Energy versus Development

Energy versus Development. “Fuelling economic development in the CEE region requires an increase in the supply of energy resources”.

Yevgen Groza

Since the collapse of communism the region of Central and Eastern Europe has faced significant changes. After a period of sharp decline the region’s economy is growing now and this growth is likely to continue in the future. However, the welfare of countries in the Central and Eastern Europe is different. While some countries has achieved comparatively good results in the economic reform and experienced steady growth in the last years, others have just recently started to recover after the long recession period. This study will focus on economic transition in Ukraine, which economy is likely to start recovering this year.

According to OECD data the level of energy intensity in Ukraine is among the highest in the world. Thus, if the country’s economy will grow the total primary energy supply could grow as well. Since energy production is the main source of pollution in the world (Urge-Vorsatz 2000), the economic growth may lead to increasing the impact on the environment. The main question of this study is whether it is possible for a country in transition to reach high development level without significant increase in fuel consumption and, thus, rising impact on environment.

According to the data from the Energy Efficiency and Alternative Power Sources in Ukraine by V. Didkovsky, Ukraine is a country with a huge economic potential – taking only 2,7 per cent of the territory of the former Soviet Union it possesses about 17 per cent of its industrial potential (Didkovsky 1996). However, since proclaiming independence in 1991 Ukraine has experienced sharp economic decline. As stated in OECD report "Ukraine's GDP has fallen by over 55 per cent between 1990-95. Total primary demand … has declined by about 35 per cent".

Figure 1

Figure 1 shows the dynamics of change of the total primary energy supply (TPES) per capita during the sharp economical decline in Ukraine compared to European OECD countries. Energy intensity in Ukraine is several times higher compared to European OECD countries. Thus, the energy which is produced in Ukraine now is more than enough for the welfare level of a developed European country. Starting at a very high level in 1990 the TPES per capita level was growing in the following years. Energy intensity increased while economy was collapsing. The increase in TPES per capita may be explained by the fact that Ukraine has outdated and low efficient technology in power generation as well as in heavy industry, which caused a lot of energy losses (OECD 1996).

After a decade of economic stagnation since 1990 Ukraine is likely to achieve the economic growth this year. In the interview to UA Today daily Yuri Yekhanurov, the deputy prime minister of Ukraine revealed that in the first nine months of the year 2000 the growth of country's GDP was about 5 per cent compared to the similar period of the previous year. Yekhanurov said that government projection for the GDP growth for the whole year 2000 is 3,5 per cent with industrial output increase by 9 per cent (UA Today 2000).

Year19901991199219931994199519961997199819992000*

GDP, percent change

-2.4

-13.5

-16.8

-14.2

-23

-8

-10

-3

-1.9

-0.4

3.5

Figure 2

2000* - official estimate

Figure 2 shows the dynamics of GDP change in Ukraine for the last ten years with an official projection for the year 2000 (OECD 1996, CASE Ukraine 2000). Using data from the table it is possible to estimate the total GDP decline since 1990 as 63.6 per cent. Calculation, based on assumption that the growth will continue in the future at the constant rate of 3.5% of GDP per year shows that to achieve the level of development of 1989 Ukraine needs about 28 years. Though the rate of economy growth could be higher, it is obvious that in the nearest years no additional power supply will be necessary for Ukraine.

One of the most important problems concerned with the power production and consumption in Ukraine is the outdated and highly inefficient equipment which causes huge losses. As stated in the Energy Efficiency and Alternative Power Sources

Figure 3

in Ukraine, the country’s potential in energy saving is enormous – about 65

per cent of total primary energy consumed, with 80 per cent of the savings available in industry. Introduction of more efficient technologies is also necessary due to political reasons. Ukraine is highly dependent on imported fuel and huge external debts have been produced in the last years because of inability of heavy industry to pay for the consumed power (Didkovsky 1996). As Didkovsky stresses, “further increases in external debts pose a real threat which may severely damage economy and could destroy the country’s independence.”Probably the best way to improve efficiency of energy use is the privatisation of heavy industry and energy production and distribution companies, which will attract investments and enable use modern efficient equipment (OECD 1996). Though the part of heavy industry in Ukraine is privatised, the electric power generation and transmission sector is still under the state control (OECD 1996). The deep reform of energy sector and introduction of more efficient technology is still necessary for the future sustainable development of the Ukrainian economy.

Though the reforms on national level are very important, energy savings in households can significantly contribute to minimising power consumption in the local communities. Weizsacker et al. shows that the potential of energy saving by improving the household consumption can be up to 75 per cent with no reduction in living standards. In the 1970-s the United States experienced the so-called “decoupling effect” when GNP growth was not followed by equal rise in energy consumption (Urge-Vorsatz 2000). However, the concept of energy decoupling effect was criticised by T. Prugh in Natural Capital and Human Economic Survival. Prugh argues that while the electricity consumption is diminishing the direct use of fossil fuel is growing more rapidly (Prugh et al. 1995). Though the most significant decoupling effect in the USA case was observed for the electricity consumption (50 per cent less than estimations based on GNP increase rate), the primary energy use was 36 per cent less than estimated by official projections (Urge-Vorsatz 2000). Therefore, the economic growth is not always causing increase in fuel consumption. Thus, promotion of the experience of energy saving from the West along with environmental education could increase the overall resource use efficiency in Ukraine.

Aside from the efficient use of energy potential Ukraine also has huge renewable resources to produce electric power. According to V. Didkovsky, development of renewable energy technologies has a potential which is comparable to the country’s nuclear industry capacity. At present a pilot wind power plant of the capacity of 50 MW is constructed in Crimea region by Ukrainian-American joint company and further extension of this project is planned (Didkovsky 1996). In Energy Efficiency and Alternative Power Sources in Ukraine Didkovsky states that present price of electricity produced by wind power planted is about 60 percent less than electricity from heat or nuclear power plant. According to Didkovsky, some other projects of wind energy production were proposed though they are not implemented yet. For example, scientists from the State Institute of Alternative Power and Electric Engineering have proposed to partly substitute the capacity of Chernobyl nuclear power plant (NPP) with the combined hydro-wind power plant. According to project estimations, the capacity of the plant can be up to 500 MW which is comparable to a nuclear unit power production. Moreover, if such project will be implemented it could provide jobs for the Chernobyl NPP employees (Didkovsky 1996). Commercial use of the wind power generation has good perspectives though one obstacle is still remaining for its further development. As stated above, the power distribution companies are under control of the state and it makes almost impossible to gain profit from electricity production (OECD 1996). Privatisation of energy production and distribution industry along with deep reforms in this sector could allow private capital to enter energy market. Cheap costs of electricity produced by wind power plants should attract investments and afford funds for the development of wind power in Ukraine. Thus, economic development could contribute to cleaner energy production in the country.

Recent positive changes in the Ukrainian economy indicate that the country has overcome the decline period. Since the country has extremely high energy intensity, the growth in economy could lead to rising the energy consumption level. However, it is unlikely that in the nearest years Ukrainian economy will be able to reach the GDP level of 1989. Thus, there is an opportunity for economic growth without increasing fuel consumption for the nearest future. Introduction of modern efficient technology could reduce the present energy consumption by 65% Further reform of energy sector could provide investments and further development for wind power production. Introduction of energy saving measures in industry as well as in households and wider alternative energy use will enable economic growth in future without rising fossil fuel consumption and increasing impact on the environment.

List of References:

Centre for Social and Economic Research. 2000. [on-line] Economics of Ukraine section January 2000. URL:http://www.case.org.ua/case/ext/case_work.nsf/1a72f110090f514cc22568d600374887/61f35823985aa7adc225695900342252/$FILE/uetop_20001Q.pdf [cited 29.10.2000]

Didkovsky, V. 1996. Energy Efficiency and Alternative Power Sources in Ukraine. In Electricity in Eastern Europe: 10 years after the Chernobyl disaster, ed. Matthes, E. and Mez, L., 134-148. Berlin: Heinrich-Boll-Stiftung, Oko Institut.

Organization for Economic Co-operation and Development (OECD). 1996. Energy policies of Ukraine : 1996 survey. Paris: OECD.

Prugh, T., Constanza, R., Cumberland, J., Daly, H., Goodland, R. and Norgaard, R. 1995. Natural Capital and Human Economic Survival. Solomons: ISEE Press.

UA Today (Kyiv). 2000. [on-line] Economic Section 26 October. URL: http://www.uatoday.net/kernel/economy/news-2642.html. [cited 28.10.2000]

Urge-Vorsatz, D. 2000. Introduction to Energy. Department of Environmental Sciences and Policy, Central European University, Budapest. Duplicated.

Weizsacker, E., Lovins, A., Lovins, H. and Hunter, L. 1997. Factor Four: doubling wealth, halving resource use: the new report to the Club of Rome. London: Earthscan Publications.