War-related losses in Ukraine’s energy and extractives sector reached $88.2 billion as assessed in the World Bank’s RDNA5 report. In January-February 2026, after another wave of Russian strikes, Ukraine’s available generation capacity fell below 10 GW, while demand exceeded 18 GW. This makes energy sector reform a crucial issue of wartime resilience, fiscal sustainability, and preparedness for the next winter.

This is the focus of the first issue of the Ukraine Reform Series, a new regular analytical product by KSE Institute assessing priority structural reforms critical to Ukraine’s resilience, recovery, and EU integration.

Russian attacks have changed the logic of energy reform. What was once seen as a long-term market transformation now affects whether the system can function during the war and withstand the next winter. Large-scale damage has created supply shortages, fiscal pressure, and new vulnerabilities, while private investment has not materialized at the scale required.

In the report, KSE Institute outlines three key areas of energy reform that are already being pursued and can strengthen Ukraine’s resilience ahead of the next winter.

The first is the transition toward a more decentralized and energy-efficient system as part of the infrastructure’s reconstruction. This is directly linked to winter preparedness: smaller and distributed generation, cogeneration, backup equipment, and faster repairs can reduce reliance on large facilities that remain highly vulnerable to Russian attacks. Financing instruments – including expanded international support, “special energy government bonds”, and targeted budget resources – are needed to make this possible.

In the longer term, roadmaps for liberalizing the gas and electricity markets should create clearer incentives for energy efficiency, distributed generation, and private investment. Cost-reflective pricing and competition would help shift the system away from large centralized assets toward more flexible and resilient infrastructure.

The second area is reducing quasi-fiscal risks from subsidized household tariffs and accumulated debt in district heating. KSE Institute estimates that government gas and electricity price subsidies reached $9.1 billion, or 5.1% of GDP, in 2024 and have continued to grow since then. Any tariff adjustment should be gradual and accompanied by targeted support for vulnerable households, investment in heating infrastructure, and a structured approach to district heating arrears.

Energy pricing reform should also take into account household affordability and infrastructure constraints. Many households cannot reduce consumption without investment in heating and energy supply systems. This makes sequencing central: tariff reform, social protection, and infrastructure investment need to move together.

The final area is strengthening governance in the sector as required under various arrangements with partners, including stronger oversight of state-owned energy companies and the independence of NEURC, the energy regulator whose credibility affects market rules and investor confidence.

The government of Ukraine has committed to specific reform milestones under the IMF Extended Fund Facility and the EU Ukraine Facility. Key 2026 commitments include a roadmap for gas and electricity market liberalization by end-June (sequencing tariff increases for electricity, gas, heating, and hot water), technical analysis of quasi-fiscal costs from price caps and PSOs by end-July, and the first external assessment of NEURC’s governance and independence by end-November. By end-April 2026, the government was also to revise the charters of Energoatom and Ukrhydroenergo (restoring majority-independent supervisory boards) and amend the NEURC law. A further commitment, by end-2026, is to amend law 2479-IX, which imposes a moratorium on household tariff increases.

The sector’s ability to attract private capital for reconstruction will depend on the predictability of market rules and the availability of risk-mitigation instruments. Public and international resources alone are insufficient to cover energy and extractives sector recovery needs estimated at  $90.6 billion over the period of 10 years from 2026 to 2035. More than 240 flagship private-sector projects worth over $72 billion have already been presented through the Ukraine Investment Project Portal, with energy representing the largest share.

The problem is not only a scarcity of capital. War-related risks, limited insurance coverage, and high financing costs are what prevent projects from moving from pipeline to implementation. According to KSE Institute, expanding war-risk insurance capacity to $5-7 billion annually and reducing premiums to bankable levels could significantly improve conditions for private investment in energy.

The central challenge ahead is sequencing. Investors need predictable regulation and cost-recovery pricing. Households need adequate social protection before tariffs rise. The regulator needs genuine independence before markets can function properly.

With consistent implementation, these reforms can reduce vulnerabilities in the energy sector before the next winter, improve investment conditions, and strengthen Ukraine’s long-term energy security. They can also support deeper integration with the EU energy market and reinforce Ukraine’s role in European energy security.