Ukraine is one of the least energy efficient countries in the world and has the greatest emissions level per unit of GDP among CIS countries. A recent inventory estimated that total emissions from Ukraine in 1990 were 246 million tons of carbon equivalent, placing it sixth in the world. Per capita emissions of CO₂ were 4.75 tons of carbon per year. This figure significantly exceeds the levels in most European countries and is also one of the highest in the world.

Problems in Ukrainian district heating are similar to those facing other countries of the former Soviet Union. Sharp increase in fuel prices up to the world level with heat tariffs lagging behind considerably worsened the financial state of all district-heating companies. Lack of the funds for modernization of generating capacities and heat networks impacted the level of service, which in combination with consumers' lower ability to pay significantly reduced payments collection level. Heat supply infrastructure is operated beyond the service life and requires large investments for maintaining it in operating condition and covering existing heat demand.

At the same time, it is this inefficiency of existing heat supply and consumption systems that creates significant potential for fuel and energy saving, which increases interest to this sphere in connection with environment protection problems. Heat supply in the buildings sector accounts for approximately 15% of all fuel consumed in Ukraine, and there is a huge potential for energy efficiency improvement in this sector illustrated by the following figures. Specific fuel consumption for heat generation in communal energy sector of Ukraine is 0.180-0.200 t.c.e. per 1 Gcal compared to 0.150-0.160 t.c.e. in Western countries. Specific heat consumption for heating and hot water supply of Ukrainian buildings is 1.5-2 times higher than in Western countries with similar climate conditions.

High energy intensity of municipal heat supply in Ukraine is a very serious problem that has the following important implications:

• Growing dependence on external fuel supplies (mainly from Russia) purchased at world prices;
• High fuel component of heat tariffs and consequently high level of tariffs themselves, overstraining the budgets of most families and leading to significant non-payments by households;
• Higher than necessary consumption of fossil fuel by utilities, with a considerable potential for fuel saving and corresponding greenhouse gas (GHG) emissions reduction.

There exist a number of barriers that hinder supply and demand side energy efficiency improvement in district heating systems. These include: macro-economic conditions (such as high taxes and unstable taxation policy, unstable local currency), inconsistency of regulatory and legal policies, non-payment crisis, imperfect pricing policy, institutional weaknesses, ownership inefficiency, lack of information and about existing opportunities for energy efficiency and relevant experience, high transaction costs for relatively small energy efficiency projects, unsatisfactory financial state of district heating companies, consumers and local budgets, difficulties in arranging financing for efficiency projects, lack of capacity and experience in preparing, implementing and managing energy efficiency projects, technical deficiencies of heat supplier and consumer systems, absence of incentives to energy saving for majority of heat consumers.

Increased energy prices in the Central and Eastern European countries after the collapse of the Soviet Union and development of market economy opened opportunities for energy service companies that reduce energy costs for their clients and reimburse themselves from the savings produced. ESCO business is also appearing in Ukraine. There already exist a state-owned company UkrESCO, and several private ESCOs, which is an indication that there is a healthy market for ESCOs in the country.

The proposed project addresses a key issue in the reduction of greenhouse gas emissions through large-scale improvements in energy efficiency in Ukraine's communal heat supply sector.

These improvements will result from a four-part approach:

1. Capacity building to create the basis for systematic energy efficiency activities at the local level;
2. An integrated approach of supply and demand-side improvements to achieve maximum fuel savings and emissions reduction;
3. Attraction of external investment resources for an energy efficiency program in a pilot city; and,
4. Project-specific replication measures including development of relevant procedures, guidelines, information materials and their dissemination, and public awareness-raising through the involvement of NGO's, in particular those concerned with environmental and energy efficiency problems.