The World Bank recently issued a report which says that for every one dollar invested in improving energy efficiency we would save two dollars in power-generation investment. Is Ukraine going to seize this opportunity? This was the subject of a lecture Serhii Yermilov, chair of the National Agency for Efficient Use of Energy Resources, delivered the other day at Columbia University (New York, USA). In his words, the speech of the Ukrainian guest aroused great interest in the largest US megalopolis. Among those who were present at the lecture (which lasted almost three hours) and asked a lot of questions were not only students and professors of this world-famous academic institution but also representatives of the biggest companies and investment banks as well as some leading political and economic experts.
To begin with, Yermilov showed a slide picture of Europe and asked: “Maybe, some of those present here do not remember where Ukraine is?” The audience burst out laughing. They know us now not only thanks to Chornobyl and the soccer player Andrii Shevchenko, and they consider us a European country and wish to know more and better understand us. In particular, Americans would like to know why the world’s 26th most populous country is only 36th in per capita GDP. Moreover, they basically know that the whole point is in the inefficient use of energy resources. Therefore, they invited Yermilov to tell them what we are going to do about this.
I can well suppose that you presented in New York the recently-approved governmental Increased Energy Efficiency Program for 2010-15 and The National Energy Efficiency Plan of Actions now being drawn up jointly with the World Bank.
“Yes, because these documents are extremely important for us. We hope that the planned energy efficiency reforms will draw the attention of, above all, foreign investors who will see that it is a good idea to invest in Ukraine, in the modernization of our economy. Accordingly, our new government is going to pursue a proper policy. Let me quote the coalition agreement on the basis of which it was formed: ‘In the economic sphere: wide-scale modernization of national production facilities, introduction of energy conservation.’ This is quite an inspiration for me. Should this be implemented ‘on the basis of a wide-scale application of the innovative investment pattern,’ as the agreement says, Ukraine will stand a chance to become one of the world’s twenty most developed countries, although now the power intensity of one GDP dollar in this country is 2.3 times higher than the average figure in the rest of the world.”
And why should we show this country’s real situation abroad?
“Whenever we do this in a open and frank contact with foreign experts and obtain their assessment of our problems, we can march forward more successfully and attract investments because this forms a positive background. We are now finishing six months’ hard work on Ukraine’s first National Energy Efficiency Plan, and a World Bank mission is coming to Kyiv in a week to finally coordinate this document and submit it to their superiors.
“Hard work is in store for us, as the mission will spend two weeks here. Then the World Bank will have to follow some regular procedures, and the bank’s Board of Executive Directors may approve our plan in May this year. As a result, this program will enable us to annually receive up to two billion dollars – not only from the WB but also from other international financial institutions. But, unfortunately, this is not all. To fulfill this program, we need 40 billion for six years, i.e. $6.5 billion a year.”
And where shall we find these dollars?
“This should come from the national and local budgets. This money is in fact available. Maybe, this year it will be slightly less – from four to five billion. But the amount will sharply rise as soon as the next year.”
The so-called return money?
“Naturally. Even the budgetary money ought to return there. Whenever a program is budget-funded without compensation, the money is usually used ineffectively. But the obligation to return funds, even indirectly, brings on responsibility. For example, today’s budget subsidizes consumers due to low public utility charges. But from now on it will be giving money for energy efficiency. As a result, we will be able to reduce consumption and raise the charges, i.e., overturn the balance – and everything will be OK. What is more, no bank or any other international financial organization will give money for loss-making projects.
“All energy efficiency measures should be highly cost-effective, which is the No. 1 Rule. The economy, too, should be cost-effective on the whole. When we finance, say, the coal industry or thermal power generation at the state’s expense, this means the economy is not cost-effective. When, instead of paying taxes to the budget, Naftohaz becomes a budget dependant, this means it works ineffectively and, consequently, the state experiences an economic decline and has to fold up some of its programs, including social ones, which is nothing but loss of statehood.”
What does the cost-effectiveness of such programs depend on? It seems to me that what really counts here is the current utility charges.
“Yes, you are right. The trouble is that utility charges are usually set by popularly-elected people, such as mayors and local council members. These people have been elected by local residents who told the former to set and keep up the world’s lowest utility charges. This is the way it is. But the truth is in a different approach. The charges should be set by the one who is responsible for supplying resources. For this reason, the draft housing and public utilities reform calls for establishing the national heat generation and supply regulator. But delivering heat to a house is the local authorities’ responsibility. When heating systems are worn out and buildings have not been winterized, voters are supposed to know who is to blame.
“But if a certain category of the populace needs target-oriented subsidies, these should be granted not to all but to some specific people. Our society is now sufficiently differentiated: some may be considered as middle class, some live off a low pension or, say, have lost a job, some are scraping off on meager wages, but there are also millionaires who, naturally, need no subsidies. In reality, however, oligarchs on the Forbes list pay the same charges as do the underprivileged, say, an old woman who is paid a 700-hryvnia pension.”
But were any consumption-dependent differences taken into account?
“By all accounts, all are paying the same, without differences. If, for example, a 15-children large family consumes a lot of gas, it pays very much – as much as an oligarch. But if a ‘higher-than-medium’ businessman has replaced all windows and doors and winterized his house with an area of, say, 500 square meters, and had a thermal pump or some other device put in, he has thus reduced the consumption of gas and pays quite little for it – as others do. So there must be some kind of differentiation.”
To conclude the World Bank subject, who is to allot money for energy efficiency and how much?
“This needs a total six billion hryvnias a year. The government is giving one and we can borrow two from international financial organizations as loans for very cost-effective projects, which makes it possible to guarantees the return and avoid overburdening the public debt and, accordingly, the state budget. And we should obtain another three billion, i.e., about a half of the required amount, on the free financial market. But we should, of course, get it interested at first. A bank should find it profitable to issue credits for energy-saving equipment, such as thermal pumps – against the collateral of these pumps to boot.”
Is it realistic to get banks interested in this?
“Undoubtedly, one must create proper conditions for them. We have described this in detail in our proposals to the government. I think they may undergo some changes but will still be approved. Then we will be sure that the program we are talking about can be fulfilled. And, let me say it again, we will achieve in 2015 a 20-percent drop in power consumption and raise three-to-five times the contribution of alternative and renewable sources of energy in the country’s energy balance. This will help withdraw a considerable portion of imported energy resources from the balance and, as a result, improve the trade balance and make the national currency more stable. And, in general, I have arrived at the conclusion that the energy efficiency program is the only existing program in this country, which can create a point of growth and promote the all-round restoration of economic health. Follow-up programs have already been drawn up in all sectors, with regional programs being in the pipeline. When a region, a district, or any small town has a program like this and includes it into its socioeconomic development plan, this creates sort of an economic pyramid and we can see the amount of the needed resources and the budget that will provide the funding. This is the well-known program-and-target-oriented approach. All the previous governments had programs of their own – except for the one that resigned recently and was denied this opportunity. It is too bad indeed – no programs, no targets. But if our program is approved and targets, as well as means to reach them, are set, we will be able to work. But all this should be realistic. If a program has been approved in a city but the budget provides for no money to carry it out, for example, to winterize a hospital or a kindergarten, what energy efficiency can we speak of?”
But we are not the first to come up with a program like this. In all probability, they existed and worked before us…
“We have examined the programs of many states. The more the country is developed, the more detailed and clear the program is. And each of its components is constantly monitored as it is being carried out. I have brought from New York a program called Long-Term Plan of Energy Consumption and Greenhouse Gas Emission Reduction and drawn up under the guidance of mayor Bloomberg. It has everything explained in detail on 60 pages: what, how much and when should be done, in what way it is funded, who supervises and who is responsible for it. And is there a similar program in Kyiv, have you heard of it?”
New York also has very old utility pipelines…
“Oh yes, they have as many problems as we do. Besides, they are short of thermal and other energy facilities. So there is no other option: either you develop the utility network and set up new substations, which is extremely expensive, or you draw up and carry out an energy efficiency program and relieve the existing facilities, thus saving the resources. Besides, you are simultaneously combating environmental pollution and making the megalopolis more attractive for tourists. Still more impressive is the US National Energy Efficiency Plan until 2015. Here is one of the tables: natural gas supplies. This program was worked out for 14 states. But we are only approaching this.”
Are the Americans also pinning hopes on private, not only budgetary, investments as far as funding is concerned?
“Undoubtedly they are, for there is no other way out. Our strategy has it that the state is responsible for about 25 percent of the funding, international organizations for another 25 percent under governmental guarantees, and private investors for 50 percent. Naturally, this requires favorable conditions which are still to be created. What is needed is a favorable and protected program of energy efficiency and a corresponding utility-charges policy which will, as I said above, ensure cost-effectiveness. We should adopt laws and standard-setting instruments that are clear to investors and draw up easy-to-grasp programs – this will make it easier to attract investment capitals.”
