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Rising prices for natural gas and other fuels are expected to slash Ukraine’s economic growth rates but encourage energy-saving technologies

Rising prices for natural gas and other fuels are expected to slash Ukraine’s economic growth rates while encouraging the country’s wasteful enterprises to finally invest in energy-saving technologies, such as cogeneration.

The modernization process, however, will likely prove painful and expensive, costing the nation’s industries in excess of $10 billion over the next several years, according to one estimate.

Ukraine is one of the world’s most energy-intensive economies, consuming four times more energy per unit of GDP than Western European economies. According to the World Bank, net energy imports are equal to 16 percent of Ukraine’s GDP.

Experts say Ukraine is the world’s sixth-largest consumer of natural gas not because its industry requires such enormous consumption, but because its subsidized prices make the country indifferent to energy-saving technologies. Waste abounds in industry.

But things are about to change, largely due to the new gas agreement Ukraine inked with Russia and other suppliers earlier this year, which envisions prices upon import nearly doubling.

“Russia really did a good thing for us in a way, as this will help stimulate the introduction of energy efficiency technologies,” said Victor Klimenko, Director of the Institute of Applied Studies in Power Engineering.

Ukraine, which has been consuming about 75 billion cubic meters of gas per annum in recent years, most of which is imported, needs to reduce consumption by at least 26 billion cubic meters, he added.

Conservation is particularly needed in the metallurgy and chemical industries, which account for a lot of the country’s gas consumed in the country. These industries also account for about 42 percent of the nation’s exports and much of the nation’s foreign currency earnings. Experts estimate that the steel sector alone should reduce gas consumption by as much as 20 percent.

Former Energy Minister Serhy Yermilov, who currently serves as the director of the Institute of Ecology and Energy Savings, recently told journalists that Ukraine’s metallurgical industry alone would have to invest more than $9 billion to reduce its consumption of gas and become more energy efficient.

Major improvement is also required in the district heating systems scattered across the country. Providing better sealing for windows and introducing thermostats, which would allow residents to control heating in their apartments rather than opening windows when it gets too hot, are all places to start.

Cogeneration, a technology widely used in the West also has lots of promise.

Renco Group is one of a handful of Ukrainian companies specializing in turnkey cogeneration solutions. Klimenko, who serves as one of the group’s top experts, described cogeneration as an energy efficiency technology that employs various technological methods designed to capture heat, steam and other energy resources that normally would be wasted, and put them to use as energy. Doing so reduces waste as well as operating costs. Ukraine currently has about 40 cogeneration operations installed across the country, yet cogeneration technology accounts for only a tiny fraction of energy produced when compared to Western countries.

The cost of introducing such technologies varies tremendously depending on specifics, Klimenko said, adding that generally it can cost $300-800 dollars for cogeneration technology capable of producing one kilowatt. A return on investment can generally be expected within four years, he added.

Cogeneration technology is extremely popular in the West. Europe began to introduce it after the oil crisis in Europe in the 1970s. Today, in some European countries the share of this technology as a percentage of total energy generation is quite high: 50 percent in Denmark, 40 percent in The Netherlands, about 35 percent in Finland and 28 percent in Austria.

Klimenko said the first modern cogeneration plant in Ukraine was installed in 2001 in the industrial town of Zaporizhzhya. According to him, in 2005, Ukraine produced 179 billion kilowatts per hour (kWh) of electricity. Of this, cogeneration, facilities produced only 600 million kWh.

It is definitely not enough, Klimenko said, adding that his company has developed a bold program envisioning massive introduction of cogeneration in Ukraine.

“Our project – called Cogeneration 5000 – envisions construction of a dispersed cogeneration network with a total installed capacity of 5000 megawatts,” he said, adding that implementation of the project will ensure energy independence for the country as a whole as well as individual cities and businesses.

Project implementation would cost almost $3 billion and would take 10 years, he said. Renco is still looking for financing from potential investors, loans, grants and subsidies.

Energy Alliance, a venture established in partnership with the United States funded Western NIS Enterprise Fund, is a company that already provides cogeneration technology to Ukrainian industry, helping them to better utilize the gas and biofuel that they burn.

Company director Maxim Burtovy said use of cogeneration in Ukraine will grow by around 20 percent within the next two or three years. Energy Alliance gets financing from the European Bank for Reconstruction and Development as well as from shareholders who fund pilot projects for clients. In return, clients agree through a contract to share a portion of funds saved through the introduction of the energy saving technology.

“We have completed one project and are currently working on two more,” Burtovy said.

“Together, these projects are worth about $5 million,” he said adding that contracts are expected to pile up in connection with rising energy prices and budding energy efficiency awareness.It’s not clear how much the state intends to invest. Following the New Year’s gas showdown with Russia, President Vitkor Yushchenko has put the country’s energy needs on the front burner. On Jan. 23, Yushchenko discussed energy conservation technology with U.S. Deputy Secretary of State Daniel Freed and Swedish Premier Goran Persson, both of whom pledged support in finding alternative energy resources and implementing energy efficiency technologies.