Green New Deal in Ukraine? The Energy Sector
and modernizing a National Economy
By Dmytro Naumenko, Senior Research Fellow, Institute for Economic Research and
Policy Consulting
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.
Energy use in different countries (kg of oil equivalent per
capita). Source: WDI, 2007.
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:
High level of energy consumption, partly due to wasteful use of natural
resources;
Persistent underinvestment in production, storing, and transmission capacities
of national industry and energy sector; sluggish implementation of new,
environmentally friendly technologies;
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.