Preparing for Winter

Economic News

22 Jul 2010
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Ukraine's ongoing effort to create an enduring energy solution, particularly concerning subsidies and industrial production, was discussed by officials this week.

The month-old government of Ukraine is working out its agenda for 2007, where energy is topping its list of priorities.

With this year's strong growth in industry and other sectors, despite the political wrangling in government, officials are presenting an ambitious programme for the next 10 years, under which it plans to double the country's GDP. The plan entails reforms in the industrial, financial and social sectors as well as an improvement in living standards. However, to achieve this, officials are aware of the need to find an enduring energy solution for industrial costs to be maintained at a reasonable price level, to strengthen the country's competitive edge in some sectors.

Economic growth took quite a tumble in 2005, falling from 12% in 2004 to 2% at the end of last year, according to the Associated Press. Growth for the first half of 2006 has been listed at 5%.

Despite the rise in gas prices, industrial growth has continued in 2006 by about 5%, compared to 3.1% in 2005. The sector was also given a boost by a reduction in gas tariffs, even as household consumer tariffs for gas and electricity were increased on May 1 by 25%.

The government had promised discounts to low-income households and the Cabinet of Ministers approved a 10% discount on electricity for large industrial consumers and those that had consumed more than 50 GWh per month in 2005. Most of those benefiting from the discount will be metallurgical and mining industries. Sergiy Dunaylo, a member of the National Energy Regulating Commission, said smaller industries would benefit from discounts in the future, though the details have not been worked out.

This will end an era of cross-subsidies, where industries are charged more to compensate for losses accrued by the state gas distributor in providing low-cost gas and electricity to private household consumers.

Many cited the large industry tariff as counter productive because Ukraine's industries are extremely inefficient in using fuel, and should be encouraged to cut consumption and increase efficiency to become more competitive on world markets.

All factions of the current government are looking to establish, or at least increase, Ukraine's energy security.

Yulia Tymoshenko, leader of the Union Fatherland Party and the former prime minister, leads an electoral bloc that carries her name, which remains antagonistic towards Russia concerning the gas price hikes instituted in January. President Viktor Yushchenko's pro-Western Our Ukraine party has sought to mend relations with the country, even as it works to maintain its goals of NATO and EU membership, which Russia is strongly opposed to. Before accepting Yanukovych as prime minister, the President made him sign a declaration, stating that he would work towards these and other goals.

However, it would seem that some compromises are being made even as fierce debate on some issues rage on. Some political insiders thought Yanukovych would be better able to negotiate gas prices with Russia. He managed an agreement in which the current rate of $95 per 1000 cu metres will hold only through 2006. Ukraine may face a 42% price increase come January, with the price jumping to $135.

Yet overall, the country's energy security seems to be improving, and a repeat of last January's "gas wars" is unlikely. Yanukovych said the country would survive such a price hike with the $598m stabilisation fund, currently being raised by the Cabinet. Ukraine also claims to be pumping enough gas into its underground reserves to last the winter. At a rate of 130m cu metres per day, the storage facility should be full, with 24.7bn cu metres, by October 15 according to Fuel and Energy Minister Yuri Boiko, who is a member of Party of the Regions.

The energy ministry also ordered the state-owned gas company Naftohaz Ukrainy and Ukrtransnafta to draw up proposals by September 13 on making seasonal oil reserves.

The US and Europe are supporting these initiatives. Ukraine could reportedly take out a loan of 370m euros from the European Bank for Reconstruction and Development and the European Investment Bank for projects concerning fuel and energy, including fuel reserves, according to the Ukrainian News Agency. USAID is planning to grant $1m to Ukraine to strengthen its energy security, which will include assistance on increasing energy efficiency. The only known measure taken in support of greater efficiency in recent months has been the announcement of a plan to install boilers in schools and hospitals across the country over the next three years that can run on synthetic gas, woodchips or straw.

Europe and the US may be seeking to keep Ukraine from falling fully under the sway of Moscow, while Europe in particular is wary of its own dependence on Russian gas shipped over Ukrainian pipelines. Yanukovych has assured Europe that its energy supply will continue uninterrupted, with no repeat of gas shortages in the middle of the approaching winter.

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