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Hopes rise for energy savings as Ukraine tackles waste

Russia`s gas price shock is having an unexpected benefit: Ukraine, with its obsolete industrial plants and leaky urban heating systems, is scrambling to cut back or find other energy sources.

In a cavernous warehouse along the Dnieper River, four giant open-hearth furnaces rage at 1,500 degrees Celsius day and  night, making steel the same way they have since they were installed in 1931.

Furnaces like these haven`t been used in the U.S. for 20 years. They guzzle more than twice as much energy as their modern replacements. But until this year, Ukraine paid just one-fifth of the average world price for natural gas from Russia, so there was little urgency to replace these  museum pieces.

That has changed. In January, the Russian gas monopoly OAO Gazprom  doubled prices to Ukraine overnight, and warned of more rises to come.  Alexander Kirichko, who runs the steel plant, saw the move coming and  fast-tracked plans to replace the old furnaces. "We have no choice," he says.

Russia`s price shock -- which included a brief interruption of gas to Ukraine -- sent shudders of concern across Europe about access to Russian gas, much of which arrives in a pipeline through Ukraine. But the price jolt is also having an unexpected benefit: It`s starting to force fundamental change on some of the most energy-wasteful economies in the world, those of former Soviet republics.

Ukraine, with its obsolete industrial plants and leaky urban heating systems, last year consumed almost as much natural gas as Germany, a country with a gross domestic product 10 times as large. Now, Ukrainian companies that relied on cheap gas to export low-cost metals and chemical products are scrambling to cut back or find other energy sources.

Rising oil and gas prices are forcing governments around the world to rethink energy policies, including looking for ways to curb demand growth. President Bush has warned Americans about their oil addiction, and Congress is drafting a flurry of legislation aimed at limiting energy consumption and oil imports. The European Union has endorsed a goal of cutting energy consumption 20% by 2020.

Over the same period, fast-growing China has a plan to reduce by 40% the energy used to produce a unit of gross domestic product, an attempt to slow the Chinese demand increases that are a big contributor to rising global energy prices.

Former Soviet republics were built on cheap energy pumped out of the ground in Russia and Central Asia. Now they are home both to great waste and to great opportunity for savings -- plus, thanks to Gazprom, great urgency.

Gazprom`s price move was seen here as Moscow`s revenge for Ukraine`s so-called Orange Revolution, which led to the election of a Western-friendly government in 2004. Gazprom, in which the Russian government holds a controlling stake, denies any political motivation.

But the effect has been that Ukraine, which has a population of 50 million, has quickly produced a program to reduce gas consumption. It has set up a new energy-efficiency agency to direct the plan and is pouring government money into efforts to carry it out.

"My inbox is filled with letters from metals and chemicals companies asking for help in cutting their energy use," says Yevgen Sukhin, the new agency`s chief. Netherlands-based Mittal Steel Co., which bought a massive steel plant in Ukraine last year, has substituted coking coal for some of the gas used to fire the furnaces, reducing gas use by half. That one plant accounted for 1.5% of Ukraine`s gas consumption last year.

Georgia, hit with a similar rise in gas prices, has mothballed plans to build new gas-fired power stations. It is going to build a hydroelectric plant instead. Armenia also has ordered up a plan targeting gas consumption.

Russia itself saw gas prices rise 30% last year. A spokesman for Gazprom said it will seek at least the same size increase again this year, although the Russian government will make the decision. Pressure to conserve is building even in resource-rich Russia as domestic gas use rises faster than production, limiting what is available for lucrative exports.

The savings potential is large. If all former Communist-bloc nations in Eastern Europe and Central Asia could reach West European levels of energy use per GDP unit, world energy consumption could fall 7.2%, says the European Bank for Reconstruction and Development.

In addition, a fall in consumption of gas from Russia by Ukraine and its neighbors might make supplies more secure for countries such as Germany and Italy. Eighty per cent of gas Russia sells to the European Union passes by pipeline through Ukraine and the rest through Belarus. When Russia cut off gas supplies during a price showdown with Ukraine early this year, the Ukrainians tapped the pipelines for gas meant for elsewhere in Europe.

There are big obstacles to carrying out all of Ukraine`s plans. Financing can be hard to get where companies and local authorities are poorly audited, often unprofitable and often corrupt. Ukraine`s political instability has consistently undermined government plans. "We`ve had a lot of broken promises," says Stanislav Potapenko, program coordinator in Ukraine for a nonprofit organization called Alliance to Save Energy, though he says attitudes are changing.

Dnepropetrovsk, a city of 1.2 million people, neon-fronted casinos and crumbling infrastructure, is a prime example of Ukraine`s need to tame its energy thirst. The entire city is heated centrally by municipal boilers. They pump hot water under the streets through a one-meter-wide, 60-mile pipe. Smaller pipes fan out to offices, stores and apartment blocks. The system is common in the former Soviet Union.

In Ukraine, heating cities this way accounts for about half of the nation`s gas use. In theory, it should be more efficient than having separate boilers in each home. But minimal maintenance, subsidized prices and a lack of metering and thermostatic controls have made the system hugely wasteful.

"Look at the way we control the temperature -- we open a window," said Aleksey Mikulin, director of an energy institute called DenprVNIPIenergoprom. His office window was wide open in wintry weather.

Maxim Burtovy, director of an energy savings company called Energy Alliance, is trying to put together a project to capture more waste heat from an electricity-generating station and pump it into the city`s heating system. He estimates that doing so could cut gas consumption by 500 million cubic meters a year, worth about $47.5 million at the price Ukraine currently pays for gas from Gazprom, and twice that on world gas markets.

If all former Soviet-bloc nations used such heat-and-power "cogeneration" to the extent that Western Europe does, says the International Energy Agency, 80 billion cubic meters of gas a year could be saved. That would be equal to the entire annual gas usage of Germany, the world`s third-largest economy.

Soviet authorities actually had the same plan for this city -- in 1986. The coal-fired power plant bought two turbines, and authorities designed a new Dnieper River bridge with built-in pipes that would carry hot water from the power plant to the city center. But before it could be built, the Soviet Union fell.

Then there was no money for the pipes, and the bridge was built without them. So now, while one turbine does pump hot water from the power plant to 250,000 people on the plant side of the river, the other turbine sits in storage.

Mr. Burtovy wants to raise money to install the second turbine, a boiler and hot-water pipes along the bridge, at a cost of $20 million to $50 million, depending on the scope of the project. Up to 500,000 more people then would get their heat from the electricity plant, allowing some gas-fired boilers to be switched off. Energy Alliance would be paid with part of the energy savings. The firm is looking for more such projects in Ukraine.

The power plant`s managers are enthusiastic, as are local authorities. An energy-conservation plan they drew up endorses tapping the power station for more heat as one of its major projects. "Since the gas crisis, they got serious," says the plant`s director, Andrei Krepak.

Across the river, a Swedish engineering company, Alfa Laval AB, is working on another part of the city heating system. The firm is close to finishing installation of about 250 heating substations to regulate the temperature and flow of hot water moving to apartment blocks.

Doing so could cut the city`s gas consumption for heating by 10% to 15%, according to Alfa Laval`s Ukraine director, Gennadiy Rudenko. There were plans for energy efficiency before, he says, "but the time for investment recovery was so long they didn`t make sense. That`s changing."

A new energy program produced by Ukraine`s government in response to the price shock aims to cut gas consumption by more than a third by 2030, even as the plan foresees a tripling in the size of the country`s economy. Such a saving, of 27 billion cubic meters of gas, would equal two-thirds of the gas consumption of France last year.

The government has told every city to come up with an energy-saving plan, has budgeted $100 million for energy conservation this year and is proposing to end subsidies that provide below-cost heat to the entire nation. Subsidies should be focused on those too poor to pay their bills, says President Viktor Yushchenko.

He also has called for new nuclear power plants -- a controversial idea in the land where the Chernobyl disaster occurred 20 years ago. Despite Chernobyl, Ukraine still has four operating nuclear plants, providing 48% of its electricity.

Natural gas accounts for 41% of Ukraine`s energy consumption, twice the world average. Ukraine produces some gas itself, but two-thirds of what it consumes comes from Russia, making the country unusually dependent on a single supplier for its dominant energy source. It also gets 100% of the fuel for its nuclear plants from Russia.

In all, this dependency is "a very dangerous situation," says the energy-efficiency agency`s Mr. Sukhin. President Yushchenko has proposed that Ukraine develop the ability to enrich uranium for the plants – the kind of project that Western powers vehemently oppose in Iran.

Mr. Kirichko, the managing director of the steel plant with open-hearth furnaces, decided a year ago he would eventually replace the 75-year-old contraptions. "I knew that gas prices would rise, but I also knew that Ukraine had a contract with Gazprom until 2013. So I forecast a 10% annual increase" in the gas price, says the 41-year-old head of the complex, Nizhnedneprovsky Tube Rolling Plant, which produces steel pipe and wheels for railroad cars.

Late last year he realized his price forecast was wrong. Gazprom intended to tear up its contract with Ukraine and push for world market prices, a potential leap of almost 500%. Mr. Kirichko swiftly cut in half his five-year timetable for the $400 million plan to replace furnaces.

Two companies are bidding for the project, SMS Demag AG of Germany and Danieli & C. SpA of Italy. Mr. Kirichko expects a contract to be signed this month. The steel company says it will pay 20% of the cost itself and finance the rest through a group of banks.

When refitted, the plant will make steel with electric arc furnaces that push electrodes down into baths of scrap metal and melt them. In the current system, burning gas and heating oil are injected into the furnace chamber, superheating the air above the metal. The process is less direct and thus less efficient.

While the new furnaces will use far more electricity, they should reduce metal waste 20% and cut overall energy use by 55% per ton of steel made, says Peter Leyzerovich, a Ukrainian-born U.S. engineer at work on the project.

Gas consumption is expected to be cut in half even as the furnaces produce twice as much steel, a capacity increase the plant needs to meet orders. The engineer says the refitted plant will also cut pollution. 

By Marc Champion, The Wall Street Journal

New York, New York, Monday, May 8, 2006; Front Page, A1

The article was monitored by The Action Ukraine Report (AUR) Monitoring Service, Morgan Williams, Editor.

 

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