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Green New Deal in Ukraine? The Energy Sector and modernizing a National Economy

Energy use in different countries (kg of oil equivalent per capita). Source: WDI, 2007.

November 11, 2010
By Dmytro Naumenko

The recent global economic crisis revealed a number of problems that endanger the sustainable development of modern society. The structural deficiencies in finance sector regulation and deviated patterns of production and consumption in the world economy has led to the worst decline of global GDP and employment ever seen since the Great Depression of the 1930s. Like US President Roosevelt’s “New Deal” – a series of economic programs passed by Congress in the 1930s – Europe today has a popular Green New Deal strategy put forward by Europe’s Green Parties as a possible response to the challenges posed by the distressed world economic system. The Green New Deal policies are geared toward overcoming both the economic and environmental implications of the crisis and creating sustainable and decent jobs for European citizens.

The cornerstones of the Green New Deal are comprised of two central strands of reforms:

  • Major structural changes to national and international financial systems, including taxation;
  • Sustained investment in energy conservation and renewable energy generation.

The Green New Deal policy is grounded in the concept of ecological industry, or eco-industry. According to the Eurostat/OECD definition, eco-industries are "those engaged in activities which produce goods and services to measure, prevent, limit, minimize or correct environmental damage to water, air and soil, as well as problems related to waste, noise and eco-systems. This includes innovation in cleaner technologies and products and services that reduce environmental risk and minimize pollution and resource use."

However, the Green New Deal needs to be more than just a technology platform for eco-industries. It has to be guided by a vision that shows what a green modernization of industry looks like in the long run. To become established in the EU, the Green New Deal policies should become the backbone of structural changes at the strategic level, at the level of individual EU policies, and at the programming level.

If the Green New Deal became the official EU development strategy, it also would be the driving force and the main policy tool for the European Neighborhood Policy, which is aimed at the modernization of the national economies in the Eastern European countries. The implementation of Green New Deal policies in neighboring eastern countries would enhance their structural renovation and foster the development of a new eco-industrial model of economic growth that would increase productivity and simultaneously prevent environmental pollution and depletion of natural resources. At the same time, these countries are of strategic interest to the EU regarding the issue of the Union’s energy security, as Russia is the biggest supplier of oil and natural gas to Europe, and Ukraine, Belarus, and Georgia possess the main gas and oil transit facilities to Europe. Specifically, modernization of these countries’ energy sectors will play a critical role in the successful implementation of the Green New Deal, influencing sustainable energy policy goals that foresee substantial reductions in greenhouse gas (GHG) emissions and widespread development of renewable sources of energy. Besides, improving the performance of existing facilities in energy sectors in neighboring eastern countries would have a tremendous impact on the security of natural gas and oil supplies to the EU. Thereby, stimulating development of new models for energy markets in Eastern European countries based on Green New Deal principles within the framework of the European Neighborhood Policy, the EU would be contributing both to the modernization of the national economies and ensuring the energy security of the EU itself.

For the successful promotion of the Green New Deal in Eastern Europe, the European Neighborhood Policy should develop a clear understanding that neighboring eastern countries’ energy sectors have a number of institutional drawbacks that are to be overcome first for further modernization of national economies. The next analysis of applicability of the Green New Deal in Eastern Europe is conducted for Ukraine – a very representative case of the modernization challenges faced by Eastern Europe countries.

Ukraine’s economy has a number of problem zones that obstruct the development of a new model for eco-industries. These problems are the following:

  1. High level of energy consumption, partly due to wasteful use of natural resources;
  2. Persistent underinvestment in production, storing, and transmission capacities of national industry and energy sector; sluggish implementation of new, environmentally friendly technologies;
  3. Weak institutional foundation of national economy, resulting in non-transparent and monopolized markets, including energy sector.

As a result, Ukraine consumes three times more energy than the OECD countries, twice more than the new members of the EU in Eastern Europe (Hungary, Poland, Slovak Republic, and Bulgaria), and 30 percent more than Russia. Apart from negative economic effects, excessive energy use coupled with outdated production facilities results in substantial GHG emissions into the atmosphere and waste of environmental resources. Ukraine has huge potential to reduce energy consumption. The International Energy Agency (IEA) has estimated that even modest increases in energy efficiency could allow the Ukrainian economy to make energy savings by 2030 equivalent to the United Kingdom’s total energy consumption in 2004. 

Gas still accounts for nearly 40 percent of Ukraine’s energy usage; Ukraine was the 15th-largest gas consumer in the world in 2010.  It consumes more gas than Poland, Romania, the Czech Republic, Hungary, and Slovakia combined. Even with greater conservation efforts, Ukraine will continue to be one of the world’s most intensive energy users over the medium term and thus dependent on imports, particularly from Russia. The IEA estimated that the potential to reduce carbon dioxide emissions in the Ukrainian steel sector, if the best available technology were used, amounts to 700 kg per ton of steel produced, against a global average of 300 kg per ton. 

Ukraine’s national industry disposes of quite obsolete equipment with low productivity and high environmental pollution effect. Twenty-six percent of fixed assets in national industry operated for more than 26 years and almost 50 percent has been operating more than 10 years. But the most serious problem exists within the Ukrainian energy sector production and transmission facilities that are almost completely outdated and carry serious risks for the sustainable development of the national economy and the environment. As of 2006, the estimated service life of 92.1 percent of thermal power plants’ equipment had expired and 63.8 percent of thermal energy units were completely depreciated and required replacement by new ones in the near future. The total capital expenditures required for renovation of thermal power plants and electricity transmission lines were estimated by the government at about $50 billion in the prices of 2006.  Ukraine’s gas transport system (GTS) also requires significant investments for becoming safe and efficient by international standards. In the Brussels Declaration – signed in May 2009 – the Ukraine, the EU, and international organizations estimated the required investments for full rehabilitation of GTS at $2.75 billion. These investments would allow for reducing the consumption of fuel, reducing GHG emissions, and lowering the risk of interruption of natural gas and electricity supplies to Europe.

Development of the energy sector in Ukraine is seriously constrained by a weak institutional structure of the energy market, including a strong dependency of market regulators on the government’s decisions, deteriorated market pricing, strong cross-subsidization between industry and household market segments, and state domination of natural gas and electricity markets. Lack of competition and populist pricing that disabled cost-covering in state-regulated segments of the energy market have resulted in continual losses for the state generation and transmission companies and significant underinvestment. Meanwhile, apart from boosting growth of the national economy, sustainability of Ukraine’s energy sector is critical for energy security in Europe, in particular because Ukraine remains a major transport corridor for Russian natural gas exported to the EU. About 70 percent of Russian gas exports to Europe have been transited just through Ukraine. The national power industry also has a significant potential for expanding electricity exports to Europe but is currently restricted by the lack of unified transmission capacities with the European Network of Transmission System Operators for Electricity and by its low compatibility with European electricity sector standards, especially the EU Emissions Trading Scheme.

The first real step toward the establishment of a competitive energy market resembling respective EU regulations was made in 2009/2010 when the markets of natural gas and electricity export were liberalized. The law “On the principles of operation of the natural gas market”  envisages the legal independence of the government regulator for gas and electricity markets – the National Commission on Electricity Regulation (NERC) – and market actors creating the background for setting fair, cost-covering pricing. According to the law, distribution and supply segments of vertically integrated monopolies have to be unbundled in 2012; customers will get the right to choose gas suppliers from 2015. Together with fair pricing, it would open the gas market for competition, improving operational performance of gas companies, and attracting investments for the facilities.

The share of renewable energy in domestic energy consumption is low, but growing. The main source is hydropower, which accounted for 2.4 percent of the country’s primary energy consumption in 2009, according to BP.  Biomass consumption has also increased in rural areas, particularly as a fuel for district heating systems. The authorities have not traditionally placed great emphasis on environmental issues, and this situation is only slowly changing. Although the authorities have adopted various plans to increase the use of renewable energy, implementation has lagged. Current legislation is aimed at encouraging investment in alternative energy sources, such as solar, geothermal, and wind power, by providing economic stimuli. The parliament introduced “green tariffs” for so-called alternative electricity and heat producers that are set by the NERC and are at least twice as high as the cost of electricity to the wholesale market.

The authorities have also been slow to use opportunities provided by the Kyoto Protocol. Ukraine ratified the Kyoto Protocol in February 2004, and in November 2007 met the final requirements needed to begin implementing it. However, efforts to take advantage of Kyoto have picked up only in 2009, spurred by the country’s financial and economic problems. In March 2009 Japan bought 30 million tons of Assigned Amount Units (or AAUs, equivalent to 30 mil. tons of carbon dioxide). The proceeds have been earmarked for environmental programs, including renewable energy projects. 

Summing up, to modernize the national economy, Ukraine must complete the already started vital reforms in its energy sector aimed at modernization and the development of unconventional and renewable sources of energy. With this purpose in mind, the European Neighborhood Policy should be directed toward promoting the best EU models of energy market and regulation experiences to the Ukraine. It should shift priorities of Ukraine’s energy policy toward the Green New Deal principles, which will bring new quality standards in energy efficiency and conserve use of scarce natural resources. Wide-ranging support for attracting investments for depreciated facilities from the national energy sector and for the development of renewable energy sources needs to be an essential element of the European Neighborhood Policy, thereby providing opportunities for funding national modernization projects. In addition, it should promote transnational cooperation on energy issues – as with, for example, the Baltic Sea Initiative practices – to help coordinate modernization efforts of energy sectors in neighboring countries. If successful, the best European practices of the Green New Deal and implementation of modern models of eco-industry will ensure the full compliance with ambitious targets for GHG emissions set for the year 2020 as well as high standards for new technologies in traditional and renewable energy sectors in Europe.

Dmytro Naumenko is a Senior Research Fellow at the Institute for Economic Research and Policy Consulting