The regulatory framework for energy services has been developing gradually. In 2011, Order No. 9 of the Ministry of Housing and Communal Services of Ukraine, dated January 26, 2011, approved the methodological recommendations for the creation of a System of Economic Incentives for Implementing Energy-Saving Measures at Housing and Communal Services Enterprises.
According to the Methodological Recommendations on Establishing a System of Economic Incentives for the Implementation of Energy Saving Measures at Housing and Utility Companies, an energy service company is a business entity that implements energy-saving measures in whole or in part at the expense of its own, borrowed, or raised funds and ensures guaranteed savings in fuel and energy resources and water during the period of implementation of energy saving measures.
Therefore, an energy service company (hereinafter referred to as an ESCO) is a business entity that offers services aimed at improving energy efficiency through the introduction of energy-saving products, modern energy-saving technologies, and/or equipment.
The energy service market was launched in 2015 with the adoption of the Law of Ukraine “On the Introduction of New Investment Opportunities, Guaranteeing the Rights and Legal Interests of Business Entities for Large-scale Energy Modernization” No. 327-VIII of 09.04.2015, which created the legal framework for the energy service mechanism (ESCO) in the public sector, defined the concepts of “energy service” and “energy service agreement,” established the basic terms of such an agreement, and provided a legal basis for regulating the relationship between the customer and the energy service provider, defined the mechanism of pricing and payment for services, including the savings achieved, and allowed public institutions to enter into energy service agreements for more than one year.
Subsequently, the above-mentioned Law was amended by the Law of Ukraine “On Amendments to the Law of Ukraine ‘On the Introduction of New Investment Opportunities, Guaranteeing the Rights and Legal Interests of Business Entities for Large-scale Energy Modernization’” No. 1980-VIII dated 23.03.2017, which significantly improved the ESCO mechanism. In particular, it introduced the possibility to combine several facilities into one lot; extended the maximum term of an energy service contract from 10 to 15 years; established a fixed percentage of the customer’s cost savings to be paid to the ESCO contractor, which must be at least 80 percent; approved a transparent contractor selection mechanism via tender (as mentioned above – based on contract efficiency rather than price); and stipulated that payments for energy services must be made only in monetary form (no asset transfers or barter, only in hryvnias).
In addition, amendments were made to the Budget Code regarding multi-year expenditures, and the Law “On Public Procurement” was adopted, which established specific energy service (ESCO) procedures.
The main difference between the announcement of an energy service procedure (or ESCO procedure) and all other public procurement procedures is the absence of an expected purchase price, as the price will be determined after the energy service contract is signed. In turn, the winner is selected based on the criterion of the best performance indicator, i.e., contractual savings. This innovation was necessary, as the “lowest price” approach is not suitable for ESCOs, where the main thing is to maximize energy consumption.
The adoption of the Law of Ukraine “On Energy Efficiency” No. 1818-IX of 21.10.2021 enshrined the basic principles of energy services and obliged government agencies to promote the development of the energy service market. The Law sets goals for the development of energy services, strengthening cooperation between consumers, producers, energy suppliers, energy service providers, public authorities, and local governments to achieve goals and targets in the field of energy efficiency, implementation of energy monitoring systems, etc. Consequently, it creates favorable conditions at the macro level by declaring support for energy efficiency projects, but the activities of ESCOs are regulated by specialized regulations, which will be discussed below.
Starting an ESCO company in Ukraine does not require a special license or permit – it is sufficient to register a business entity under the standard procedure. The legislation does not establish a separate legal form for energy service companies.
The most common legal form for ESCOs is a Limited Liability Company (LLC), as it offers the most practical framework for such activities in Ukraine. Its advantages include limited liability for the founders (they are only liable within the scope of their contributions to the charter capital), reduced financial risks, financial flexibility, and a relatively simple and transparent management structure.
To register an LLC, you need to choose a company name, define the KVEDs (types of economic activity, for example, energy efficiency activities), prepare a charter, and collect constituent documents. The state registration of the company is carried out through the Center for the Provision of Administrative Services or online on the Diia portal. After registration, the company receives an extract from the Unified State Register (USR) and can start operating.
Energy efficiency measures and the provision of energy-saving services, including but not limited to energy modernization of buildings, optimization of energy consumption, and energy efficiency consulting, are not included in the list of activities subject to licensing by law, so no special license for energy service activities is required. However, if an ESCO plans to carry out additional activities, such as the production or supply of electricity or heat, such activities require separate licenses in terms of the applicable law.
The main mechanism for ESCOs is an energy service agreement, which is a contract for the provision of energy services by an energy service provider, paid for by reducing consumption and/or costs of fuel and energy resources and/or housing and communal services as a result of energy service provision compared to consumption (costs) in the absence of such measures.
The difference between an energy service agreement and ordinary contractor agreements is the payment model: the customer does not pay in advance for the work but pays the ESCO’s remuneration solely from the energy savings after the implementation of energy efficiency measures.
The Cabinet of Ministers of Ukraine approved the Model Energy Service Agreement by Resolution No. 845 of 21.10.2015, which establishes a standard form of the contract and a list of its terms.
The essential terms of this agreement, according to Article 5 of the Law of Ukraine “On the Introduction of New Investment Opportunities, Guaranteeing the Rights and Legal Interests of Business Entities for Large-scale Energy Modernization,” are:
– the subject of the contract – a list of energy efficiency measures that the ESCO undertakes to implement and the terms of their implementation;
– the contract price is the total amount payable to the contractor, which is tied to the achieved reduction in the customer’s energy costs (defined as a share of the total savings for the entire term of the contract);
– The baseline consumption level is the initial (before the implementation of the measures) annual consumption of energy resources and utilities by the facility in physical and cost units;
– guaranteed level of savings – the planned amount of consumption and/or cost reduction that the ESCO undertakes to achieve as a result of the implementation of measures;
-a fixed percentage of savings; a share (up to 100%) of the customer’s savings to be paid to the energy service provider;
– contract term: the period during which the energy service is valid (usually from 1 to 15 years, depending on the scale of the project and the amount of investment);
– payment procedure – a mechanism for paying for ESCO services exclusively at the expense of the savings achieved (the difference between the customer’s base and actual costs for the relevant period);
– obligations and liability of the parties – compliance by the parties with the agreed terms of operation of the facility and liability for failure to achieve the guaranteed performance or other violations established by the contract;
– termination and completion of the contract – grounds for early termination of the contract and conditions for transferring the modernized property to the customer’s ownership upon completion of the project (including compensation for ESCO costs).
The price of the contract directly depends on the savings made in fuel and energy costs for the entire term of the contract compared to the costs that would have been incurred in the absence of such actions. Settlements under the contract are made precisely by reducing the customer’s costs compared to the baseline consumption level.
However, the law limits payments under the contract to the amount of savings achieved; when the ESCO receives the entire amount stipulated in the contract, the contract is terminated early. This incentivizes the contractor to exceed the energy-saving plan to receive the due remuneration sooner.
Under the agreement, the ESCO usually bears all technical and financial risks: if the actual savings are less than planned, the company will not receive part of the payments (or may not recover the investment at all if the project is unsuccessful). The contract stipulates the level of reduction to be achieved each year, throughout the entire term of the contract, and fixes the conditions for the use of equipment and buildings. The ESCO is obliged to ensure savings without deteriorating operating conditions, such as maintaining the standard temperature in the premises, proper lighting, etc.
Implementation of energy service projects requires significant initial investments. Typically, the ESCO covers 100% of the project cost with its own or borrowed funds, freeing the customer from the need to advance the work.
Ukrainian legislation allows for flexible financing models: funds for energy services can be raised by the energy service provider (ESCO) itself, by the customer, and from other sources not prohibited by law, including partially through grants, government support programs, or co-financing from the budget. In the public sector, following amendments to the Budget Code, customers have the right to enter into multi-year energy service contracts with phased payments within the approved budget allocations for the respective years.
The guarantees of payment for ESCO services by the customer are embedded in the very essence of the contract: payments are made solely from the savings achieved, so if there are no savings, the customer does not incur any costs. On the other hand, if savings are achieved, they create a resource for payment — these funds are essentially “self-generated” as a result of ESCO activities. Furthermore, if the customer is a regulated utility (e.g., a district heating company), the cost of energy services can be included in the tariff within the limits of the savings achieved, which further protects the investor.
The biggest challenge is the initial need to secure sufficient capital to invest in energy efficiency measures. ESCOs use their own or third-party funds and recover them over several years from the savings, so they must have startup capital. A potential solution could be the introduction of concessional financing mechanisms — for example, energy efficiency funds or programs by international financial institutions. In Ukraine, such approaches are still in the development stage (there are initiatives by the State Agency for Energy Efficiency and Energy Saving and UNDP regarding the implementation of ESCO factoring), but systemic lending is still lacking.
Consequently, setting up an energy service company in Ukraine is a promising business area for energy efficiency specialists. The state has formed the necessary legal framework covering all key aspects of energy services (definitions, procedures, payment guarantees). An entrepreneur who plans to start an ESCO company should carefully prepare: form a competent team, secure financing, study regulatory requirements, and assess market prospects.
Nowadays, energy service companies have already become an extremely important part of the state energy efficiency policy. With a competent approach and taking into account the risks, the ESCO business can be profitable for both the investor and the customer, ensuring the modernization of facilities and long-term resource savings. The legal conditions for this exist in Ukraine and are constantly being improved, which makes opening an ESCO company a timely and relevant step.
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