require circa 40-80 MWe of peaking power during non-heating season. The
combination of thermal storage and highly responsive cogeneration units will allow for
electricity demand-led operation of the CHP during times of low heat demand, and ensures that
all produced heat can be efficiently utilised in the DH network. The modernisation of CHP-6 is
also imperative to ensure the DH system has sufficient capacity to connect the rapidly growing
number of new multi-story residential buildings in the northeast of the City. High growth is
expected in area served by CHP-6 due to the planned commissioning of a new bridge and a new
metro line. [REDACTED] The new cogeneration equipment will be compliant with “Best
Available Techniques” (“BAT”) requirements ensuring that NOx and CO emissions will be
significantly lower than the existing units and compliant with the EU Industrial Emissions
Directive (Directive 2010/75). CO2 emissions intensity from the new equipment will be below
240 gCO2/kWh of electricity or heat produced. The facility will also be ready to run on a
hydrogen-natural gas mix or even pure hydrogen in the future, depending on the availability of
appropriate hydrogen supply infrastructure and with appropriate plant modifications.
The economic assessment incorporating shadow carbon prices identified that the proposed
investment delivers the highest economic benefits out of the options assessed, including both
the base case (do-nothing scenario) and two low carbon alternatives (biomass-fired CHPs of
different configurations). However, biomass generation at this scale requires vast quantities of
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biomass. There are serious logistical and environmental constraints in sustainable supplies of
biomass in Kyiv and the surrounding region. A detailed carbon lock-in risk assessment shows
that the PIP implementation has a low risk of carbon lock-in across the assessed technical,
economic and institutional factors. The Project is unlikely to lock out low carbon fuel sources,
such as hydrogen and biogas, should these become economically viable, and/or implementation
of low carbon technologies, including those based on biomass, in the future. Furthermore, the
gas-fired CHP-6 can transition to a peaking or even a backup role as greener baseload heat and
generation sources are introduced. The Project will operate in a market that does not exclude
entry of third party heat producers and suppliers; there are no commercial arrangements related
to the Project that would oblige KTE to utilise the cogeneration facility in full or partial capacity
when lower carbon options become economically feasible. The wider institutional factors of
alignment with the NDC and commitments of KTE and the City of Kyiv to develop and adopt
low carbon strategies, which are covenanted, are also relevant.
Two alternative heat technologies (biomass-fired boilers and heat pumps based on Kyiv
wastewater treatment plant) have been determined to have the greatest potential for introduction
in Kyiv in the next decade based on the strategic investment programme developed by the
Feasibility Study Consultant. A few medium-sized biomass boiler plants can be installed in less
dense and heavily trafficked areas on the outskirts of Kyiv. The proposed heat pump plant
would be located at the Bortnychi wastewater treatment plant near the southern border of the
City. The heating networks in the area surrounding the plant are hydraulically separate from the
heating areas serviced by the CHPs (effectively, they are operated as a separate DH network).
The wastewater treatment plant is currently undergoing a major reconstruction using
concessional financing provided by the government of Japan.
Both of these options are included in the strategic investment programme developed by the
Feasibility Study Consultant and the City’s DH Sector Strategy to 2030. The proposed
renewable solutions will require further feasibility work and capacity building; however,
Ukraine has an industrial base with experience of constructing and operating biomass plants.
Challenges include the need to develop sustainable biomass supply chains and the need to
demonstrate large scale heat pump operation in Ukraine (at present, there are no large-scale
heat pumps operating in Ukraine in either DH or industrial applications) Heat pumps are
electrically driven and improvements to Kyiv’s electricity supply will further support their
deployment. The planned investments in modern control and monitoring systems and additional
DH network interconnections should also improve the network’s ability to integrate renewable
or waste heat based sources.
At the same time, installation of a new monitoring and dispatching system, also known as
SCADA, which is included in the PIP, should optimise heat generation based on actual demand
and ensure quick detection of any heat carrier leakages or equipment malfunctions. The
COVID-19 crisis reemphasised the need for automated monitoring and control and
strengthened the dedication of the City authorities to implement the developed PIP including
SCADA. This is confirmed by the approval of the proposed PIP by two commissions of the
City Council and the approval of the PIP and the municipal guarantee by the City Council on
22 April 2021. The City of Kyiv has been implementing several programmes aimed at replacing
DH pipelines and introducing energy efficiency and demand-side management measures in
residential and public buildings, which include installation of Individual Heat Substations
(“IHS”). In particular, during the last two years following the transfer of the DH system assets
from the oligarch-owned Kyivenergo back to the City, more than 55 km of DH pipelines were
replaced and more than 100 new IHS were installed. At the same time, the City committed
itself to provide Project co-financing in the amount of EUR 26.1 million.
The Project is consistent with the Bank’s Strategy for Ukraine and Municipal and
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Environmental Infrastructure Sector Strategy 2019-2024, focusing on promotion of energy and
resource efficiencies and climate change mitigation, as well as improving corporate
governance, operational performance and financial results of municipal enterprises. The Project
also contributes to a host of United Nations Sustainable Development Goals (“SDGs”), namely:
SDG 3: Good Health and Well-Being, SDG 7: Affordable and Clean Energy, SDG 9: Industry,
Innovation and Infrastructure, SDG 11: Sustainable Cities and Communities, and SDG 17:
Partnerships for the SDGs.
The Project is also consistent with the Green Economy Transition (“GET”) Approach 2021-25
as it is consistent with the MDBs positive list for climate mitigation (“Brownfield energy-
efficiency improvement in energy production to supply electricity, heat, mechanical energy or
cooling”). The annual emission reduction was assessed at the level of 193,150 tonnes of CO2
equivalent [REDACTED] per year.
1.2 TRANSITION IMPACT
The GrCF2 represents a strategic and multi-project approach seeking to help identify and
address environmental challenges in cities in our countries of operation. The primary goal is to
achieve significant environmental improvements and to promote the Green transition quality
within the relevant cities. In addition to the environmental objective, the GrCF2 also promotes
sustainable cities through inclusive, resilient, well-governed and smart urban development.
Depending on which area can generate the strongest and most relevant transition impact, either
Well-governed, Inclusive, Resilient or Competitive will be pursued and presented as the
secondary transition quality for each sub-Project under the framework. These transition
objectives are supported by the development and implementation of a city-specific Green City
Action Plan (“GCAP”) aiming to identify environmental challenges, facilitate better
coordination and buy-in among stakeholders and help to prioritise and develop the best ways to
address the environmental challenges through targeted investments, services and policy
instruments.
This Project will contribute to achieving Framework objectives through the following TI
qualities:
Green (primary quality) – The Project is fully in line with the GET approach and will
help to promote the Green transition quality by: (i) significantly contributing to climate
change mitigation through essential reduction of GHG emission (193,150 tonnes of CO2
per annum) versus no project scenario, (ii) introducing real-time heat supply monitoring
and dispatching system, which should also improve quality and reliability of DH and
hot water services for 2.7 million residents, and (iii) contributing to pollution prevention
and control affecting air quality (reduction of NOx [REDACTED]) through the reduced
operation of less efficient and more polluting CHPs and installation of continuous gas
analysers at the Company’s CHPs and all the reconstructed boiler houses. Furthermore,
the Project will covenant and support development of a comprehensive GCAP for the
City of Kyiv. The GCAP will require the City to measure, identify, benchmark and
prioritise environmental challenges and identify appropriate mitigation actions and
investments. Such a plan will set a vision and benchmarks for the sustainable
development of the City and help the municipal authority and key stakeholders to
prioritise and make informed decisions regarding investment and reforms aimed at
addressing identified challenges. The GCAP will support identification of measures that
support decarbonisation of the heating system of Kyiv including demand side
management solutions and energy-efficiency measures in buildings. The process itself
of developing the GCAP will also help improve the municipality’s governance of
environmental issues. Finally, the City will develop a Long-term Decarbonisation Plan
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for DH Sector of the City aimed at reaching full carbon neutrality of the DH services by
2060.
Well Governed (secondary quality) – In addition, the Project will promote good
governance through the introduction of a PSC, which will support the Company in the
improvement of financial and operational performance, commercialisation of
operations, cost recovery tariff settings, quality of management and institutional
capacity building, including in the area of asset management. The corporate
development of KTE is also supported by a large-scale independent project financed by
USAID, which should provide synergetic affect along with the PSC.
The Transition Impact (“TI”) objectives and the relevance for this sub-project are detailed in
Section 2. The transition qualities will be monitored at the Framework level aggregating data
on each transition benchmark for all sub-projects.
Delivery Risks: The main risks to transition impact are related to: (i) implementation of the
project (ii) corporate/municipal capacity/willingness to implement the GCAP
recommendations, the District Heating Strategy and long term decarbonisation plan; (iii)
willingness to adopt the PSC and (iv) risks to affordability and implementation of tariff
increases. These risks are mitigated by the following factors: (a) the City’s commitment to
pursuing the green agenda demonstrated during preparation of the Project which is also in line
with the Kyiv City Strategy Until 2025 and the Strategy of Low Carbon Development of
Ukraine until 2050, (b) technical assistance from an experienced international consultant with
specific expertise in the sector and deep knowledge of technologies and environmental policies
covering both procurement process and work supervision; (c) inclusion of appropriate
covenants in loan documentation; (d) the City’s interest in ensuring sustainable operation of the
district heating sector and limited expected effect of tariff increases on affordability as the heat
and hot water costs are expected to remain below 12% threshold of average disposable
household income for the duration of the loan and (e) the EBRD’s continual engagement in
policy dialogue and sponsoring of Green Cities events to facilitate knowledge sharing.
1.3 ADDITIONALITY
Identified triggers Description
No triggers identified n/a
Additionality sources Description of additionality sources
Financing Structure
EBRD offers financing that is not available in the
market from commercial sources on reasonable
terms and conditions, such as longer tenors and
longer grace periods, etc. Such financing is
necessary to structure the project.
The Bank is able to offer long-term loans with long
grace periods without any pledge of company’s assets.
Such financing is not widely available on the market,
where commercial banks are asking for mortgages
over the assets financed and offer loans with less than
5-year tenors.
Knowledge, innovation and capacity building EBRD provides expertise, innovation, knowledge
and/or capabilities that are material to the timely
realisation of the project’s objectives, including
support to strengthen the capacity of the client.
Although the City has implemented projects with
EBRD, KTE lacks expertise in implementing projects
under IFI procurement policies and rules. The Bank is
providing technical assistance for the tendering
process, which will be carried out in line with best
international standards and contribute to enhanced
technical and implementation capacities of KTE, and
is offering loan financing for technical supervision of
contracts. The Bank is highly additional due to its
district heating and energy sector expertise and long-
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lasting policy dialogue in the renewable energy area.
The Bank will also ensure the application of the best
international technical, environmental and social, and
procurement standards.
Standard setting: Helping projects and clients
achieve higher standards Client seeks EBRD expertise on higher
environmental standards, above ‘business as usual’
(e.g. adoption of emissions standards, climate-
related ISO standards etc.) including, inter alia,
gender-sensitive benchmarks.
The Project will be the “trigger project” for the City
under GrCF2, through which the Bank will support
Kyiv in developing its GCAP. The GCAP will help the
City identify and prioritise the environmental
challenges to be addressed through long-term
development goals. In addition, the Project envisages
the use of external consultants who will support KTE
through preparation of tender documents and work
supervision in accordance with the best world
practices. The Project will also support the City in
developing a decarbonisation pathway for its district
heating sector by covenanting the 2030 District
Heating Strategy and long term decarbonisation play.
In addition, the project envisions additional gender-
sensitive benchmarks, which will be monitored
throughout the project’s life cycle.
1.4 SOUND BANKING - KEY RISKS
The City of Kyiv (the Guarantor) is the wealthiest Ukrainian municipality with the most
diversified local economy. It has an acceptable credit rating from Fitch (‘B’) and Moody’s
(‘B3’) given moderate direct debt to be fully repaid in 2021-22, limited guaranteed debt levels
(long-term solely with IFIs) and good operating performance.
Risks Probability
/ Effect
Comments
Risks of the Borrower
Tariff risk Medium/
High
Given that it operates two large CHP plants, the Company sells both heat and
electricity. Cogeneration of heat and electricity at two large CHPs provides
additional cost savings, and the new highly manoeuvrable cogeneration units
[REDACTED] will significantly improve the Company’s operational efficiency.
The tariffs for generation of heat at the CHPs operated by KTE are set by the National
Regulator, while the tariffs for DH and hot water services are set by the City, which
is committed for their regular review. This obligation will be further secured in the
PSC. The Law of Ukraine No. 1060-IX regarding new regulation of communal
services, which became effective in May 2021, simplified conclusion of public
agreements on connection to DH systems as well as tariff adjustments for residential
customers, which had been frozen due to various regulatory contradictions. KTE
also started negotiating a fixed price gas supply contract with the dedicated Naftogas
subsidiary following the cancellation of the PSO mechanism from 20 May 2021. The
Company sells electricity in the open market. Hence, the tariff risk for electricity
revenues is low
Financial
risk
Medium/
High The Company is sustainable on an operational level. [REDACTED] The PIP and
PSC implementation as well as continuous financial advisory services provided
under a separate project financed by USAID are expected to improve the
Company’s financial and operational efficiency and its overall credit standing.
[REDACTED]
The Loan will be provided on the basis of a municipal guarantee, which covers
all debt service payments. [REDACTED]
The additional risk mitigation will be achieved through the loan tranching
[REDACTED].
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FX and
interest
rate risk
High/
High
The Company’ sensitivity to an increase in interest rates and local currency
devaluation is limited [REDACTED].
The financial model of the City, which guarantees the loan repayment, demonstrates
resilience when stress-tested to assess sensitivity to local currency devaluation and
interest rate fluctuations taking into account the impact of the COVID-19 pandemic.
Implement
ation risk
Medium/
High The Company has experience of implementing large-scale construction and
rehabilitation projects and has established a PIU with working groups
responsible for the selected PIP components.
The Company’s lack of international procurement experience and limited
knowledge in the area of new co-generation technologies will be addressed by
the involvement of an experienced international consulting firm, which will
provide support with procurement and overall project implementation including
full technical supervision of contracts related to the PIP components. The
procurement risk is further mitigated by using proven technological and technical
solutions. All tenders will be carried out in accordance with the Bank’s PP&R.
Risks of the Guarantor/City
Sovereign
risk
Medium/
Medium In June 2020, Moody’s upgraded Ukraine’s long-term foreign currency
sovereign credit rating from ‘Caa1’ with positive outlook to ‘B3’ with stable
outlook. In September 2020, S&P affirmed the rating at ‘B’ and stable outlook,
while Fitch also confirmed the rating at ‘B’ with stable outlook in February
2021.
Ukraine’s economy was already slowing down when it was hit by the pandemic.
GDP is estimated to have shrunk by 4.2% in 2020, with expected growth of 3.0%
in 2021-2022 (Global economic prospects – WB).
Public and publicly guaranteed debt to GDP ratio declined from 81% in 2016 to
50% in 2019. According to Fitch, it increased to 62.8% in 2020 on the back of
an increase of the fiscal deficit (estimated at 5.5% in 2020), output contraction
and currency depreciation. The impact of the Covid-19 shock and poor grain
harvest was generally offset by wage growth, employment support measures,
solid remittances, a positive net trade contribution as well as moderate monetary
and fiscal stimulus.
Ukraine’s official reserve assets reached USD 29.1 billion in January 2021
(record high for the latest 8 years) while import coverage of international assets
reached 4.8 months.
In June 2020, IMF approved 18-month SBA in the amount of USD 5 billion to
help Ukraine address large balance-of-payments and fiscal financing needs
emerging due to the pandemics and to advance a set of key structural reforms.
USD 2.1 billion tranche was immediately disbursed, unlocking additional
support from the World Bank and EU and enabling a successful Eurobond
issuance. Total external financing attracted since June 2020 amounted to nearly
USD 6.0 billion. Continued engagement with the IMF remains crucial for
maintaining access to external funding in light of economic weaknesses,
significant uncertainty and high public debt service obligations.
Economic
volatility
Medium/
Medium The City’s local economy is well diversified and is Ukraine’s most prosperous
region. Kyiv contributes more than 20% of the national GDP and enjoys the
lowest unemployment. Its economy is diversified across manufacturing and
services, and supported by a large number of major national and international
companies.
While the macroeconomic risks may negatively affect the financial performance
of the municipalities through the effect on the local economy, as well as through
Ukraine’s inter-budgetary relations, the risks are mitigated by the (i) moderate
aggregated debt of the City, (ii) strong operating performance, and (iii) growing
share of own tax and non-tax revenues in the City’s total revenues (almost 85%
in 2020).
The City took into account the COVID-19 impact while preparing its budget for
2021, and is able to implement some austerity measures to offset the impact of
a prolonged Covid-19 crisis. In 2020, despite the turbulent year, the City
managed to get the operating margin of 27%.
Financial
management
Medium/
Medium The budget is planned annually. The regulatory framework for multi-year budget
planning is not yet in place in Ukraine. Furthermore, given that decentralisation
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reform is relatively recent, the City does not have enough capacity to project a
mid-term budget, albeit this is its long-term goal.
The risk is mitigated by the conservative financial management as evidenced by
moderate direct debt to be fully repaid in 2021-22 and long-term debt solely with
IFIs. [REDACTED]
Financial
balance
Medium/
Medium The City has demonstrated strong financial performance [REDACTED]
The liquidity position of the City is stable with a cash balance of EUR 134 million
as at year-end of 2020. The City can also tap short-term interest-free Treasury
loans for liquidity support.
FX and
interest rate
risk
High/
High The City’s financial forecasts demonstrate resilience when stress-tested against
negative shocks. [REDACTED]
2. MEASURING / MONITORING SUCCESS
The TI objectives of the GrCF2 and their relevance to the Project are presented in the Table
below. The TI objectives will only be monitored at the framework level, aggregating data on
each transition benchmark for all sub-projects.
Obj
.
No.
FW
Monitoring
Indicator
Corresponding
Sub-Project
Monitoring
Indicator
Details (FW) Details for Specific Sub-
Project
Baseline
(Sub-
Project)
Target
(Sub-
Project)
Due
date
(Sub-
Project
)
Primary quality: Green 1.1 Number of
recommended
policy or strategy
agreed by
relevant
stakeholder(s)
Recommended
policy or
strategy agreed
by relevant
stakeholder(s)
New Green City Action
Plans: 30 new GCAPs
finalised and submitted for
approval by relevant
authorities, and includes
priority actions and a
monitoring strategy in each
participating City. Baseline
target of the GrCF and GrCF2
combined is 20 GCAPs.
Kyiv’s GCAP sent to the
City Council for approval
including an
implementation and
monitoring strategy
[REDA
CTED] [REDA
CTED] [REDA
CTED]
1.2 Performance or
action plan
implemented by
the client
Performance or
action plan
implemented by
the client
Strong follow-on support: 50% of transactions (under
GrCF2 and future extensions)
are follow-on investments
addressing priority
environmental challenges
identified in the GCAPs.
Trigger – the Project is the
City’s first under the
GrCF, and includes a
GCAP that will enable
follow on opportunities.
[REDA
CTED] [REDA
CTED] [REDA
CTED]
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1.3 Performance or
action plan
implemented by
the client
Performance or
action plan
implemented by
the client
Multiple green investments:
Each participating city makes
on average at least 3
investments (with or without
EBRD financing) that address
priority environmental
challenges identified by the
GCAP, where all EBRD
financed projects will meet
the extended Framework’s
eligibility criteria for
investments.
The project will be signed
and implemented and
meets the eligibility
criteria for investments
under GrCF2. The Project
will result in the improved
quality and reliability of
heat and hot water supply
to 2.7 million residents of
the City of Kyiv, the
improved air quality due
to NOx emission reduction
by 345 tonnes per year,
and GHG reduction by
193,150 tCO2 per year
(26.2% for the main
component). The new
manoeuvrable co-
generation facility with
heat storage at CHP-6 will
support integration of
renewable energy sources
into the Kyiv DH system
and Ukraine’s energy grid.
It will also be designed to
reduce equipment
exposure to flooding.
[REDA
CTED] [REDA
CTED] [REDA
CTED]
1.4 Performance or
action plan
implemented by
the client
Performance or
action plan
implemented by
the client
Effective GCAP
implementation:
The Framework achieves at
least 50 per cent of all
verifiable targets, set in the
GCAP, within 5 years after
the respective GCAP
finalisation (including both
investments and well-defined
policy measures).
Trigger – the Project will
support the City to
develop a Green City
Action Plan that sets
verifiable targets.
[REDA
CTED]
[REDA
CTED] [REDA
CTED]
1.5 Improved
environmental
standards
Improved
environmental
standards
Environmental impact:
The Framework achieves
significant environmental
improvements for at least one
priority environmental
challenge, i.e. the promotion
or protection of certain
performance levels (colour
codes) for priority
environmental challenges as
specified in the GCAPs, for
more than 50 per cent of the
Green Cities.
While the Project results
in the improved Kyiv DH
system efficiency with
significant CO2 equivalent
emission reduction, the
relevant environmental
improvements within the
respective cities will not
be monitored at project
level.
[REDA
CTED]
[REDA
CTED] [REDA
CTED]
Secondary quality: Well-governed
2.1 Number of tariff
reforms in target
segment adopted
by authorities
Tariff reform in
target segment
adopted by
authorities
A formal cost recovery tariff
methodology is introduced,
approved and respected by the
authorities.
District heating tariffs to
reach cost recovery level
[REDA
CTED] [REDA
CTED] [REDA
CTED]
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Monitoring Indicators
Indicator Projected Impact Implementation timing
CO2 equivalent reduction per year [REDACTED] [REDACTED]
Annual water savings [REDACTED] [REDACTED]
Total population benefiting from
improved district heating services
[REDACTED] [REDACTED]
3. KEY PARTIES
3.1 GUARANTOR
City of Kyiv is the capital of Ukraine and the seventh largest city in Europe. The City benefits
from Central governmental support and is the wealthiest and most populated Ukrainian
municipality with the most diversified local economy and tax base. Kyiv City’s credit rating
was affirmed at B by Fitch (May 2021), as well as Moody’s at B3 (June 2021) and the City is
currently rated on par with sovereign. The City is an existing client and the Guarantor on two
sub-sovereign loans (OpID 37599 and OpID 50836 - Metro loans), with one fully disbursed
and repaying and the follow on loan (signed in February this year) pending first disbursement.
Kyiv is the capital of Ukraine and the country's economic hub. It has a registered population of
circa 3.0 million, which is around 7.0% of the national population, while the city's gross
regional product (“GRP”) accounts for approximately 20% of national GDP. The city boasts a
diversified economy, with the tertiary sector accounting for approximately 90% of GRP. The
main sectors are trade, financial, telecommunications and other services. The city is the focal
point for domestic and foreign investment and a home for almost all of Ukraine's largest banks.
The City has aging infrastructure assets (including, inter alia, district heating assets) and
considerable investment needs. The proposed project is a priority for the City which has agreed
to advanced procurement to ensure efficient implementation.
The City is governed by the Mayor/Head of City Administration. The City has its own budget
and is financially independent (albeit within the constraints of Ukraine’s inter-budgetary
relations). However, when issuing a municipal guarantee the City requires consent from the
Ministry of Finance of Ukraine and the clearance from the Antimonopoly Committee.
For financial highlights covering the City budget execution for 2019 –2020, as well as budget
for 2021 please refer to Annex V.
2.2 Number of
Public service
contract or Public
Service
Obligation signed
and implemented
Public service
contract or
Public Service
Obligation
signed and
implemented
A new service contract in line
with international practice is
developed and signed (not a
revision to an existing PSC)
and respected by the parties
during the first 2 years of the
contract – and where such
contract is not a norm in the
country.
A performance-based PSC
introduced between the
City and KTE
[REDA
CTED] [REDA
CTED] [REDA
CTED]
Gender Additionality:
3.1 Tailored training programme
developed and implemented
At least 50% of women working in KTE to attend
professional development and advanced training courses in
KTE by the end of 2024
[REDA
CTED] [REDA
CTED] [REDA
CTED]
3.2 Practices of the relevant
stakeholder improved (equal
opportunity practices of KTE)
Company’s Code of Conduct to be updated (by the end of
2022) to ensure policies are in place regulating behaviour
at the workplace and ensuring no gender based
discrimination and/or harassment occurs at the workplace
[REDA
CTED] [REDA
CTED] [REDA
CTED]
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3.2 BORROWER
KTE is a municipal enterprise established by a decision of the Kyiv City Council No. 9/66 of
28 June 2006. In May 2018 KTE became an operator of the DH system of the City of Kyiv,
which was previously operated by private JSC Kyivenrgo on the basis of a management contract
between the City Council of Kyiv and JSC Kyivenergo, which was concluded in 2001.
Although the contract between JSC Kyivenergo and the City Council was extended several
times, the City Council took a final decision not to prolong it after its expiry on 27 April 2018.
Correspondingly the Company took the DH assets on its balance sheet and commenced
operations in the heating season of 2018/2019. At present, the DH system operated by KTE
consists of:
Two gas-fired CHPs (CHP-5 with electrical capacity of 700 MW and heat capacity of
1,874 Gcal/h and CHP-6 with electrical capacity of 500 MW and heat capacity of 1,757
Gcal/h);
15 large boiler houses each with heat capacities over 80 Gcal/hour;
168 small and medium-sized boiler houses with the average capacity below 20 Gcal/hour;
2,800 km of DH network (2-pipe measurement, trench length);
Circa 9 500 heat substations;
Waste incineration plant “Energia” with the annual solid waste utilisation capacity of
250,000 tones and heat generation capacity of 50 Gcal/hour.
During the last two decades, both reconstruction and maintenance of the equipment and the DH
network were significantly underfinanced. The lack of investments led to the reduced efficiency
of equipment, increased heat, electricity and water losses as well as undermined reliability of
heat, hot water and in some cases electricity supply.
4. MARKET CONTEXT
The Kyiv DH system operated by KTE is by far the largest DH system in Ukraine and one of
the largest DH systems in the world. KTE supplies circa 12.7 TWh of heat and hot water to
almost 2.7 million residents as well as numerous commercial and public sector clients. The
Company is responsible for circa 90% of heat generation for DH purposes in the City, and circa
99% of heat transmission and distribution. Approximately 8% of heat is generated by the very
old privately owned CHP-4. The remaining 2% of heat is generated by more than 100 entities
with different ownership, which operate small boiler houses.
The tariffs for generation of heat at CHPs operated by KTE are set by the National Energy and
Utilities Regulatory Commission (the “National Regulator”), while the tariff-setting for DH
and hot water services is within the purview of the municipality. The Law of Ukraine No. 1060-
IX regarding new regulation of communal services, which became effective on 1 May 2021,
simplified conclusion of public agreements on connection to DH systems and opened a door
for the adjustment of DH tariffs for population, which were frozen due to various regulatory
contradictions.
In 2020, KTE generated 5.03 TWh of electricity (3.4% of the total Ukraine’s generation mix or
circa 40% of electricity generated by all the Ukraine’s CHPs), of which 4.75 TWh were
delivered to the grid. Starting from the introduction of the competitive power market structure
in Ukraine as per the EU Third Energy Package in July 2019, the Company has sold electricity
according to bilateral contracts, on the day ahead, intraday, balancing and ancillary services
markets. According to the recently adopted Law of Ukraine No. 3364-1-d, all bilateral contracts
between municipal electricity generators and electricity buyers are to be concluded at electronic
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auctions. The date of the first electronic auction launch is not known yet, but the Company is
getting ready for the change.
In 2020 KTE consumed over 2.3 billion Nm3 of natural gas, i.e. more than 7.7% of Ukraine’s
total natural gas consumption or circa 30% of natural gas consumed by all DH companies and
CHPs in Ukraine. Historically, NAK Naftogas has supplied natural gas to KTE under the Public
Service Obligations (“PSO”) mechanism. As part of its commitments to the IMF aimed at full
liberalisation of the gas market, Ukraine removed the PSO for DH companies starting from
20 May 2021. As a result, KTE will be purchasing natural gas on the open market. The City
confirmed its commitment to support KTE if it needs to provide additional guarantees to
selected gas suppliers.
Notwithstanding the challenges posed by the DH tariff increases, a well-designed and
functioning DH system remains a future-proof energy efficient and cost-effective way to supply
heat and hot water, which allows gradual integration of low carbon heat generating
technologies. Detailed DH and electricity market analysis is provided in Annex VI.
5. FINANCIAL / ECONOMIC ANALYSIS
5.1 FINANCIAL PROJECTIONS
[REDACTED]
5.2 SENSITIVITY ANALYSIS
[REDACTED]
5.3 PROJECTED PROFITABILITY FOR THE BANK
[REDACTED]
6. OTHER KEY CONSIDERATIONS
6.1 ENVIRONMENT
Categorised B (2019 ESP). The Project is part of an ongoing rehabilitation and modernisation
of the district heating infrastructure in Kyiv and will result in environmental and social benefits
associated with the overall improvement in the quality of heating and hot water services,
improved energy efficiency, reduction in fuel consumption and heat and water losses, and lower
air emissions. As a result, net reduction of Green House Gas (“GHG") emissions will be around
193 k t/yr of CO2.
An independent Environmental and Social Due Diligence (“ESDD”) for the Project included a
review of KTE’s corporate operations and assets. The ESDD confirmed that the Company is
compliant with National legislation and has all valid locally required environmental air, waste
and water discharge permits, complies with Sanitary-Protection Zone (“SPZ”) requirements,
but needs to enhance capacity for environmental & social risk management to implement the
Bank’s PRs and to address Occupational Health and Safety (OHS) risks linked to the COVID
response.
The ESDD confirmed that the Project financed by the Bank will comply with EU (EU BAT)
and National legislation and will meet EU BAT requirements and (Emission Limit Values)
ELVs as defined under the EU Industrial Emissions Directive 2010/75/EU.
The Project requires an Environmental Impact Assessment (“EIA”) in accordance with
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Ukrainian legislation, which will be completed at the next stage of the project development
together with public hearings. Implementation of the local EIA and public hearings will be
supervised and monitored by the international consultants and in accordance to the developed
Stakeholder Engagement Plan in line with the ESD COVID-19 response and reviewed by the
ESD’s specialists. A Non-Technical Summary (“NTS”) will be developed and disclosed for the
Project financed by the Bank and any new modernisations in the future.
The ESDD confirmed that there is no resettlement associated with the Project. Project
components will be developed on existing land owned by the Company and the size of existing
SPZs will not change. The Company has basic H&S standards, complies with national labour
laws and is largely aligned with PR 2. The Project could lead to a reduction in up to ten existing
positions, however there are no plans for labour restructuring or major redundancies within the
next two years.
An Environmental and Social Action Plan (“ESAP”) has been developed and agreed with KTE
to strengthen the Company’s EHS capacity and to ensure the Project is structured and developed
in line with best practices, relevant EU standards and EBRD’s PRs and to mitigate any negative
impacts from the project implementation. The ESAP contains a number of actions including:
enhancing corporate EHS management; improving waste management; developing OHS and
public safety risk assessment and construction management system; asbestos management plan,
redeployment of staff with positions affected by the Project etc. The ESAP also specifically
requires introduction of the continuous monitoring of NOx and CO at the CHPs to meet the
requirements of the Industrial Emissions Directive 2010/75/EU and includes introduction of
enhanced natural gas leak detection measures. As part of the DH Sector City’s Strategy, the
Company will further pursue implementation of the EU requirements to reduce emissions and
increase energy efficiency, and will develop ESG/Sustainability reporting and include
disclosure in line with the best practice and EU guidelines.
The Company will be required to provide the Bank with annual environmental and social
reports, including updates on the implementation of the project and the ESAP in compliance
with the EBRD PRs.
6.2 INTEGRITY
In conjunction with OCCO, integrity due diligence was undertaken on the Company, the City,
senior management and other relevant parties. The [REDACTED] project does not pose an
unacceptable reputational risk to the Bank. [REDACTED]
All actions required by applicable EBRD procedures relevant to the prevention of anti-money
laundering, terrorist financing and other integrity issues have been taken with respect to the
Project, and the Project files contain the integrity checklists and other required documentation,
which have been properly and accurately completed to proceed with the Project.
6.3 ECONOMIC ANALYSIS
[REDACTED]
6.4 AFFORDABILITY
The Project will result in improved affordability of the DH tariffs as the Project financial
benefits significantly exceed debt service payments during the whole period of loan repayment.
Heat and hot water costs are expected to be below the threshold of 12% of the average
disposable household income during the loan period as well as the economic life of assets
reaching 9.9% in 2021. [REDACTED]
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ANNEXES TO OPERATION REPORT
ANNEX I: SHAREHOLDING AND ORGANISATIONAL STRUCTURE
ANNEX II: INVESTMENT PROGRAM
ANNEX III: PROJECT IMPLEMENTATION AND PROCUREMENT
ANNEX IV: IMPLEMENTATION PROGRESS OF GREEN CITIES FRAMEWORK
ANNEX V: HISTORICAL FINANCIAL STATEMENTS
ANNEX VI: DISTRICT HEATING AND ELECTRICITY MARKET ANALYSIS
ANNEX VII: ECONOMIC ASSESSMENT
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ANNEX I – SHAREHOLDING AND ORGANISATIONAL STRUCTURE
The Company is a communal enterprise incorporated in Ukraine fully owned by the City of
Kyiv.
The Company’s organisation structure is provided below.
The Company comprises of the following seven divisions or structural units:
1. Management - Head Quarters (HQ)
2. Kyiv Heating Networks (Kyivskyi Teplovyi Merezhy - KTM)
3. Kyiv CHPPs (Kyivskyi TETS)
4. Energia Plant (Zavod Energiya)
5. Energy Sales (Energozbut)
6. Avtotransport (Avtotransport)
7. Energy set up and maintenance (Energonaladka)
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ANNEX II - INVESTMENT PROGRAMME
The proposed Priority Investment Programme (“PIP”) focuses on increasing energy efficiency,
reducing natural gas, electricity and water consumption, optimizing operating and maintenance
costs as well as improving the reliability and quality of DH services in the City of Kyiv. The
implementation of the PIP will provide benefits for all the residents of the City connected to
the third largest DH system in Europe.
At the same time, the Project should contribute to the sustainability of the electric system of the
City of Kyiv and Ukraine in general thanks to the modernisation project components at CHP-6
and CHP-5. This is especially critical when the share of intermittent renewable generation in
the electricity mix of Ukraine is growing, and the country needs responsive, highly efficient
generating capacity capable of maintaining the system frequency as supply from renewable
sources ramps up and down. In order to support the City’s electrical system outside of the
heating season, the Company has to operate a portion of the CHP in an extremely inefficient
manner, releasing considerable amounts of produced heat into the atmosphere. This approach
leads to excessive natural gas consumption and reduced reliability of the facility. Installation of
new cogeneration units with heat capacity of up to 136 Gcal/h will allow for more rational and
efficient operation outside of the heating season. It should also ensure more efficient use of gas
and improve the sustainability and reliability of the heat and electricity supply in Kyiv.
The proposed PIP also stipulates installation of a new monitoring and dispatching system
(“SCADA”), which should optimize system performance based on the actual heat demand. It
should also ensure quick detection of system leakage or equipment malfunctions, improving
the quality of service for end-users and reducing system losses. [REDACTED]
The annual natural gas and electricity savings, additional electricity generation and combined
CO2 saving are summarised in the table below:
Project components
Natural gas
savings,
000 Nm3
Electricity
savings,
MWh
Additional
electricity
production,
MWh
CO2
savings,
tonnes
EBRD Loan:
1+2 Supply and installation of new cogeneration
units and a new heat storage at CHP-6 -316 325,400 170,224
3 Supply and installation of a new heat recovery
unit (condensing economizer) at CHP-5 5,760 9,600 16,157
4 Rehabilitation of boiler houses 590 353 1,324
5 Supply, installation and commissioning of a new
monitoring and dispatching system (SCADA) 2,821 5,445
Total for EBRD loan financed components 8,855 353 335,000 193,150
Local Contribution:
6 CHP-5 and CHP-6 modernisation 900 0.8 1,737
7 DH network replacement and laying of
interconnections 882 1,702
Total for components financed from local
contribution 1,782 0.8 0 3,439
Total 10,637 354 335,000 196,589
The implementation of the Project should also result in an annual NOx emissions reduction
[REDACTED]. The location of the CHPs and boiler houses to be rehabilitated as well as the
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small inefficient boiler houses that will be decommissioned is shown on the map below. The
PIP rehabilitation, DH network replacement and interconnection work will allow the closure of
these outdated plants.
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Components 1-2: Supply and installation of new cogeneration units in combination with
a new heat storage at CHP-6
The Company currently has two operating steam turbine based cogeneration units at CHP-6,
each with a heat capacity of approximately 330 Gcal/h and electrical capacity of 250 MWe in
condensation mode or 215 MWe in backpressure mode. The cogeneration units have been in
operation since 1982 and 1984 respectively, they are both at the end of their useful lifetime, and
require replacement within a short period. In case of necessity, each unit can reduce its
electricity output by circa 50%, i.e. to 107.5 MWe in backpressure mode. Even in optimal
operational modes, the cogeneration units have significant carbon intensity compared to new
equipment available on the market as they are both physically and technologically obsolete.
Photos of the CHP-6 are provided at the end of this Annex.
The Kyiv electrical grid has some specific characteristics that influence the need for local
electricity generation capacity. Districts on the western bank of the Dnipro River can utilise
electricity supplies from outside the City, via substations with high capacity connections to the
national grid. CHP-6 is located on the eastern bank and serves a supply area with the population
of over 1.2 million people.This area lacks the high capacity connection to the national grid and
heavily relies the generating capacities of CHP-6, especially during the winter. If CHP-6 were
to go offline during a period of high demand, a City power emergency is highly likely with
blackouts in some districts. The necessary capacity to uphold the stability of the grid is
estimated to be in the range of 50 - 80 MWe in the summer period and 100 MWe in the winter
period. Upgrading Kyiv electricity grid would require installation of new high-voltage sub-
stations and electricity lines in the City with the total value in excess of EUR 100 million.
In order to ensure adequate electricity supplies CHP-6 must operate, irrespective of the level of
heat demand. The minimum heat supply requirement for hot water supply purposes during non-
heating season is 66 Gcal/h. It is not possible to reduce the heat output on the existing
cogeneration units in line with this demand, therefore the remaining heat is wasted in the
cooling towers and CHP-6 has to operate in the suboptimal mode with steam loss.
The current practice of daily starts and stops of the cogeneration unit designed to operate in a
baseload mode (near continuous operation) results in increased wear as well as additional gas
and electricity consumption. Start/stops take several hours depending on the temperature of the
equipment.
The installation of new cogeneration units with the combined electrical capacity of up to
108 MWe in combination with a heat storage tank with circa 20,000 m3 capacity is expected to
tackle all the aforementioned inefficiencies of the CHP-6 during non-heating season. The
technological solution can include either (i) two new gas turbines with generators, waste heat
recovery units and district heating condensers or (ii) several large gas engines with generator
sets and separate waste heat recovery systems. The combination of efficient cogeneration units
with thermal storage will allow the Company to support the electricity grid as more intermittent
renewable generation sources while ensuring the co-generated heat can be efficiently utilized
by the DH network. The Project is expected to significantly reduce the cost of heat and
electricity production during the heating season and improve the overall reliability of heat
supply.
The new units will meet or exceed the requirements for emissions control (NOx and CO) and
“Best Available Techniques” of the EU Industrial Emissions Directive. Emissions from the new
plant will be significantly lower compared to the existing units at CHP-6.
The rapid increase of renewable power capacities in Ukraine over the last few years has already
created additional operational challenges for the country’s grid. The further growth of the green
energy share in the generation mix will only increase the need for highly maneuverable
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generating capacities capable of covering peaking demands, inter alia caused by fluctuations in
electricity production by renewable sources. Furthermore, in order to reach desired
synchronisation with European Network of Transmission System Operator - Electricity
(“ENTSO-E”), the Ukraine’s grid operator must demonstrate its compliance with ENTSO-E
technical standards, which should be proven through autonomous operation of the grid also
known as “island-mode” testing. During this period, Ukraine will have to show its frequency
control capabilities and other ancillary services. At present, Ukraine mainly uses its
[REDACTED] coal-fired power plants to support the grid when demand is high, while highly
efficient gas turbines or gas engines with generator sets are considered one of the most suitable
and environmentally friendly solutions for such purposes. The proposed CHP units coupled
with thermal energy storage will allow CHP-6 to efficiently render such services, play an
important role in supporting the existing solar and wind power capacity and help facilitate
increased renewable capacity.
At the same time, it is important to assess the suitability of the proposed CHP equipment should
supplies of green hydrogen be available in the future, either blended with natural gas or as pure
hydrogen. Based on the information provided by the feasibility study consultant, and
independently confirmed through other sources, as of today, 30% blending of hydrogen with
natural gas is possible in new gas turbines supplied by major manufacturers with limited or no
plant modification. Operation on 100% hydrogen is possible with additional investment and
appropriate modification. There are also field-tested natural gas engines that can operate off
natural gas to begin with, and hydrogen can be blended in gradually, or they can be switched to
100% hydrogen when available and the appropriate modifications have been made. Based on
this, it is already possible to procure a CHP solution (whether turbine or engine) with the
potential to run on a blended hydrogen mix or pure hydrogen with investment and the
appropriate modifications.
The key benefits of the components 1 and 2 include [REDACTED] additional electricity
generation with a marginal increase of gas consumption [REDACTED] and annual savings
[REDACTED] of CO2 and [REDACTED] NOx.
Component 3: Installation of a new heat recovery unit (condensing economizer) at CHP-
5
The CHP-5 is located on the western bank of the Dnipro River. It is the largest combined heat
and power plant in Kyiv and in Ukraine. The plant has electrical capacity of 700 MWe and heat
capacity of 1,874 Gcal/h and provides heat to more than 850,000 residents as well numerous
public entities and commercial clients. The CHP operates two natural gas-fired energy blocks
with steam turbines with the nominal electrical capacity of 250 MWe each, and two natural gas-
fired energy blocks with the nominal capacity of 100 MWe each. All the blocks were
commissioned in the mid-1970s. The CHP-5 also has several hot water boilers to cover peak
heat demand during low temperature periods and provides large quantities of make-up water to
the whole DH system of the City. Please see the photo of the CHP-5 at the end of this Annex.
In order to ensure the overall efficiency of the CHP-5, reduce natural gas consumption and
boost production of electricity, a new heat recovery unit also known as Flue Gas Condensation
(“FGC”) plant is planned to be installed between the flue gas paths of energy block 1 and
energy block 2, which have electrical capacity of circa 100 MWe and heat capacity of circa
160 Gcal/h (186 MWth).
The FGC plant will consist of the following equipment:
Flue Gas Condenser heat exchanger also known as an economizer with two sections;
flue gas ducts connecting it with the ducts of energy blocks 1 and 2;
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multiple flue gas dampers; and
pumps, pipelines, fittings, control, measuring and automation appliances.
Capital repair of one of the two existing chimneys including insertion of an internal liner will
also be required.
The economiser of the FGC plant will consist of two stages:
The first (in flue gas direction) stage for pre-heating DH water (a partial flow of the
overall return flow upstream of the DH condensers). There is no particular set point for
the outlet temperature, as the final supply temperature is reached and controlled in the
heating condensers.
The second stage for pre-heating make-up water from the chemical water treatment
plant at approximately 28°C. There is also no set point for the outlet temperature, as this
water flow is afterwards heated further in the deaerator(s).
The FGC plant will operate both during heating and non-heating seasons. The connection to the
energy blocks 1 and 2 should ensure overall efficiency and flexibility of the FGC plant in case
of repair of one of the energy blocks.
The key benefits of the component include [REDACTED] natural gas savings, [REDACTED]
additional electricity generation, [REDACTED] CO2 equivalent and [REDACTED] NOx
savings per annum.
Component 4: Rehabilitation of boiler houses
The Company operates a large number of old inefficient boiler houses, the main equipment of
which have exceeded its designed lifetime more than twice:
In district boiler-houses with the overall heat capacity over 80 MWth, 40 boilers (56%)
have been in operation for more than 40 years, including 14 boilers that have been in
operation for more than 50 years;
In district boiler-houses with the overall heat capacity less 80 MWth, 52 boilers (55%)
have been in operation for more than 40 years, including 15 boilers that have been in
operation for more than 50 years.
In block boiler-houses, 21% of boilers have operated for more than 40 years;
In roof and in-built boiler-houses, 24% of the boilers have operated for more than 40
years, including 17% that have been in operation for more than 50 years.
The small boiler houses are usually equipped with out-of-date NIISTU or similar type boilers
without automatic control and safety systems and with efficiency in the range of 60-80%. The
operation of such boiler houses without constant staff supervision is not possible, which also
has a negative impact on the Company’s financial indicators.
As a result of the comprehensive baseline assessment conducted by the feasibility study
consultant together with the Company’s staff, four boiler houses with the connected heat
demand of circa 58 MWth have been prioritised for rehabilitation, while five obsolete smaller
boiler houses with the total heat generation capacity of circa 10 MWth located in the vicinity of
the selected four will be closed, and their customers will be reconnected to the rehabilitated
boiler houses. Please see the map above for details. The feasibility study found no barriers to
laying new district heating interconnection pipelines. Whereas the four selected boiler houses
operate at higher supply temperature (150 oC) compared to that of the smaller boiler houses
(95 oC), and whereas the system is designed to operate at lower supply temperature, the
installation of heat exchangers and additional pump stations in the premises of the boiler houses
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is included the Project scope.
Thus, the scope of works under this component includes the following:
Rehabilitation of four boiler house;
Laying of interconnection pipelines; and
Installation of heat exchangers and pump station;
The implementation of this component will increase reliability of heat supply, while allowing
the Company move towards a leaner and more sustainable heat supply model. The key benefits
of the component include [REDATED] natural gas savings, [REDACTED] electricity savings,
[REDACTED] CO2 equivalent and [REDACTED] NOx savings per annum as well as
additional personnel cost savings (circa 300 man-month per year).
Component 5: Installation of Supervisory Control and Data Acquisition (SCADA) System
The Company’s existing automated systems for dispatch control are quite limited in capacity,
functionality and scope. They are not integrated into a unified Supervisory Control and Data
Acquisition (“SCADA”) system with common data structures and functions and a possibility
of automatic data transfer to users at various management and operational control levels.
Commands from various dispatch offices are issued mostly via voice connections and often use
information verbally communicated by staff working at respective facilities. The systems
installed at the CHP-5 and CHP-6 provide data to external systems mainly on electricity
production, while data on thermal energy production is limited to the Company’s internal
systems. The absence of SCADA system results in a slow reaction to emergencies, inefficient
operation of heat and electricity generating equipment, increased probability of human
mistakes, and ultimately poor quality of DH services for the Company’s customers.
The Company will install a new SCADA system in order to achieve the following objectives:
increase the quality and efficiency of heat generation and supply based on precise real-
time information about the heat supply network’s hydraulic and heat parameters;
decrease the number of emergency situations and limit their impact on heat supply and
electricity production through proactive maintenance of equipment, quick response to
emergency events, customised alerts and direct supervisory control;
optimise fuel and electricity consumption by the heat/electricity production units and
heat supply through DH network thanks to stricter compliance with the heat supply
schedule provided by the main dispatch office (e.g. temperature, flow, pressure); and
ensure full monitoring and control of the heat and electricity production process
including detailed reporting, calculation of key production indicators, and data exchange
with other external or corporate information and control systems.
The necessity of the process digitalisation and real-time monitoring became even more obvious
in the COVID-19 pandemic period when it was difficult to ensure presence of all personnel,
guarantee prompt collection of data and prepare adequate response to non-standard situations
or emergencies.
Based on the comprehensive analysis of the DH system of Kyiv, the installation of SCADA
should result in [REDACTED] natural gas savings and [REDACTED] CO2 equivalent savings.
At the same time, the system should significantly improve the quality of DH services for all the
customers connected to the DH system.
Component 6: CHP-5 and CHP-6 modernisation
The main equipment of the CHP-5 and the CHP-6 has been in operation for over 35 years.
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Although the equipment was serviced, the amount of investments and upgrades was limited.
Hence, the primary objective of this component, to be financed from the Company’s internal
resources or the City’s contribution, is to ensure continuous and safe operation of the CHPs.
The scope includes the repair of power units, reconstruction of switchgear, transformers, and
electrical parts as well as technical re-equipment of general station equipment. It is expected
that following the modernisation, the facilities will comply with the Industrial Emissions
Directive of the EU including the requirements of best available techniques.
The implementation of this component will result in [REDACTED] natural gas savings,
[REDACTED] electricity savings, and [REDACTED] CO2 equivalent reduction per annum.
Component 7: DH network replacement and laying of interconnections
The Company operates 2,729 km of DH networks in two-pipe dimension. Circa 70% of the DH
network operated by the Company has an actual life of well above 20 years, and less than 5%
of the networks was replaced within the last 5 years. The majority of DH pipelines are located
underground. Approximately 75% of the pipelines are buried in non-passable reinforced
concrete channels with suspended mineral wool insulation that has low thermal insulation
properties, especially when moistened.
The age of the DH network and its limited protection from corrosion results in significant heat
losses through both the poor insulation and leakages. The number of identified bursts exceeded
50,000 cases during the last 5 years. With no leak detection system installed, leaks are typically
identified by visual inspection and monitoring of consumption of make-up water in respective
boiler houses. The lack of proper chemical water treatment at some boiler houses also
contributes to the fast network corrosion, increasing the failure rate and water losses.
The DH network replacement component, which is to be financed from the local contribution,
is a part of the long-term investment programme of the Company and the City aimed at
replacing the obsolete and poorly insulated pipelines with new pre-insulated pipelines equipped
with leakage protection system. Within the scope of the Project, the Company plans to
(i) replace leaking sections of the transmission and distribution networks with the total length
of over 8.5 km in two-pipe dimension with pre-insulated rigid steel pipes, and (ii) reconnect
consumers to more efficient heat sources by laying approximately 2.5 km of new networks in
two-pipe dimension.
The implementation of the component will result in [REDACTED] natural gas savings and
[REDACTED] CO2 equivalent savings.
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Kyiv CHP-6
Kyiv CHP-5
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ANNEX III – PROJECT IMPLEMENTATION AND PROCUREMENT
PLAN
Procurement classification – Public (sub-sovereign)
[REDACTED] Involvement of an independent implementation consultant and the use of the
EBRD Client s-Procurement Portal (“ECEPP”) will ensure the compliance with the Bank’s
Procurement Policies and Rules (“PP&R”) and other policies and contribute in minimising this
risk
The Client’s capacity assessment related risk - Moderate High
The capacity of the Company to implement the Project was assessed as part of the due diligence
using the simplified version of the assessment tool. There is a dedicated procurement
department and clear procedures for cooperating with other relevant departments (technical
research and development, operations, finance etc.) in planning and managing the procurement
activities. During 2018-2020 the Company’s Procurement Department managed over 1,500
tenders annually resulting in 4,620 signed contracts, with all companies awarded to local
contractors/suppliers. All contracts have been procured via open tenders in accordance with the
national legislation via Prozorro e-procurement platform. A clear process for procurement and
implementation planning, decision making and monitoring is in place, which will largely be
used for the Project.
The Company lacks the experience of IFI project procurement and implementation, as well as
use of international form of contract, which represents moderate high risk to efficient
implementation of the proposed investments. The PIA has provided an introductory
presentation on PP&R, which will be followed up by a more detailed workshop on procurement
procedures and use of ECEPP, which shall minimise the risk. An independent consultant will
be engaged to assist with procurement of all works contracts, which will address the risks
related to the lack of procurement of design-build contracts (providing for alternative technical
solutions and related evaluation methodology) and using internationally recognised forms of
works contracts.
Contracts risk assessment - Moderate High
Several contracts covering, supply and installation of co-generation units, heat storage at CHP-
6 and SCADA as well as rehabilitation of the boiler houses are proposed to be financed from
the proceeds of Bank’s loan. The assigned risk is based on the scale and complexity of the
proposed contract and lack of Company’s experience with co-generation technologies, as well
as the fact that the works will be carried out at functioning facilities. The prequalification for
the largest contract (Supply, installation and commissioning of cogeneration units at CHP-6)
will ensure that the Company receives good quality technical proposals from leading
contractors deemed to be capable of performing the project/contract satisfactorily, thus
reasonably expected to manage contractual risks efficiently.
The support of the experienced consultant will ensure that designs and technical specifications
are suitable for open tendering, including allowing and assessing possible alternatives, and that
any procurement and contractual issues that may arise are addressed in a professional and timely
manner. Review of the designs by the consultant will also ensure Bank’s ESHS requirements
are incorporated, and that potential risks that may lead to time and cost overruns are addressed.
The Client has accepted Bank’s concerns regarding potential cost and time overruns, and
associated contractor claims, and a contingency of up to 10% is included in cost estimates.
Project implementation arrangements
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A PIU has been established within the Company and will have overall responsibility for the
implementation of the Project. The Company is also intending to set up separate ‘management
teams for each contract to ensure the efficient contract management. At all times the PIU and
contract management teams will have access to in-house technical, environmental, financial
etc. experts, as necessary. The PIU will be supported by the Consultant financed from TC donor
and loan funds and selected in accordance the Bank’s PP&R. The Consultant will assist the
Company to prepare tender documents and carry out procurement and will act as a FIDIC
Engineer/Project Manager in works contracts.
Procurement arrangements
The Project is classified as public sector for procurement purposes. All works contracts and the
Project Implementation Support and Works Supervision consultancy services contract to be
procured by the Client financed out of proceeds of Bank’s loan and, where applicable, TC grant
funds will be procured through open tendering via EBRD Client e-Procurement Portal
(“ECEPP”) in accordance with the PPR. All contracts will be subject to prior review by the
Bank.
With Bank’s PPAD prior agreement, the procurement of consultancy services for the Project
implementation support and works supervision assignment commenced in February 2021 in
advance of loan signature. Seven expressions of interest were received, and all participants have
been shortlisted and will be invited to submit proposals.
Multi-stage open tendering will be followed and FIDIC Conditions of Contracts will be used
for all works contracts.
Potential tenderers for the largest and most complex contract for the Supply, installation and
commissioning of cogeneration units at CHP-6works contracts will subject to a prequalification
prior to the invitation to submit tenders, in order to simplify the subsequent tender evaluation
phase and encourage the participation of qualified contractors. The Selective Review procedure
will be applied to this contract.
The Procurement Plan below provides the details of planned investment and consultancy
assignments. The dates are provisional and contract signature will be conditional upon the
Borrower meeting conditions precedent to commitment of relevant tranches. [REDACTED]
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ANNEX IV - IMPLEMENTATION PROGRESS OF GREEN CITIES
FRAMEWORK
Since 2016, the GrCF and GrCF2 have mobilised nearly EUR 3 billion in EBRD and donor
funding. The Green Cities Framework (GrCF), approved by the Board in November 2016, set
an ambitious agenda for the Bank’s municipal business, with the over-arching aim being ‘to
serve as a sector-wide catalyst for addressing environmental challenges at the City level‘. After
only 2 years of operation, the Framework proved its ability to act as such a catalyst with the
utilisation of the entire EUR 250 million headroom. As a consequence, in October 2018 a new
Framework was approved by the Board, Green Cities Framework 2 (GrCF2), with a headroom
of EUR 1.1 billion, with EUR 700 million from the Bank’s own capital and the remainder from
the Green Climate Fund (GCF) and other donors. Given the sizeable amount from the GCF, in
the form of concessional loans and grants for both capex and TC and the requirement to confirm
to GCF the availability of Bank co-financing, GrCF2 is divided into two windows: Window I
for GCF co-financing and Window II for non GCF co-financing. Following the continuing
successful uptake, in November 2020, an extension of EUR 950 million was approved for
GrCF2 WII. [REDACTED]
Progress on TI objectives GrCF and GrCF2 to date: To date 46 transactions have been signed through the GrCF and GrCF2, or as a result of GCAPs.
Out of these projects, 21 are follow-on investments (45%). So far, 29 GCAPs have been
initiated, of which 18 have been completed and 16 have been approved. While it is too early to
confirm the achievements under the various GCAPs, most of the TI objectives were assessed as
on track by EPG in September 2020, and the GrCF currently has a PTI of 87, up from an ETI of
80 given in 2016 and the GrCF2 currently holds a PTI of 72 – up from an ETI of 70 given in
2018.
Kyiv GCAP Status:
In April 2019, WS Atkins International, in consortium with Tebodin Bilfinger, was appointed
to deliver the GCAP for the City of Kyiv. To date, stakeholder engagement plan, technical
assessment section of the GCAP and external framework report have been prepared and
presented. Priority environmental challenges have been identified and confirmed with the
stakeholders. Vision and strategic objectives sections of the GCAP have been drafted and
shared with the City’s working group for their comments and suggestions. Policy options and
actions sections of the GCAP are at the stage of preparation. The Kyiv GCAP including an
implementation and monitoring strategy is expected to be submitted for the approval by the
City Council in early 2022.
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ANNEX V - HISTORICAL FINANCIAL STATEMENTS
[REDACTED]
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ANNEX VI - DISTRICT HEATING AND ELECTRICITY MARKET
ANALYSIS
Ukraine has a developed DH infrastructure in all major and secondary cities, which is a valuable
asset for the country. To date, DH services are provided to half of the population of Ukraine,
and the total market size is estimated to be above EUR 1.5 billion per annum. DH services also
account for more than 20% of the total housing and utility services of Ukrainian households.
As a rule, DH systems are operated by municipal utilities that supply heat to residential, public
and commercial customers. The tariffs for DH services are set either by municipalities or by
the National Energy and Utilities Regulatory Commission (the “National Regulator”). The
latter regulates tariff-setting and licencing for combined heat and power plants and large DH
utilities with the level of metering exceeding 90%.
Natural gas remains the dominant fuel for the DH sector. According to Ukrtransgas, in 2019
Ukraine consumed 29.8 billion Nm3 of gas, 7.4 billion Nm3 (25%) of which was consumed by
DH companies and CHPs, including 4.6 billion Nm3 for DH services for population and
1.2 billion Nm3 for DH services for non-residential consumers, with the remainder being used
for electricity generation and internal needs. The share of CHPs, waste heat and renewable
energy in heat generation in Ukraine is quite low compared to other European countries. In
particular, in 2017 the CHPs’ share in heat generation was below 40% compared to 72% in
European Organisation for Economic Co-operation and Development countries. According to
the official statistics of Ukraine, the share of renewable sources in the heating sector of Ukraine
is circa 8%, while its share in DH is even lower. In 2019, the volume of heat energy supplied
to final consumers in Ukraine was at the level of 33 million Gcal.
The Kyiv DH system is by far the largest in Ukraine. It is also considered to be the third largest
in Europe and one of the largest in the world. It supplies circa 10.9 million Gcal (12.7 TWh) of
heat to almost 2.7 million residents as well as numerous commercial and public sector clients.
Kyiv is one of a very few cities in Ukraine that supplies hot water 24 hours a day during non-
heating season. To date, the DH services in the City are provided from 804 heat sources with a
total installed capacity of over 15,120 MW. With the exception of heat generated by the KTE’s
waste incineration plant “Energiya” and a few small-size independently operated biomass boiler
houses, heat generation in Kyiv is entirely fossil fuel based.
KTE is responsible for circa 90% of heat generation for DH purposes in the City, and circa 99%
of heat transportation. Circa 8% of heat is generated by an old privately-owned CHP-4, also
known as the Darnytsia CHP. Its first block was commissioned in 1954. It has installed heat
capacity of 1,428 MW and electrical capacity of 160 MW. The remaining 2% of heat is
generated by more than 100 entities with different ownership (communal, state, private), which
generate heat at small boiler houses mainly for internal needs and/or to heat one or several
residential buildings located in the same area. In the majority of cases, such entities also have
licences to transport heat by their own local hydraulically independent pipelines. LLC Euro-
Reconstruction, which owns and operates CHP-4, uses the DH networks of KTE and pays a fee
for the heat transportation services. In particular, according to the audited IFRS financial
statements, in 2020 KTE earned UAH 190.2 (EUR 6.2 million) for heat transportation services.
To date, KTE operates the following DH infrastructure:
Two gas-fired CHPs (CHP-5 with electrical capacity of 700 MW and heat capacity of
1,874 Gcal/hour (2,179 MW) and CHP-6 with electrical capacity of 500 MW and heat
capacity of 1,757 Gcal/hour (2,043 MW));
15 large boiler houses with the heat capacities over 80 Gcal/hour (93 MW) each;
168 small and medium-sized boiler houses with the average heat capacity below 20
Gcal/hour (23 MW);
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Waste incineration plant “Energia” with an annual solid waste utilisation capacity of
250,000 tones and heat generation capacity of 50 Gcal/hour (58 MW); and
2,721 km of DH networks (2-pipe dimension, trench length).
The location of the assets is shown on the map below. CHP-5 and CHP-6 represent 41% of the
total installed heat capacity managed by the Company and circa 46% of the Company’s heat
production depending upon year. The CHPs and the majority of boiler houses were built or
reconstructed in the 1970-80s. They are inefficient and require modernisation to ensure
sustainability of DH services. The current state of the DH networks is unsatisfactory, with 71 %
of them requiring replacement.
In 2020 KTE burned over 2.3 billion Nm3 of natural gas, i.e. more than 7.7% of Ukraine’s total
natural gas consumption or circa 30% of natural gas consumed by all DH companies and CHPs
in Ukraine.
Residential customers account for circa 80% of the total heat and hot water sales of the
Company. In 2020, KTE supplied heat and hot worth more than UAH 7.5 billion (EUR 0.24
billion). The shares of public and commercial entities were 11.4% and 8.3% respectively. The
Company both provided centralised heating services and supplied heat and hot water to heat
exchangers owned and operated by other institutions.
The National Regulator sets heat tariffs for generation of heat by the two CHPs operated by
KTE, while the City State Administration sets the tariffs for DH and hot water services and DH
energy transportation in line with the Cabinet of Ministers Decree No. 869 of 1 June 2011 with
amendments. According to the National Regulator’s Decree No. 2743 of 24 December 2020,
starting from 1 January 2021, the tariffs for generation of heat by the CHP-5 and CHP-6 were
increased by circa 10% to the following levels:
UAH 937.74 per Gcal (plus VAT) for residential consumers;
UAH 938.49 per Gcal (plus VAT) for public entities;
UAH 938.54 per Gcal (plus VAT) for other consumers.
On 29 December 2020, the Kyiv City State Administration adopted a Decree No. 2077
regarding the tariffs for different type of consumers depending upon type of connection.
According to the City’s Decree, the tariffs for heat energy including costs for repair of
centralised heat sub-stations, were set at the following levels:
UAH 1,398.31 per Gcal (plus VAT) for residential consumers;
UAH 1,399.47 per Gcal (plus VAT) for public entities;
UAH 1,402.86 per Gcal (plus VAT) for other consumers.
By the same Decree, the Kyiv City State Administration increased tariffs for transportation of
heat by the DH networks of KTE from UAH 376.36 per Gcal to UAH 418.49 per Gcal, which
has been applied to heat energy produced by LLC Euro-Reconstruction and transported by KTE
starting from 1 January 2021.
The Law of Ukraine No. 1060-IX regarding new regulation of communal services became
effective on 1 May 2021. It is expected to have a positive impact on all DH companies. The
Law simplified conclusion of public agreements on connection to DH systems, provided an
opportunity for the inclusion of costs on installation and service of building-level heat meters
into DH tariffs and opened a door for the overall adjustment of DH tariffs for population, which
were frozen due to various regulatory contradictions.
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Electricity Market
Ukraine is among the top-10 largest electricity producers and consumers in Europe with the
total installed generation capacities of circa 55.8 GW. Whereas Ukraine is located between two
regional markets with different characteristics and price policies, the Ukrainian power grid is
composed of two separate segments: a small western region, also known as the “Burshtyn
Energy Island”, is interlinked with ENTSO-E, while the main part of the power system is
synchronised with the Russian/Belarussian IPS/UPS4 system. Ukraine is a net exporter of
electricity to its western neighbours through the Burshtyn Energy Island. It also exports
electricity to Moldova, imports electricity from Belarus and has frequency support flows of
electricity with the Russian power system. In 2020, Ukraine exported 4,754 GWh of electricity,
which was twice as much as imported volumes for the same period.
Starting from July 2019, to meet its Association Agreement commitment regarding the
implementation of the EU Third Energy Package, Ukraine successfully switched from a single
wholesale buyer model to one with a more competitive power market structure consisting of
bilateral contracts, day-ahead, intraday, balancing and ancillary services markets. There is a
state-owned offtaker, also known as the Guaranteed Buyer, which is responsible for the Public
Service Obligation (“PSO”) to the population and renewables. The Guaranteed Buyer performs
two key functions: (i) it purchases low–cost electricity generated by Energoatom and
Ukrhydroenergo and sells it at discounted prices to universal service suppliers and regional
electricity suppliers for consumption by residential customers; and (ii) it buys and sells 100%
of the electricity produced by renewable energy sources under the feed-in tariff. A significant
increase in the new renewable energy capacities (mainly solar) in 2019 became a challenge for
the Guaranteed Buyer, which accumulated significant arrears to renewable generators. A state-
owned Market Operator monitors the day-ahead and intraday electricity markets as well as
provides legal support for conclusion of power purchase agreements and implementation of
export-import transactions.
Ukrenergo is the country’s state-owned national electricity company responsible for operational
and technological control of the Integrated Power System (“IPS”) of Ukraine, including
transmission networks and interconnections with neighbouring countries. Ukrenergo transmits
around 135 TWh yearly and receives revenue in a form of tariffs for electricity transmission
and dispatching services. The tariffs are regulated and approved by the National Regulator. As
per the market model, Ukrenergo’s transmission tariff should also cover the compensation to
renewable energy producers, which is effectively a difference between the feed-in tariff level
and electricity market price. Ukrenergo has divided its operations into eight regional power
systems with dispatch and control functions. Please see the map below.
The electricity distribution function is carried out by twenty five regional Distribution System
Operators (“DSO”). Each DSO is a natural monopoly on a certain fixed territory. DSO’s
activities are licensed by the National Regulator. Most DSOs are fully or partially privately
owned, mostly by entities linked to oligarchs.
The list of largest electricity generators in Ukraine consists of (i) Energoatom, a state entity that
operates all Ukrainian nuclear power plants, (ii) Ukrhydroenergo, a state-owned hydro power
generator, (iii) DTEK, Akhmetov-owned thermal electricity generator, (iv) Centrenergo, a state
owned thermal electricity generator, (v) privately-owned Donbasenergo, which includes two
thermal power plants, (vi) a pool of private renewable energy generators selling electricity at
feed-in tariffs, and (vii) more than forty CHPs, of which Kyiv CHP-5 and CHP-6 are the largest
ones. In 2020, the total electricity generation by Ukrainian power plants reached 148.8 TWh,
which is 3.3% lower compared to 2019 reflecting decline in the consumption deriving from the
4 Integrated Power System / Unified Power System
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COVID-19 crisis. Nuclear power plants generated 51.2% of total electricity output. The shares
of thermal power plants and CHPs in the generation mix were 26.6% and 8.6% respectively.
The share of renewable energy sources increased by circa 100% in 2020 compared to 2019 and
reached 7.3%. Hydro power plants and hydro accumulation power plants have currently the
lowest share in the generation mix.
In 2020, KTE generated 5.03 TWh of electricity (3.4% of the total Ukraine’s generation mix or
circa 40% of electricity generated by all the Ukraine’s CHPs, of which 4.75 TWh were delivered
to the grid. In 2019, the level of electricity generation was only 3.56 TWh, of which 3.06 TWh
were delivered to the grid. The 41% increase in power generation in 2020 versus 2019 was
linked both to the opportunities offered by the new energy market and the growing balancing
demand of the grid due to the introduction of new renewable energy sources. In 2020, 58% of
electricity was generated by CHP-5, while the remaining 42% by CHP-6. More than 70% of
electricity is generated during the heating season, which usually starts in mid-October and ends
in mid-April depending upon the ambient temperature levels.
The split of electricity sales by type of buyers is shown in the table below:
Volumes, MWh, % Sales, in million UAH, %
LLC Energiks (private trader) 83.17% 79.87%
SE Market Operator – day ahead market 10.16% 11.28%
SE Market Operator – intraday market 1.52% 1.86%
Ukrenergo, balancing 3.47% 5.69%
Ukrenergo, non-balancing 1.69% 1.30%
The power purchase agreement between KTE and LLC Energiks No. 1911/УРРЕ-19 was
signed on 28 December 2019 following the evaluation of proposals received from several
electricity traders. According to the Company’s management, LLC Energiks was able to
guarantee timely payments and offtake electricity during night periods, which was critical for
KTE to ensure uninterrupted operation of the steam turbines at the CHPs. According to the
agreement, LLC Energiks informs KTE regarding the daily and hourly volumes of electricity
to be purchased next month not later than 16-00 of the 25th day of a preceding month. Limited
adjustments are possible during month. The contract price per 1 MWh of electricity is set as
actual price at the day-ahead market in UPS during respective hours of trading day as published
at the official website of SE Market Operator decreased by UAH 20 per MWh without VAT.
KTE also sells additional volumes of electricity to SE Market Operator on day ahead and
intraday markets and to Ukrenergo for the grid balancing and other purposes, but only during
day time.
On 15 April 2021, the Parliament of Ukraine adopted a new Law No. 3364-1-d related to
certification of Ukrenergo. On 26 April 2021, the Law was sent to the President for signing.
The Law is aimed at facilitating future synchronisation of the main part of the Ukrainian energy
system with ENTSO-E. It inter alia obliges all state and municipal companies in Ukraine to
conclude bilateral power purchase agreements at electronic auctions, the regulations for which
will be approved by the Cabinet of Ministers of Ukraine. In view of the above, KTE has advised
LLC Energiks regarding termination of their contract upon the effectiveness of the Law. New
bilateral contracts will be concluded exclusively through electronic auctions. In the meantime,
KTE intends to continue selling electricity directly to SE Market Operator on day ahead and
intraday markets and to Ukrenergo for balancing the national grid.
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ANNEX VII – ECONOMIC ASSESSMENT
[REDACTED]
