Low tariffs a barrier for investors

Ukraine’s energy strategy until 2030, which was discussed last Thursday with the participation of President Yushchenko, caused quite a ripple. One of the first to assess it was the World Bank. According to Paul Bermingham, World Bank Director for Ukraine, Belarus, and Moldova, this is a comprehensive, all-embracing, and ambitious program that will require enormous investments for many years to come. Comparing the strategy’s two main directions — construction of new power-generating facilities and energy saving, — the World Bank prefers the latter because it can produce a fast effect.

In the view of Dejan Ostojic, a senior energy expert at the World Bank’s Ukraine office, successful energy saving will require heavy investments. Hence, certain stimuli must be created via a tariff policy, among other things. The problem is that Ukraine has very low electricity tariffs.

“Ukraine has the lowest electricity tariffs — even lower than in Russia. This is not conducive to investing because investors naturally want to have their expenses offset, which is difficult to do if tariffs are underrated,” the expert says. The WB office’s senior economist Mark Davis pointed out that, given today’s energy intensity at 5.4 percent of the GDP, it will be rather difficult to find $200 billion to pursue the new strategy because there are other cash-strapped areas.

The World Bank believes that reducing energy intensity will allow the Ukrainian economy to offset the impact of gas price increases. “The gas price increase may have a negative impact on the economy; however, a 12% decrease in energy intensity would offset the impact of the current price increase,” Bermingham said.

Meanwhile, Ukraine has a significant potential for reducing heat consumption of buildings connected to district heating systems. Most public buildings and high-rises in Ukraine waste at least 30% of heating. Heat loss is primarily due to the low quality of construction materials, poor insulation, and the absence of building level metering and regulation equipment.

The recently completed Kyiv Public Buildings Energy Efficiency Project, co-financed by the World Bank, proves that the implementation of relatively simple and cost- effective measures yield significant energy efficiency benefits. The project embraced about 1500 public buildings (schools, kindergartens, hospitals, museums) that were retrofitted with various energy efficiency measures, including heat meters, heat substations, weather stripping of windows and doors, and radiator reflectors. Annual heat savings reached about 270,000 Gcal in 2005, and it is expected that they will exceed 300,000 Gcal (or 25%, compared to heat consumption in these buildings before the project) in 2006 and beyond.

The World Bank strongly recommends implementing similar energy efficiency projects throughout Ukraine. “We intend to cooperate with Ukraine on projects like this. We are interested in making investments in this sector, which produce immediate results in terms of energy saving, reduced energy dependence, and increased energy security for Ukraine. We will continue to carry out these projects with our partners and all the high-profile donors working in Ukraine,” Bermingham said.

Ukraine will benefit from reduced natural gas consumption (heating with natural gas) reaching 45 million cubic meters a year. Reduced consumption will lower the cost of gas imports by more than US$ 4 million a year at the gas price of US$ 95/1000 m 3 . If such projects include residential high- rises, annual gas savings are expected to reach an estimated 2 billion cubic meters per year.