Ukraine must tackle how it uses energy

While many of the headlines concerning Ukraine and Russia have included the problems over natural gas, Ukraine has to take a more balanced approach and address how it uses energy. Christian Oliver and Roman Olearchyk provide a good article in the Financial Times, explaining many of the problems. The article describes the support from the World Bank and it should have, at least, also added what the European Bank for Reconstruction and Development is doing. But many are trying to help. Yet, Ukraine will not come close to solving its problems until it gives a higher priority to a more balanced approach. No doubt we will be reading more about this.

Energy waste adds to Ukraine’s problems

Nedyezhda Ivanivna waves her latest utility bill angrily at a cashier in a state bank in Kiev: “What the devil is this?” she barks.

As the 52-year-old disputes the bill, an angry cohort gathers to complain about energy costs, which they say already eat up more than a third of their monthly incomes of $200-$300. “That’s right, don’t pay it!” shouts one woman.

Resentment over fuel costs is likely to deepen further over the coming months as Ukraine phases out energy subsidies to qualify for its $14bn-$18bn bailout from the International Monetary Fund. Fuel subsidies have become a huge drain on Ukraine’s economy, with households in 2012 paying only a fifth of import prices. In all, the subsidies amount to 7.5 per cent of Ukraine’s gross domestic product.

Add to this the conflict with Moscow – Russia’s Gazprom, which supplies more than half of Ukraine’s annual consumption of 50bn cubic metres, recently severed supplies to its neighbour in a row over unpaid bills. Energy costs in Ukraine began to rise in the spring and more increases are imminent.

Yet Kiev’s energy problems run much deeper than uncertainty over supplies. Ukraine’s vulnerability is exacerbated because when it comes to energy consumption, it is one of the most wasteful and inefficient countries in the world.

The country’s energy intensity – the ratio of energy used relative to economic output – is twice that of Russia and 10 times that of the OECD average. Carl Bildt, Sweden’s foreign minister, said recently: “If Ukraine improved its energy efficiency to reasonably EU levels, I doubt it would need to import any gas at all.”

Changing this will depend heavily on whether Ukraine can overhaul its Soviet-era heating networks, which are often black-holes of energy usage.

In cities, many Ukrainian apartment blocks are linked to “district heating” networks. In theory, this is a highly efficient system, using the heat that would normally be wasted from power stations to warm water that is then pumped into buildings. But while district heating is a paragon of energy efficiency in cities such as Copenhagen, it is badly run in Ukraine thanks to poor insulation, dilapidated boilers and leaky pipes.

Many Ukrainians also have minimal control over when the system comes on or off, having to fling open windows when their apartments steam up. The IMF is recommending more accurate metering so people can take greater responsibility for consumption.

After the annexation of Crimea, pro-Moscow separatists in eastern Ukraine have escalated the turmoil that threatens to tear the country apart

To help address the problem, the World Bank has launched a $382m district heating programme in 10 urban areas in Ukraine. Companies such as Denmark’s Danfoss are also working to improve the efficiencies of the country’s networks. “Only 6-7 per cent of the networks have been modernised. There is much to be done,” said Lars Tveen, president of Danfoss district energy.

Danfoss says buildings it has worked on have reduced gas consumption by 30-40 per cent and raised piped water temperatures to 55C from 40C.

Ukraine is not unique in its need to upgrade heating networks to reduce reliance on Russian gas. Many eastern European cities are dependent on ancient district heating systems, which serves 80 per cent of the population of the Polish capital Warsaw.

The difference is that renovations in Poland are at a more advanced stage. Dalkia Polska, an energy service group co-owned by Australian fund manager IFM, runs a major heating network in Warsaw as well as in Poznan and Lodz.

However, the cost of upgrading such networks are high, which is one of the reasons why eastern European countries are wary about signing up to the EU’s landmark package of climate targets for 2030.

As an example, modernising just 130km of district heating pipes in the Polish city of Krakow cost €75m. The total length of Poland’s heating network is almost 20,000km.

The view of eastern Europe’s heating networks as financial black-holes has also been coloured by financial scandals in Bulgaria and Romania. The IMF has voiced concern that Ukraine’s gas network is “vulnerable to corruption” because industries can illegally siphon off gas at the heavily subsidised household rates.

Despite these issues, Kiev insists it will still be able to retain an energy cushion to help pensioners and the country’s poor.

But one of those supporting Ms Ivanivna in the bank queue had little faith in the government’s willingness to help: “They have raised tariffs and now they are trying to squeeze more from the common person. Shame on them.”