UAFP Study: Roots of corruption in Ukraine’s energy sector
Energy and Climate
Corruption in the energy sector remains one of the key factors slowing the recovery of Ukraine’s energy system and deterring investment in its development. The root cause lies in the selective implementation of European norms and market rules, while political influence and excessive state control create fertile ground for corrupt practices.
Experts at the Ukraine Facility Platform identified the main corruption drivers in Ukraine’s energy sector – most with deep political roots – and analyzed their consequences in the study “Roots of Corruption in Ukraine’s Energy Sector”, conducted with the support of the EU Anti-Corruption Initiative in Ukraine (EUACI). The research also outlines recommendations to help minimize the harmful effects of corruption on the sector.
Key corruption factors and consequences in the energy sector:
🔹 Excessive state ownership. The energy sector includes more than 400 state-owned enterprises, of which only about 10% operate effectively.
🔹 Politicized pricing mechanisms. The state spends around UAH 100 billion annually to subsidize household electricity tariffs under the Public Service Obligation (PSO) mechanism. This approach disregards consumption levels and household incomes and undermines the financial stability of key state-owned energy companies.
🔹 All major state-owned enterprises that have adopted OECD-based corporate governance systems continue to face political intervention in both operations and staffing decisions.
🔹 Failure to enforce penalties against enterprises that do not pay for electricity consumed is often politically motivated. As a result, mutual arrears in the electricity market now exceed €1.5 billion.
“Anti-corruption efforts that focus only on the selective implementation of reforms and the consequences of corruption will always fail. The real problem lies in the political instruments – the excessive state influence over the sector and its ownership of energy assets. Unless this root cause is addressed, corruption will continue to re-emerge,” said Oleksandr Vizir, Energy and Climate Sector Lead at the Ukraine Facility Platform.
Key recommendations to minimize corruption risks:
1️⃣ The state is an ineffective owner. Its share in the energy sector should be reduced through transparent privatization of non-strategic state assets. The functions of operational management and policy-making must be clearly separated.
2️⃣ The process of selecting supervisory boards and top management must not be financed by those same state-owned enterprises. Independent recruitment agencies should be engaged – funded by donors at the initial stage and later from the state budget. Contract terms should be standardized and published in advance.
3️⃣ Replace the current PSO mechanism with a system of targeted subsidies. Funding for the new model can be generated by reforming the dividend-payment policy of the energy companies to the state budget.
4️⃣ Any government or local authority decision prohibiting the disconnection of non-paying enterprises must be accompanied by a binding financial guarantee provided and paid by that authority.
5️⃣ Private investors will be ready to finance new generating capacity once regulatory barriers are removed and price incentives are introduced in the electricity market.
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