Ukraine’s huge energy efficiency potential is key to improving its energy security

(Kyiv) — 13 October 2006

“Ukraine has an enormous potential to save energy. By 2030, the country’s projected energy savings would be as large as the United Kingdom’s total energy consumption in 2004. And this assumes only modest improvements in energy efficiency”, said Claude Mandil, Executive Director of the International Energy Agency (IEA) today in Kyiv at the launch of a new publication: Ukraine: Energy Policy Review 2006. The country’s energy policy is driven by a strong desire to improve domestic energy security and reduce natural gas imports. Despite this, Ukraine remains significantly reliant on non-diversified energy imports, which supply almost half of its domestic energy needs. This dependence increases risks for security of supply. High energy intensity also makes Ukraine’s economy vulnerable to price shifts and reduces competitiveness. At the same time, the country is key to Europe’s energy security. Mr. Mandil noted that “transit is very important to Ukraine, and transit through Ukraine is important to Europe.” Due to its geographic position, Ukraine plays a major role in securing Europe’s energy needs: 84% of Russian gas supplies to Europe transit through Ukraine via pipeline. In fact, Ukraine is the largest gas transit country in the world by volume and also hosts major oil transit routes.

How can the country meet these challenges? Ukraine: Energy Policy Review 2006 identifies three key priority areas for action: energy efficiency, cost-reflective pricing and transparency.

Energy Efficiency
“ Efficiency represents not only Ukraine’s single best opportunity to improve energy security but is also vital for the country’s growth and development, particularly as energy prices rise”, Mr. Mandil noted. Cost-reflective prices are essential to upgrade the ageing energy sector infrastructure and to promote greater efficiency.

Mr. Mandil welcomed Ukraine’s moves in the past year to strengthen its energy efficiency policy, raise energy tariffs and ensure better coordination in the government on energy issues. ”The Ukrainian government has worked very hard to make this Review a success though high-level meetings, consistent openness and excellent feedback.”

At the same time, Mr. Mandil emphasised that Ukraine could further strengthen its energy policy by enhancing the transparency of energy data and clarifying market rules. He added that improving energy efficiency also represented a major opportunity to increase energy security, reduce imports, improve economic growth and lower Ukraine’s environmental footprint. Estimates in the official Energy Strategy of Ukraine to 2030, approved early this year by the Cabinet of Ministers, show energy efficiency will have a greater impact on the country’s energy balance at a lower cost than all investments in new supply combined. Yet Ukraine has focused relatively little attention and funding on the issue. Policy and legislation in this area is not always followed through with support for implementation plans.

Fossil Fuels
Ukraine is particularly reliant on natural gas in its energy balance, and most of this gas is imported. Ukraine produces most of its coal domestically, but as its mines are very deep, old and, in many cases, unprofitable, it has seen coal imports rise. Ukrainian mines are also quite dangerous by global comparison. To reduce its reliance on imports, Ukraine plans to increase domestic production of fossil fuels. “Achieving this goal will require improving the upstream investment climate and raising prices to cost-reflective levels,” said Mr. Mandil.

Most of the fossil fuel industry is in state hands. The most notable exception to this is oil refining and distribution. Competition exists in the oil and coal sectors, but problems remain. For example, state owned coal mines on average sell their coal below cost; stronger governance and a move toward coal auctions would improve this competition.

Electricity, Heat and Renewables
Ukraine’s power sector is probably best known internationally for the 1986 Chornobyl nuclear power accident. Since then, the sector has seen major changes, with closure of the Chornobyl power plant, higher collection rates and fewer power outages. The government launched electricity sector reforms in the mid 1990s, though non-payments and debts have muted the effectiveness of these reforms. Nuclear energy accounts for about half of total power production. The Review notes that the power sector still needs significant new investment and would benefit from a more vibrant market and cost-reflective prices particularly regarding nuclear tariffs.

District heating is a major energy source in Ukraine, both for heating homes and for manufacturing. Reforms to enhance sector performance are at an early stage. The IEA recommends comprehensive reform, including independent heat tariff regulation and a level playing field for all competing heating options; the government has announced plans for large reforms.

Renewable energy has a small but growing share in Ukraine’s energy balance today. Properly pricing conventional fuels is an important first step in promoting renewables.

“Ukraine has taken several courageous steps to improve its energy security, like raising domestic energy prices. We look forward to working with the government as it continues its energy sector reforms”, Mr. Mandil concluded.

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