May 2015—Oleksiy Shostak, the mayor of Malyn, a city located in north central Ukraine, smiled with satisfaction as he watched a group of third graders leaving Malyn School #1. This past winter, three schools in the city switched from natural gas to biofuel heating. 

Shostak glanced at the boiler house, which provides heat for the schools’ 1,700 students. “I think the city will have no trouble meeting the new restrictions on imported natural gas,” he said. “This will also allow us to cut municipal heating costs.”

In 2012, Russian natural gas was increasing in price and supply was becoming vulnerable to political disagreements. That’s when the Zhytomyr Regional Council turned to the USAID Public-Private Partnership Development Program for help to convert municipal boiler houses from imported natural gas to locally produced biofuel. The council needed help to attract funds and expertise from the private sector.

Switching to locally available biofuel, such as wood or straw pellets, had the potential to reduce expenses while ensuring a reliable supply of heating fuel. USAID selected Malyn, which is located in Zhytomyr oblast, for a pilot project to test a newly developed business model known as a public-private partnership (PPP), which leverages the expertise and resources of the private sector.

“Zhytomyr oblast has a wealth of wood and agricultural byproducts, and it is shame to waste it by using natural gas for heating,” said Georgiy Geletukha, head of the Bioenergy Association of Ukraine. “With these resources, it shouldn't take Ukraine long to substitute up to 18 percent of its natural gas use with local biofuel.”

USAID helped Malyn prepare a feasibility study, conduct a legal review and undertake an environmental assessment. The project facilitated discussions between the municipality, pellet producers and technical experts; drafted the PPP contract and tender documents; and communicated key information about the project to schools, government, the private sector and the general public.

The winning bidder, Heat Energy Ltd., financed two new biofuel boilers, provided a sustainable supply of biofuel from local wood-producing companies, and now makes a profit providing heat to three schools. This public-private partnership is a model for other towns in Ukraine that could also benefit by partnering with the private sector to substitute natural gas with local biofuel.

Pavlo Kozyriev, head of the Association of Small Cities of Ukraine, explained that public-private partnerships are the best way for small communities to undertake large capital investments. “Small municipalities cannot afford a large, one-time investment to purchase new biofuel boilers,” he said. “But we all understand that we need a substitute for expensive, imported gas. The PPP mechanism provides an ideal solution that meets local heating needs under tight budgetary constraints. In some cases, fuel substitution can save up to 40 percent of heating costs while also reducing carbon emissions.”

USAID’s Public-Private Partnership Development Program, which runs from 2010 to 2015, is designed to improve Ukraine’s public services and infrastructure through alliances between the public and private sectors.

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