You're reading: EBRD wants to help nation cut energy consumption

A reduction in Russian natural gas prices may give Ukraine some breathing room, but big savings will only come when the nation overhauls its devastatingly energy inefficient economy through modernization.

The good news is that investors, starting with the European Bank of Reconstruction and Development, are ready to help, as long as corporate governance and transparency standards are up to par.

Since independence, Ukraine’s energy bill – notably its gas component – has continued to grow despite years of economic stagnation. The country remains one of the most energy inefficient in the world, an unsustainable burden both for businesses, households and government.

Populism has held governments past and present hostage to costly subsidies that have stretched the nation’s finances to the limit. It has also strained Ukraine’s international relations. Imports of increasingly expensive gas from Russia make the government vulnerable on the international scene.
Yet a drastic reduction in energy consumption is readily achievable, the EBRD and experts claim.

The EBRD was created to promote transition towards a market economy in 30 countries from Central Europe to Central Asia. Through loans, credit lines or equity purchases in promising companies, the bank hopes to stimulate investment, increase transparency, and encourage sound and sustainable development. While its main focus is the private sector, the international lender also cooperates with public institutions, supporting privatization, restructuring and the improvement of public services.

With more than 7.5 billion euros invested in Ukraine to date, the EBRD is the country’s biggest financial investor, and growing bigger. The past four years saw investments close to 1 billion euros yearly. This makes Ukraine the second largest part of the lender’s portfolio after Russia.

Much of the EBRD’s activities involve energy efficiency, a pivotal issue for Ukraine. Companies based in Ukraine use three times more energy per dollar produced than those in Poland, according to energy consulting company Enerdata. A lack of investment and dilapidated infrastructure now place it dead last among former Soviet states, according to the EBRD.

The public sector, however, is dragging its feet. And a recent round of energy company privatizations, for example, have been questionable, to say the least.

DTEK, the energy giant controlled by Ukraine’s richest citizen, pro-presidential lawmaker Rinat Akhmetov, was the sole bidder in most of the tenders, all of which it won. Asked about the value of such privatizations, EBRD Ukraine director Andre Kuusvek said that DTEK was certainly a solid and eligible player on the market, but more competition would have been better.

“I think the result for the government and eventually for the country would be better if the privatization tender would be more open to other bidders, foreign and domestic,” Kuusvek declared.

Kuusvek said that the EBRD had offered its engagement, possibly even as a debt provider or minority shareholder. Yet a lack of firm commitments could not be replaced by positive government statements, and the EBRD stayed outside the process.
Ukraine’s biggest and most immediate energy problem remains state-owned energy behemoth Naftogaz. Kuusvek said the monopolist’s current structure and mode of operation were major problems.

“It is a huge drag on the state budget, a black hole in terms of where the financial management is concerned,” he said.

The EBRD, together with an assortment of international financial institutions and the European Union, had previously put together a package of 1.5 billion euros for emergency repairs and gas purchases from Russia. It fell through, however, notably due to Naftogaz’s notoriously opaque management style.

At present the European Investment Bank and EBRD are preparing a 230 million euro pilot project, to test the waters. Kuusvek said there is still hope for cooperation.
“If Ukraine delivers its part of the deal, we are firmly committed to delivering our part of the deal,” he said.

This is only half the gas story, though. Indeed, what gushes out of giant Naftogaz, trickles out of millions of private dwellings. Ukraine’s residential stock of 10 million is one of the largest in Europe, but remains very poorly isolated and metered despite the frightful winters.

In a recent interview with Reuters, Serhiy Maslichenko, who manages EBRD Ukraine’s energy efficiency and climate change department, said that Ukraine could cut its gas imports by half within 10 years with the right investment.

For individual residencies the gains are even greater. Properly insulating the roofs and sides of a typical four-to-five-story Khrushchovka can produce energy savings that pay the project off in one harsh winter, Kuusvek said. The EBRD would be ready to support a credit line, dispensed through major banks, for individual residencies to take loans, install meters, and properly isolate their houses.

But there will be little incentive for homeowners to do so until the gas subsidies remain in place, Kuusvek said. These are particularly pernicious, as they drain the budget, hamper modernization, and sabotage talks with the International Monetary Fund. Kuusvek suggested scrapping them in favor of targeted support to poorer households.

Moreover, these may not even be necessary. Indeed, installing a meter usually causes registered usage to fall by half or more. This, Kuusvek explained, reflects technical losses, more rational consumption, and stealing that occurs along the way. Thus, proper metering and a price increase could balance each other out, he said.

In order to stimulate improvements in municipal heating, the EBRD has put together an E5P fund with precisely such a purpose. Its first successful project, a 5 million euro grant combined with a 10-year 10 million euro EBRD loan to Zhytomyr-based municipal heating company Zhytomyr Teplokomunenergo, was announced in a press release on Feb. 23. The project should improve heating efficiency for 75,000 homes, resulting in savings of 3.7 million cubic meters per year.

On an even brighter note, Kuusvek said he was particularly pleased with some of the private sector projects, notably with Polish-Ukrainian hydrocarbon exploration and production venture KUB-Gas and Ukrainian-owned gasoline retail network company Galnaftogaz.

The latter was one of the first partners of the EBRD in Ukraine, and has “led by example” in corporate governance. The two projects were among 5 nominated by the EBRD for Euromoney 2011 Financing Project of the Year award.

Yet much more could be done. For one thing, EBRD lending has so far been limited to dollars and euros, for lack of a proper local currency capital market. This took its toll during the severe hryvnia devaluation at the end of 2008. More than six years of talks with the national regulator have yet to produce any major progress, though.

The key, however, is for Ukraine to stay on the path of market-based democracy. Kuusvek firmly opposed the claims by some that Ukraine is better suited to an Asian economic model, where business conglomerates, or oligarchs in the Ukrainian version, manage major economic sectors.
“Free market should be the principle, there is nothing else we can say, there is nothing else we believe in because of who we are and what we are promoting,” he said.

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].