Sticks and carrots for energy efficiency of small and medium businesses



Small and medium businesses now simply include increased tariffs into the price of their products. But the state that held a course for energy independence can and should change it. The head of the BRDO Energy sector Oleksiy Orzhel explains how to do this.

The cheapest energy is the one, which is not produced and consumed. The state should promote the actions of all categories of consumers, which increase the energy efficiency.

The Better Regulation Delivery Office (BRDO) has analyzed the Ukrainian legislation in terms of the energy efficiency focusing on small and medium-sized enterprises (SMEs) and has found that there are virtually no incentive mechanisms for them to take energy efficiency measures.


The SME sector itself is primarily focused on current business activities. It simply does not have enough time, opportunities and money for such a type of investments as energy efficiency.

Large businesses begin to move slowly in this direction, since they are able to count the money better and understand the benefits of energy efficient consumption. As a rule, large companies already have an energy office or a chief power engineer or involve a contracting organization for energy audits.

As for small and medium-sized enterprises, they do not really think about energy efficiency now. When tariffs grow, SMEs simply include these additional costs into the price of their goods or services. This affects end users – the prime costs are increased and the competitiveness of products is reduced. In general, this situation is also negative for the state, since it does not help to reduce energy consumption in the country.

In terms of state approaches and attention, it would be appropriate to give the SME sector a status of the residential sector. Moreover, they are often immediate neighbors, as it is a common practice to place the business on the first floors of residential buildings. Consequently, the state should encourage the business to be energy efficient as well and should introduce the regulation of these measures, and then, of course, control in an appropriate way. Speaking about analogy with the residential sector, the logical incentives could be separate funding from the Energy Efficiency Fund and introducing credit privileges.

Bad cop

The introduction of progressive tariffs can perform, let us say, the function of “sticks” or regulatory tools, when each new “portion” of energy for non-productive small businesses (for example, hotel business) is sold at a higher cost.

By analogy with the fact that the consumption of more than 100 kWh per year is much more expensive for the population, the same can be for non-productive businesses – it would be better to differentiate the cost by volumes depending on the business size.

On the other hand, progressive tariffs conflict with the interests of energy suppliers, who are interested in selling more products. Therefore, the state should introduce a differentiated “tariff menu” for different segments of consumers, including for SMEs, to balance its own costs and interests of market participants.

Another possible “stick” is an environmental tax imposed in case of excessing standards for using energy resources due to low energy efficiency.

Good cop

Let’s go back to the “carrots”: if we are talking about small and medium businesses as a production, then we have to offer them both customs and tax privileges for new energy-efficient equipment.

Moreover, the state can and should apply tax incentives to Ukrainian producers of such equipment. These incentives can be larger than those ones provided for imports to stimulate domestic producers. This will promote the creation of the markets for such production and, accordingly, the wider use of energy-efficient equipment.

For example, the agricultural sector, in which the SMEs have about 85%, also requires state incentives programs. As for now, there are enough investors wishing to provide funding for operational activities of agricultural producers, but there is a much more complicated situation with the re-equipment, for example, switching from gas heating to the alternative one. It implies both credit programs and the promotion to switch to more efficient and economically justified energy consumption schemes, the re-equipment.

What is currently blocking the use of such mechanisms? The imbalance of the current legislation

The Law of Ukraine “On Energy Saving” (Article 16) provides for tax privileges for:

  1. Producers of energy-saving equipment, technical devices and materials, means of measurement, control and management of costs associated with fuel and energy resources.
  1. Producers of equipment for the use of non-traditional and renewable energy sources and alternative fuels.
  1. Enterprises using equipment that works on non-traditional and renewable sources of energy, alternative fuels.
  1. Enterprises that use energy-saving fixed assets in the form of higher depreciation rates of such funds.

At the same time, the Tax and Customs Codes significantly limit the scope of the above privileges. They are possible only if these goods are used by taxpayers for their own production and if identical goods are not produced in Ukraine. In addition, these goods should be stipulated in the list approved by the SMU.

The Tax Code does not provide for any cases of using higher depreciation rates of fixed funds. At the same time, the list of energy saving equipment types, to which higher depreciation rates are applied, is expected to be established by the CMU’s Order No.159-p dated 11/02/2009.

It should be noted that the Government’s Resolution No.293 dated 30/03/2016 provided for creating special (priority) conditions for the import of energy-saving materials, equipment, machinery and components based on the projects presenting Japanese technologies. However, currently, the legislation does not stipulates similar privileges for imports from countries other than Japan. Of course, this fact prevents the spread of energy-efficient and energy-saving technologies in Ukraine. In addition, Japanese technologies are also facing with a number of bureaucratic obstacles when it comes to import activates in our country.

In general, we have a strange situation today: it is easier for small and medium-sized businesses to get grants from international institutions than from their own state. Thus, the United Nations Industrial Development Agency (UNIDO), supported by the Global Environment Facility (GEF) is implementing the project “Improving energy efficiency and stimulating the use of renewable energy in agro-food and other small and medium-sized enterprises (SMEs) of Ukraine”, which some domestic producers have been already joined.

Of course, we can tell everywhere that “energy efficiency means everything for us”, but, generally speaking, we have not established the secondary legislation yet, and the provisions already provided for by laws often do not work.

I would like to hope that the recently adopted laws, in particular on the commercial accounting of utilities and energy efficiency of buildings, will give an impetus to improve the situation not only in the residential sector, but also for the energy modernization of small and medium-sized businesses. The state has to develop a systematic approach that will have a long-lasting positive effect.