You're reading: How energy subsidies have sapped Ukraine’s efficiency

Nation’s economy is dominated by inefficient, wasteful heavy industry.

As one of the world’s most wasteful energy users, Ukraine badly needs investment in energy efficiency projects to increase the competitiveness of its economy. But with little spare cash or financing available to fund improvements and reduced incentives because of subsidized energy prices, only a small number of firms are investing.

Research shows that Ukraine uses three times more energy to produce each unit of gross domestic product than an average European Union country. The industries that dominate the country’s economy – cast iron, steel, cement, chemicals and grains – still use outdated Soviet technology.

“Investments into energy efficiency are an extremely expensive measure, but necessary for 21st-century business.”

Roman Zinchenko, coordinator at Greencubator, a national non-profit network of energy efficiency projects.

Years of low energy prices means companies have little motivation to find ways to reduce their energy consumption, which often requires hefty investment in modern machinery and processes to replace old, inefficient equipment and techniques.

“Investments into energy efficiency are an extremely expensive measure, but necessary for 21st-century business,” said Roman Zinchenko, coordinator at Greencubator, a national non-profit network of energy efficiency projects.

The European Bank for Reconstruction and Development, a major investor in energy-efficiency projects in Ukraine, estimates that about $10 billion needs to be invested by 2015 and another $10 billion by 2030 to keep the economy competitive. The large efficiency gains can be achieved in both industry and in the business of supply heat and energy to households, as well as schools and hospitals.

Despite the fact that energy efficiency has been one of the main priorities of every government’s policy since independence, the first major impetus for reducing consumption came in 2006 when the price of natural gas imports from Russia sharply increased from $50 per 1,000 cubic meters. Russia has since more than quadrupled gas prices for Ukraine. Current prices Russia charges Ukraine are in the $235-300 range.

According to Sergiy Maslichenko, principal business development manager at the EBRD, $1 billion was invested by industry in energy-efficiency projects from 2006 to 2008, the same amount as in the previous 15 years.

“For business, the main incentive to pursue energy efficiency investments is economic efficiency. If energy resources are cheap, they will postpone it as long as possible.”

– Iryna Stavchuk, internationalclimate changecoordinator at National Ecological Centreof Ukraine.

“For business, the main incentive to pursue energy efficiency investments is economic efficiency. If energy resources are cheap, they will postpone it as long as possible,” said Iryna Stavchuk, internationalclimate changecoordinator at National Ecological Centreof Ukraine.

The economic growth that coincided with gas price growth gave a boost to investments in heavy industry.

Starting in 2006, major steel mills – including Zaporizhstal, ArcelorMittal Kryvy Rih and Alchevsk attracted investment to carry out modernization aimed at improving energy efficiency. Besides the metallurgical sector, an active shift toward more energy-efficient production was observed in the chemical sector, cement production and agricultural companies.

International lenders led the way in putting money on the table. From 2006 to 2008, the EBRD committed nearly $770 million to sustainable energy projects in Ukraine. In the same period, the International Finance Corporation, the investment arm of the World Bank, spent $250 million on various projects.

But the financial crisis that hit in 2008 put the brakes on the promising progress, as financing dried up and companies cut expenditures and development programs.

“Before the crisis [in end of 2008], we had up to 20 project proposals annually, most of which received financial support. Now we get no more than 15 proposals, and only five of them can possibly get approved,” said the EBRD’s Maslichenko.

“In the aftermath of the crisis not only the number of projects decreased but the overall quality of those projects suffered because many companies postponed energy investments for better times,” he added.

“When energy resources are cheap, nobody bothers to conserve them.”

Iryna Stavchuk, internationalclimate changecoordinator at National Ecological Centreof Ukraine.

As the country creeps out of crisis, investments in modernization could resume. But experts say the government’s policy of cheap energy resources – including the $100 discount on Russian gas imports secured earlier this year – removes a major financial incentive for companies to invest.

“When energy resources are cheap, nobody bothers to conserve them,” said environmentalist Stavchuk.

“It would be better if everybody paid a fair price for energy, but could be reimbursed costs through state support programs for energy efficiency,” she added.

Despite more than 200 pieces of legislation on energy consumption, Ukraine still does not have a clear mechanism for encouraging the introduction of energy-saving measures, according to a recent report by the International Centre of Policy Studies, a Kyiv-based think-tank.

The report says that while current legislation contains such incentives as lower import duty and value-added tax relief on energy-efficient equipment, profit tax incentives for companies that manufacture alternative fuels or energy-efficient equipment, there is a lack of rules and mechanisms for regulating and introducing energy-saving measures.

But with the price of energy set to continue rising, experts say firms will have little choice but to invest to reduce consumption in order to stay competitive.

“Since the cost of energy resources is growing, companies can’t ignore energy efficiency measures,” said the EBRD’s Maslichenko.


Kyiv Post staff writer Olga Gnativ can be reached at [email protected]
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