Ukraine - Energy sector review

Repott No. 11646UA Ukraine Energy Sector Review 1uly 1, 1993 Country Departnent IV Europe and Central Asia Region FOR OFFICIAL USE ONLY - Reort No: 11646 UA ~~~~~~~~~ye E ___ K ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~11 T __ ~~~~~~~~~~~~~~~~~~~vJ ~ ~ ~ ~~~~~~~fr~-  CURRENCY EQUIVALEN'S Currency unit = karbovanets, abbrev. Kv US$1 = 500 karbovanets (as of November 1992) WEGHS AND MEASURES atm amohere MJ Megajoule (10'J) bcm billion cubic meter MS man shift Gcu. Gigacalorie (109 ca) nt million metric toils GW Gigawatt mtoe million tons of oil equivalent kg kilogram MW Megawatt (1'W) km2 square kilometer MVA Megavolt Ampere koe kilograms oil equivalent Pi Petajoute (10',J) kV kilovolt psi pounds per square inch kW kilowatt t metric ton kWh kilowatt hour TWh Terawatl hour (l0'2Wh) mn3 cubic meter CALORIFIC VALUES I Unit of Fuel ocal Coal (ton) 5.0 Wood (ton) 2.0 Natural gas (O0mn) 8.5 Mazut (ton) 9.7 Diesel (ton) 10.2 Gasoline (ton) 10.5 Kerosene (ton) 10.3 Liquified Petroleum Gas (ton) 10.8 Crude oil (ton) 10.0 CONVERSION FACITORS 1 Ocal = 4.1870G = 3.968 million Btu = 1,163 kWh 1 kWh of hydro and nuclear energy output converted to primary thermal equivalnt at 250 grams of oil equivalent. CFEFMICAL COMPOUNDS NO. Nitrogen Oxides SOz Sulfbr Dioxide ABBREVITIONS ATC Acual Thermal Capacity CEC Commission of the European Communities CHP Combined Heat and Power DWT Deadweight ton EBRD European Bank for Reonstuion and Development EC European Community GDP Gross Domestic Product ROB Heat-only Boiler LAEA Inernaional Atomic Energy Agency INPO Institute for Nuclear Power Operations LPG Liquid Petoleum Gas NMP Net Materia Product OSART Operational Safety Assessment Review Team SCADA Supervisory Control and Data Acquisiion USAID U.S. Agency for Intmrnatonal Development USNRC U.S. Nuclear Regulatory Commission VAT Value-Added Tax WANO World Organiaion of Nuclear Operators FISCAL YEAR Jamuy 1 - December 31  FOR OFCIL US ONLY MRNE EMERGY SECTOR REVIEW Table f Contmnts Page Exdective Summary ................................... i I.Lrkno .............................. I.............. I H. En y and the Eoony ..................................... 4 A. MacroeconomicPerformance ............. .................... 4 B. Role of the nyw Sector .................................... 5 m. EneryDmnmand andCosrevadon .................. 7 A. Aggregate Demand ........................................ 7 B. EnergyEfficiencyandConservation ............................. 9 C. EnergyDemandPorea ................................... 12 IV. EergySupply andTrade ..19 A. Oil, Gas andCoa1esources.19 B. DomdeicSupply ..21 C. EneryW Import ad Exort. .22 D. ThelIs=eofSupplySewrity .25 V. iza no the EnergySe .......... .................... 30 A. EnrprisesandAgencies .................................... 0 B. Sector Management and inaion ........Coor i.................... 32 C. Demonopolizaio CmmcDlon, Privatizaon ...................34 VL EueayPrIks, Twloun d Subsldles ............................ 41 A. The Systemof EneryPricig ............................... 41 B. EnergyPricesin9IM...................................... 42 C. Effectsof thePricingSystem ................................. 44 D. EnergyPrice Reform ...................................... 47 VIL S hum _ ..r Ju.......................... 51 A. Oil .......................................... 51 B. Natr Gas .......................................... 55 C. Coal ......... 60 D. Electicity ......... 67 E. District Heat ......... 79 VWI. nvestent Cost and F _nng Opdt_ ............82.............. 82 Ml Acdox ................................................ 90 Thb doument has a restrictd dtibution and may be ued by ripients only In u iewfomam of their offci dutiea Its contents may ot othewise be diclsed without Word Bank authorzation.  Annexe 1. Tables and Figures 2. Energy Utilization at Five nkrial Entrpri 3. Oil, Gas and Coal Resources of Ukraine 4. Oil and Gas Leslation Project: Terms of Referene S. Oil Refining, Transportation and Marketi Industries R c : Terms of Rderence 6. Reorganiztion of the Electricity Industry 7. Modernization of Refineries and the Odessa Ol Terminal: Terms of Reference 8. Gas D)istribution and Pricing Study: Terms of Referec 9. Donbass - Coal Resources and Operadons 10. Restuctring Program for the Donbms Coal Minig Operatios: Terms of fence 11. Electicity Supply and Demand Map A. Domestic Energy Resources and Main roduction Sites B. Oil and Gas Tra1 port and Processing Network C. Main Power Statons and Trasmission Liaes  ACKNOWLIDEMENMS The Review is based on the findings of an ener mission which visited Ukline in July 1992. The mission consisted of L. Lovei (mission leader), A. Adaan_tiades (power), N. Cornwal (power retructuing), H. Hendrk (coal), G. Hughes (energy demand), T. Joyce (gas), T. Kamny (sector resach), F. Martonhei (eolog), and T.S. Nayar (petroleum). B. Evans from Harvard University conributed to the work of the mission in the oil and gas subsectr. The Review also refcts the find of a joint World Bank - Iternationa ergy Agency ([EA) power sector mission wVAi N isited Ukraine in November 192. The power sector mission was also led by L. Lovei, and consisted of A. Ad s (electricity supply), I. Dobozi (electicity demand), H. F lkenberry (therm power), P. Jersin (district heat), R. Kar (indusl energy consmption), and T. Keamey (sector research) from the World Bank, and S. Foster (IEA team leader/hydopower), A. Banard (dectricity tamission), and D. Rubin (demand/efficiency) from the VlRA. E. SkiareWnk and G. Voitsekhovskya provided valuable assistance for the work of the missions in Kiev. G. Stuggs and J. Bsant-Jones were the two Workl Bank peer reviewers. R. Mannino prepared charts and tables and was responsible for the proution of the report. V.M. Semenyouk, Deputy Minister of Power, was the main coordinator of the missions on the Ukanian side. The Miistry of Power and Electrification, Ministry of Economy, Ministy of Finance, Ministry of Industry, Nuclear Safety Commission, Academy of Sciences, Stae Committe of Coal Industry, State Committee of Geology, Ukrmeegoprom, Ukrgawrom, Ukrgaz, Ukrneftekhim and the staff of several other energy and industrial enterprises actively participated in te work of the two missions. Te first draft was prepared in Februaty 1993. A follow-up mission discussed the draft report with the countepart government team in Ukraie in March and prepared a short and medium term action plan. [A conference to discs the propoed ene strategy was held in Kiev in June 1993 with repton from domestic and foreign governmental and non-governental g s. Based on t at the conference and comments from the Govenment of Ukrine, the report was finalized in July 1993.]  -i- UtRANE ENERGY SECTOR REVIEW Exe SwUa i. The Ukainian economy is fcing a serious and growing crisis. The disintegration of the frm Soviet Union had a dramatic Impact on the hmports of raw mateals and ener goods nd on Ukrne's export markets. The net materal product (NMP) declined 3 percent in 1990 and 11 prce in 1991, dropping below its 1985 level. The NMP experienced a further 15 percet decine in the first nine months of 1992 and the decline for the whole year is esdmated at 15- 17 percent. It has become obvious that the country's own resources could not possibly support the needs of an econoW which was so higly enegy intemive. Hi. The Goverment formed in October 1992, in the midst of a crisis of gas and oil deliveries from Russia, anonced that the two conestones of Ukraine's ener strategy should be more reliance on domestic resources and the elimination of wastefl energy use. The Goverment also asked for assistance from the intemational development agencies in the formulation of the new enaey strategy. EnDg Dmad iii. Energy demand in Ukraine is chractized by high energy intensity in relation to industrial o;tpUt and the high share of indusy in final energy consumption. This is due to the high sbare of heavy industry (iron and steel, basic chemicals) and the low thermal efficiency of energ consumption technologies. Energy coumptin per capita was about 4600 kilogram oil equialn (koe) in 1990, which is quite high even by Western European standards. Based on a coss-country analysis of the reationship between energy consumption and Gro Domestic Product (GDP), Ukrine used about 60 percent more energy in 1990 th might be expected (using the average predicted value) on the basis of its estimated per capita GDP level. iv. The major fator ifluencing energy demand in Ukraine over the nen two decades will be the profound economic changes which are tnsformg incentives, instutional arrangements and the composition of economic acdvity. The transition from central planning to markets and a more open economy should not only improve the county's economic performance in the longer tem but will contrlbute to improvemes in energy efficiency by penalizing the massive waste of resources which chatzed pro n in the past. Recognition of the true opportunity cost of capital will shift tlv smphasis away from large capital investments, drawing upon the product of heavy industry, towar better utiization of existing capital equipment and a contiuous process of inorporating new technotgy with coequentl reductions in average energy reqpirm per unit of output. v. At the end of last year, industrial enery prices approached one-half of economic cost bat the level of household energy prices (with the exception of gasoline and dlesel oil) was a very efail fraction of both economic costs and indtia energy prices. One of the most painful but essenti featres of the market reform in Ukaie is the requiement to raise energy prices to levels which cover import and domestic production and distrbution costs and provide adequate revenues to finance rehabiliation and invesment expndiu. The response to higher energy prees wfll promote nery conservation, so that the energy itensity of economic activity will be significantly reduced over the next decade. vi. A detiled model has been developed to exmine the combined impact of stuctural and prcing changes on energy demand. The results of the analysis show that, even under a  -il- ddayed/dows reform scenario, primary ener demad declines to about 70 percent of dhe 1990 leve1 towards the end of the decade. However, dtere are sin efict dihrenc in the evoluthion of enery demand depending oan the speed and c heness of market reforms. For example, under the acceerated refm scenario, primy energy demand drops to 43 percent of the 1990 level in 2000, halving the energy ntsity of Ukaines GDP. vii. There are otly a few organitons in the county capable of producing a thorough anysis of the enery consmption of industrial and other enteqss and asisting entpis to use these eney awdits to develop energy conservaton strategies. To assist en consrvation efforts (in respone to future rea enery price increases), the Govenmen should foster the development of industrial orgaiations whose funto is to provide, on a consutig basi, detailed plt eneWr audits, to recommend conservatimn _msu to individual operat plants, to assist in putt such measures in place and to rn energ conservation courses at the plant level. In addition, efforts sbould be accelerated to identify and implement mehms by which the energy utitis, key insuments in promting energy efficiency in many countries, can be offered an incentive stuue to a ge cost-effective ener efficiency meaures among customers. Supp &mrMy viii. Import Ukmine has to import about half of the primary energy it conmes. The energy suy cris of October-November 1992 dted evulnbili of Urine's economy to outside enewy supply shocks. Incrased energy self-sufficiency is only one (and not the least cosdy) of the opns whih imrove the security of Ukaine's energy supply. Ukraine's import dependency i not excessive in international compaison. There are several countries which depend on imports to supply more than half of ther eney needs. Ukraine's problem is its reliance on only one country, Russa, for more than 90 percent of its imported fuel needs. ix. Since Ukrine is located on the gas and oil export corridor from Russia to Eupe, the cost of supplying Ukraines needs will always be lower than delivering oil and gas to the rest of Europe. If Russia can prce its energy exports competitively in Europe, it should be able to do so even more in Ukraine. Therefore, strictly on the basis of supply costs, Russia appeas to be the least cost soure of imported oil and gas for Ukraine. 3c. The analysis of the events in 1992 shows that uncainty conCering payment mec_amsms and efective prices cawed the insecurity of energy supply and not the physical availity of imported fues. Since the inftcture to import large volumes of fuels from other counrie simply does not exist, Russia will remain, at least in the medium term, the main soure of imported energy for Ukraine. In order to avoid another supply crisis, the "rules of the game" must be clarified. xi. Many believe that the solution is an agreement between Russia and Ukraine to trade at world markt prioes. However, it iB clear that Ukraine will not be able to pay in convertible currency for imported ener in the near future, therefore the pricing and composition of Ukaaine's exports to Russia will hae to be taen into account. It is expected that, at least for 1993, the two countries will continue to sette payments in rubles, therefore the effective cost of imported energy will depend on (i) the price of imported fuels; (ii) the price of Ukaainian export commodities; and (iii) the cost in domestic currency of producing these commodities. In the medium term, there is litte doubt that the cost of impoed energy will approach world market levels. The unceinties are (i) how fast this is goin to happen; and (ii) what quaity constraints on fuel impons will be in effect in the period of transition  xii. Ahug htur i ptce irase for imported natural gas are expcted to be larger than fo crude oil, the avaidbit of pa in the taition period appears more certain, The reason is that th mrinal va of crude oil I much high for Russia tan the marginal vale of natual gas. It b eay to sell more de oil an dte word maket, while developing a market for additional natral gas sals tabs time. Xi. Ukie s d attempt to negotiate long term gimport aVgreent with Russia and Tmhn_ (foUowing the signing of import a b for 1993). The ipance of the Ukaa gas market for Gaprm (Russia) in te long run should not be undestimated. Ukraine is Garoms lagest li customer in teWms of volumes of gas sold and will probably remain so even when truade betwerw the two counes wil be caTried out in converdble arrency. From that perpectve, a long term provides advantages to both countries. In addition, a long term gas transit agreemnt coud also be negdod. It would provide a framework for needed transit system imprvement d ine the reliability f gas supply for European customes, which, in tun, wold ine the aue of export gs. xiv. As ven in 1992 provedte Inicative amount in the general trade a with Russia is not enough to secure the import of crude oil. Therefore, parallel to negodating a general trade Waeme for 1993, U ie should focs its efforts on signig direct import conracts between the Ukraian refineis nd te Rusian oil proding enterpies. In the long run, assumng that Ukraine has the neceay hard curnq, it can purcha crude oil in pracically unimited q'intity on the world maime. The problem is to ensure that Ukrine has the infrtrucu to receive the oil and forward it to refineds. The cpacity of the Odessa oil tminal to receive crude oil shipet is lmited to a few mniio tons of oil per year. Ukrine may explore how to utilize this capacity in the short run, and also take the iocessy steps to commission a capacity expansion project. In addition, adeqate crude oil storge capacity is also required. An import capacity of about 10 mt/year in Odessa am: a dgnificat expanion of the country's total storage capacity from the present 2 mt to about 8 mt (divided about equally between crude oil and oil products) should be sufficient to put a check on the price of the Russian crde and alleviate future short term supply problems. xv. Damde supl. In 1993, assming that domestic coal, oil and gas production register ony a modeate drop while nuclear power geneaton stays constant (compared to 1992), Ulkaines leve of energy self-sutiec will stabilize or sighly increase due to the expected decline of energy demand. In the lng trm, however, increased energ self-sufficiency would require the exson of the udlzation of coa, nucle power and remewable energy resources. The options are briefly consdered below. xv. . Coal Is neiher a clean nor a convenient fuel. Similarly to what has already happened in all developed countries, the use of coal by small consumers will inevitably decrease in Ukraine as well. From an point of view, this is a very positive trend and should be encouraged. Since UkraiDe is already self-suffient in cokig coal, it appeas that the only way to mainain the rdstive are of coal in Uklrines priay enery supply is to use a larger share of domestcilly produced coal in powe plns (which cn be equpped for polution control at a lower cost ttman small boilers). That Implie, however, that more coal shoiud be produced in the form of bituminos therml coal ther ham cokig coal or asnhracite (the latt two coal types curey represent a disprop e sbhae of coal prduction in Ukraine). In addition, thermal coal should be produced at a cost which makes it competitive w iported fiels, priarily natural gas. In rn, that requir a metorestuct of coal mining with a focus on low cost production of thermal coal utlizing resources with favouable geological condios. xvii. Since Ukrae has a number of almost or half completed 1,000 MW nuclear power unis, represent cosdera sunk investment costs, icreased reliance on domestically genered  lv - nuclear power is an actve opto from a pwely economi point of view. However, If the existg moatorim an additoalnucldea power is to be lifted, an itensified effort to demonsate in a tecnicly and pubLcly convining way that tbe plants are opated with high safety standard would be needed. Also, both the operating and the uncompleted units would have to undergo a mmiber of safety to ensure compliance with int ionally accepted norms. Finally, operation of existg and possible fitue units would require a sound plan for the short and long term stonge of spent fhel, nluing firm a m to ship the fuel to RussiL (.s before) or to store it onsite or off- site in Ukrine. xviii. The role of renewable ene resources is currently limited in Ukaaine. Furthermore, the techlogies which may become commercialy viable In the not very dbstant future cann produce the amount of energy needed to make a significant conibution to domestic self-sufficency. The addiionil cost of investing heavily Im these technologies is subsantiay higer than pusuing energy saving opos with the same or lr impa on supp.y secuity. Theefore, the Govemnent sboud give priority to measres which increase ener conservation as one of the most effective ways of increasing the security of energy supply for the country in the long run. Sector Regulatio and Ownrhp xix. During most of 1992, the oil and gas concerns (Ukmnefteim and Ukrazprom), the Ministry of Power (Mmenergo), the nuclear power conern (Uk rgoom) and th Ste Coal Commite repre direcdy to the Cabinet of Ministers. This arrugement gave great power to these ubsector acies which operated Ie nly from each otter without much aempt to produce coherent policies that involve choices about the allocation of investment and other resources across the energy sector as a whole. In response to that problem, a Deputy -Prime Minister position with the tak of coordiati the sector was created at the end of 1992. Tlere are five agencies in the energy sector reporting to the Deputy Prme Minister now: Minergo, the State Committe for the Utilizaton of Nuclear Energy, the State Coal Ccumittee, the State Oil and Gas Committee and the SW-. Comme_e for Nucear and Radiation Safety. Xi. We believe that the Goverment has three basic functions in the energy sector: (i) policy m g and coordiation, covering the major strategic decisions that affict the sector and those areas where the Govenment is seding a wider national interest tan implied by the objectives of the energy enprises alone; (ii) ownehip, i.e., ensig an adequate financial return on the nation's investmes in the sector; and (iii) regulation, whereby the goverment seeks to ensure that the consumer has approprat protection in respect of prices and quality of supply. These three functions are not without conflic0s; for example, the owner and regulator roles conflict over the question wbat is the desirable level of conmer prices. For this reason, these roles should be given separate entitles in the medium term, i.e., seprate entities/agencies should be responsible for policy, ownrhip and regulation. xxi. Generlly, economic activities can be divided into two groups. The first group contis nat monopolies, i.e., activities which, for technological and other reasons, are most efficienty carried out by a single orgaization. Within the energy sector, oil t on (via pipelina) and the transmision/distibuion of gas, electicity and distict heat belong to that group. The second group contais activities which can be carred out competitively. Within the energy sector, coal production and distribution, oil production, refining and distbution, gas production and dectricity and (to some extent) heat generation belong to that group. Tht objectives of the Goverment's regulatory functio are best achieved by maintaining a competitive business envirolmnt, i.e., competition provides the best protection for consumers in terms of both quality and price. For nual mopolies, where comptidon is not a feasible option, separation of the ownrhip and regulatory funcotins is probably the key step towards adequate consumer protection.  xxii. Assuming that it is aivl uately staffed, the newly established office of the Deputy Prime Minister (with responsibility for the energy sector) will be well positioned to carry out the finction of sector coordination, policy development and preparation for major strategic decisions at the Cabinet level. However, the Energy Prices Department of the Ministry of Economy, although it i independent from the energy agencies, does not meet all the requirements for a regulatory authority. Its focus is on only one aspect of regulation, prices, while other important aspects, such as the quality of service, are neglected. Its procedures snd decisions are not transparent. Tberefore, in the medium term, there is a need to establish an open, independent, legally based energy regulatory system where the interests of the customers (both residential and industrial), the central and local goverUnments, potential creditors and the reguated enterprises are all taken into account. xxiii. In 1992, the large scale assignment of enterprise assets to the -nadequately staffed State Property Fund weakened the accountability of enterprise managers and blurred the lines of decision making. The Government, therefore, needs to strengthen its ownership role temporarily even in those energy subsectors, which, in the long term, can be operated competitively and partly or wholly privatized. Government ministries and committees may represent the owner more effectively in the short run than the State Property Fund, which should focus its efforts on privatization. In order to create an arms' length 'elationship between the ininistries\committees and the energy enterprises (to separate the ownership function from the coordination and policy making role of these government agencies), there is a need for holding companies to act as intermediate owners. xxiv. The State Coal Committee acts as the de-facto owner of the coal associations, while it also carries out the functions of coordination and policy development in the coal subsector. The number of enterprises and associations is too large for effective coordination and control. There are too many non-mining activities. Admiistration of mine operations, safety regulations and trade unions are too closely linked. Successful privatizadon of the coal industry may ultimately be the best v-hicle to address these problems, but it is not likely to be a realistic option in the near future. Modernization, restructuring and institutional reform in the coal mining industry is expected to take at least ten years. In the first phase, the Government may transform part of the State Coal Committee into a holding company. This will separate the ownership function from the policy development finction of the State Coal Committee. xxv. The new holding company would exercise control over the coal mining associations, which would be organized into seven to nine larger, commercially operated mining companies. The holding company's management would be appointed by and responsible to its board of directors. The board would be appointed by the Government, which later may delegate that task to the State Property Fund. The members of the board would represent a broad scope of interests, in particular from the Ministry of Finance, Minenergo, Ministry of Industry and credit agencies. A labor representative may also be a board member. In the transition period to the second, competitive phase, the role of the holding company would gradually decrease and the coal companies would be given increasing autonomy not only in their operations, but also in making investment decisions. In preparation for the second phase, the Government should start the development of a new legal and reguiatory framework for the coal mining activities. The new mining legislation should promote competition and private investment. xxvi. The main steps of the institutional reform of the Ukrainian power industry should be (i) the separation of the Goverment's policy making, ownership and regulatory functions; (ii) the commercialization of electricity supply; and (iii) the introduction of competition and promotion of private sector participation. Minenergo, which acts both as a government agency and the headquarters of a large, integrated utility, should transform itself into a streamlined government ministry. It should focus on policy development and the preparation of strategic decisions for the  I vi I whole power Industry. It shod deelop an anmfs length rdationship with dhe neration. trnsmisio and dstbuton compaes. xxvii. The Itroduction of comption In power supply requ the brig up of the cu vertically integrated strmture into eprat compnies responsible for geradon, tasmission and distibution. An genros (including cogenrtors In the indual secor) would be alowed open access to the transmission network and have the right to sel bulk power to distributors and large users at uegulaed prices. Also, generators and other i4d producers would be allowed to bid for the right to develop new genang capcity. Prices charged by the transmission and dibution companies would continue to be regIated. xxviii. These changes wll require the establishment of a licesig regime with rules govering procedues for obtaning generation liceces and opation of the transmission and distrb*tion systems. In the short term, regulation can be caried om in coopeatio beweeh the Ministry of Economy and Mnego. Initially, the Ministry of Economy would contime to focus on prices, while Miero would issue Lcnces, safegard and enur coa m cool obligations to supply and connect and detemine the qudity of service. In the medium tm, both the Ministry of Economy and Minego sud give up thdr retry ftions and ser it to the new en regulaty authority (see above). xxix. In 1992, Mno actively stdied the ee of a munber of idustialized countries and de-veloped a blueprint for reoa. The prposed reognizatio wi bring very significant benefits. Decisions about genertidon capacity deveopment wil be more sl eonomically and finacially. There wil be clear incentives and pressures to reduce operation cost. Transparent prices, which better reflect costs and reduce the extensive crass-subsidiation, will send the right signas to electricity consms . The needs of the csomer will be in the focus of service improvements efforts. Most of these benefits will come from a new, compettive set-up for the operadion of the industry and will not depend on privataton, which may or may not be the ultimate objective of the Govenment. xxx. Nuclea generton tology has operati and safety reqiemen which are very diffeent from convendonal generaon. There are significant advan_ta in the present arrangement whereby all nuclear plants belong to the State Nuclear Energy Comtte. However, the Committee should focus on its policy relat activities and may preserve part of Uatomenroprom to operate as a holdig company for the nuclear power plants. The holding company would carry out a nmrber of cenalized functions, such as procement of fuel and spare parts, diosition of spent fuel, fuel cycle (loading) cdoalations, traing, applied research and development, etc. xxxi. Ukrine needs an effective nuclear regulatory agency in order to ensure the funmtioning of nuclear inlions according to the requirements of public health and safety. However, the present status of the State Committee for Nuclear and Radiation Safety is inaduate to the task set by the Government. Owing to the heretofore prevailing structre of responsibilWies and dearth of local Ukainin peroel rined in nuclear science, it is not suprising that the existng arranement are tentative and incomplete. In the near futre, the authority and responsibility of the Comitee should be established by law, a strong orgnizatioal strucre should be put in place, and the Committe:! should be provided with a budget nua with its responsibilities. Faergy Prces xxxii. In 1992, the Goverment applied a variety of hinent to contol eergy prices. Prices of adl enery cosumed in homes - elecrcity, heat, cod, heating oil, kerosne, natural gas, liquified petroleum gas (LPG) - were set by the Cabinet. Becuse the Cabinet al se the average  - ,ii-* price of electrcity and heat, it effectively detemined the prices paid by nonhousehold consuers for tee services. Prices for domestically produced crnde oil and nautu gas and 70 percent of steam coal and 90 percen of coking coal were also fixed by the Govenmen. Maxhmm prices for oil products and natural gas (for non-household consm) were determind idity, by conolling wofit margins for the refineries and transmission/distribution compaies. Dif_fere between averae costs and household enery prices were finacd from the budget. Electricity was an eweption - household electricity price subsidies were finaced ftom a surcharge on industrial consumers. District heat and solid fuel subsidies were distributed through the local governments, while other subsidies were given direcwy to the energy distnbution entses. Household energy subsidies amounted to about five percent of total goverent expenditures in 1992. udii. The current system of energy price control in Ukraine is inefficient, since it does not permit competion among energy suppliers, discoues energy conservation and misallocates resources. It is also unsusainable, since it requires subsidies at a rapidly increasing scale which undemi efforts to contain the budget deficit. The Goverment shoud find more efficient ways, such as targeted social progms, to protect low-income groups without the distontioary effects of energy price subsidies. A comprehensive energy price reform is needed which should be closely coordinated with the institutional restructuring of the energy sector. xxiv. The Government should develop a medium-erm (three to five years) program to gradually eliminate household energy subsidies. The progm shoud be linked to a nationwide program of installing gas and heat consumption metering and control devices for individual houses or block of Vaprens. In order to assist the population to make the right decisions when purchasing new energy conag devices or improving their homes, the schedule of energy price ices should be anmounced in advance. xxxv. The liberalizaton of Oetroleum product prices (including the elimination of margin cotols on refineris and distributors) should proceed parallel with (i) the corporatization of the refinmies; (ii) abolishing the system of state orders; (iii) allowing open access to oil transportation pieines; (iv) libelUation of export and import of petroleum products; (v) demonopolzation of domestic distribution/trade; and (vi) privadzation of gas stations. xxxvi. Prices or domestically produced crude oil and natural gas should t raised to the level of import prices. The difference between import prices and domestic production costs could be captured by the budget via a system of royalties and pofit taxes, which should be an integral part of a new licencinglcruession regime designed to attract forign investment in oil and gas exploration and production. xxxvii. PFl coal price liberalization in the near future woud bear a high risk that producers would set their prices significantly above import prices, due to the high production costs of several mines, their inability to adjust production patterns rapidly and the non-existence of the necessary maexet infrstr and experience of traders and consumers. The first steps should include measures which hberalize coal import, commercialize and demonopolize domestic trade and develop iutions and transport and storage infiastructure needed for competitive trading of coal. Meanwhile, coal prices should be gradually adjusted until ful import pariy is reached. Prices should reach at least 75 percent of import parity by the end of 1993 and fuil import parity in 1994. The gap between household and industrial coal prices should be reduced in 1993 and completely eliminated in 1994. Thereafter, coal prices for small industria consumers and households should be decontrolled togetier with the liberalizaton of exports. xmviii. It may prove necessary to fix coal prices for large and sategic consaner (i.e., power and steel industies) at import parity level for an extended time period as part of a  - viii - comprehensive goverment program for the structural adjustent of the coal industry. Such a program would aim at transfering labor from uneconmic coal mining to other activities in a socially acceptable way. Its key features would be temporary and decreasing budget subsidies for an agreed minimum coal production plan, which provides a seure share for local coal in the power and steel markets. Thus, the granting of subsidies would be trsparent and condidonal, while the competitiveness of consumers would be maintned. xxxix. Prices for electricity generators followed fuel cost increases with a considerable lag in 1992. Also, because capital assets were undervalued in 1992, contibution from amortizaton funds was iadequate to cover rerng equipment replacement costs and rehabilitation works needed to maintain the capacity of the electricity generation, transmission and distribution system. Finally, the pricing formula applied by the Ministry of Economy controlled profit margins on the basis of opeatng and depreciation costs and did not explicitly consider financing needs or a rate of return on capital investments. In the short term, the Govemment should adopt a policy of more fiequent (at least quarterly) price adjusmet to keep pace with increasing fuel costs and to reflect internal cash generaton req iements at the enterprise level derived from the financing needs of an adequawe rehabilitation and investment program. As soon as the separation of electricity generation from transmission and distribution is implemented and a system for competitive supply of electricity is established, pnces for electricity generators can be liberalized. X)XX. Prices should become the orinary instrument for energy demand management in Ukraine. The Govenmment should encoue Uklraiian power and gas utilities to develop time-of- day, seasonal and inteuruptible tariffs. At a later stage, after the tracking and reporting of various cost elements is drasticaly improved, the regulatory authority may design incentives for the electricity, gas and district heat distribution companies to support efficiency improvements at the consume's level. xxxxi. In summary, the proposed energy price reform would ensure that both import and domestic costs of energy supply (including capital costs) are fully passed on to consumers. These objectives would be achieved by the gradual elimination of subsidies to energy producers and consumers and the introduction of competition and price liberalization in those subsectors, which are not natural monopolies. The price reform itself would have no additional inflationary effect, since the altemative (ow energy prices coupled with budgetary subsidies and payments channeled through the bankdng system in order to finance losses and capital expenditures in the energy sector) is equally iflationay. In fact, competition will increase the efficiency of energy supply industry and thereby result in lower energy costs in the medium term. The positive effects of the energy price reform are contingen on the adoption of a strict macroenomic stabilizadon program which would effectively harden the budget consmzaint of both the energy producing and energy consuming entetprises. Investments and FUidng Opaons xxxxii. Due to the expected continuing decrease of energy demand, investments in the energy sector should primarily focus on the rehabilitaton of existing capital stock. In contrast with past practices, the highest priority should be given to safety and efficiency improvements rater than capacity expansion. Annual investment needs are estimated to total about two billion dollars per year (including local costs) in the 1993-2005 period. Assming that the instutional re uring of the energy sector is implemented and prices are set properly, most of these expenses can be financed without direct budgetauy support. The Government's role should be restricted to arranging the financing for certain non-commercl investments, such as the safety upgrades of mnclear plants and the improvement of oil supply secuity.  - ix - xxxiii. Oil. Based on the expected contining decrease of demland for oil products, the two largest refinies (Lysychask and Kremencluk) have enoh distillation apacity to supply the domestic market. In other words, the longer term vbility of the Kherson, Nadvia, Odessa and Drohobych refineries is in doubt. However, the closure of the Xherson and Nadvina refieries would significantly increase product distibution costs due to the geopc locaion of the3e two refineries, In addition, the badly needed modernition projects could be carried out in a way which allows for some capacity decrease. xxxxiv. If the domestic and foreig trade of crude oil and petroleum products is liberalized and oil product prices are completely decontrolled, the refieries which Ukraine needs win be able to attract commercl loams and equity investors and will survive the "hakeout". There is no need for Government to step in with investment subsidies. However, the Goverment should take an active role in arrang for the required feasibility studies (and other technical assistance) and the pmion of joint ventures and eventual privatization. xxxxv. The commercial viabflity of investe aimed at a higher level of supply secnty - the Odessa oil terinal, the related crude oW product pipeline and the additional petroleum storage capacity - is uncertin. Therefore, the Government should take an active role in deciding on the tming of these investm s and ptoviding supplemety funds for their implemenation. The source of the supplementary funds will ultimately be the budget, however, borrowing from multilateral development agencies or bilateral sources to cover foreign exchnge cosw is a an option which the Govermnent may want to consider. xxxxvi. Investments in oil and gas production are expected to be highly profitable. However, the current regulatory and institional aangements make it very difficult to attract foreign capital and modem technology. The most important steps the Government should take are (i) establishing a state owned exploration company by sepran the exploration function of the State Geology Committee from its smurvey and regulatory functions; (ii) dfting a new mining law which establishes a licensing/concession regime; and, as proposed above, (iii) raising the price of domestically produced gas and oil to the level of the import cost. xxxxvii. Gas. Transit fees from Russia and Turkmemstan should be the ultimate source of funds for most of the nanal gas transmission system investrments. Assuming that (i) the Govrnment negodates long term transit aeemenb with Russia and Turkmenistan; and (ii) the transit fee is gradually increased to cover at least the long run marginal cost of the services provided by Ukraine, Utrprom will be able to borrow (and repay) the foreign exchange component for these investnents. Initially, mutilateral development agencies such as the World Bank and EBRD are the most likely lenders, however, Ukrgprom is expected to be able to borrow money on fuly commercial terms and attrat private investors in the long run. Xxxviui. Financing of investment in gas distribution will depend on the pricing and cost recovery policy followed by the Governmen. If the price of gas for household consumers cotinues to be heavily subsidized, these investments costs will ultimately have to be borne by the budget. Gas is a convenient, clean and efficient fuel for household consumpton. This is reflected in the wilingness of households in other countris to pay the full cost of gas services (including distribution and metering). The Government may authorize Ukrgaz to solicit significant contributions towards the cost of the expansion of the distribution system from new ctomers, arguing that these costs are not reflected in the price. Eventually, assuming tat prices will inease to a level which covers system expansion costs, cutomers' prepayments can be deducted from their monthly biUs. This approach has been tried in other countries and proved to be very successf in alleviaing the shortage of funds for system pasion.  xxxxix. Coal. lnvestme to maintain or increase coal production levels should be postponed until the viability and non-viability of coal entepris becomes transparent through improved cost control, the abolHsment of the profit equaizaion system, and Pn agreement on the initial phases of the restuctuWg program. If the Government increases domestic coal pnces to mport parity levels and dismanles the profit equalization system, the viable mining enterprises are expected to be able to accumuate substandal fuids to finance part of the necessary invesmet themselves and rely on commercial borwig for the rest of thdir capital needs. After coal prices reah import piy, budgetary subsidies should be restrcted to the financing of programs to phase out uneconomic mines and to employ or retrain surplus labor. If a comprehensive restructring program is adopted by the Government, multilateral lending agencies (such as the World Bank) may be wlling to support projects aimed at developing or maiaining the supply of steam coal to domestic power plants fir exisdng or new low cost mines (e.g., in the Oleksandria and Pavlohrad associations) and improving coal washing. L. Eerldty. There is no immediate need to invest in new power generation capacity to replace the Chernobyl plant (scheduled to be shut down at the end of 1993). The need for investment in new temal generation capacity depends on the evolution of electricity demand, which, in turn, depends on economic growth and on prices and other incentives for the efficient use of electricity. Rapid adjustment of electricity prices in the context of a comprehensive program of economic reform (which would eliminate or restructre inefficient producers and harden the budget consraints of the remning enprises) will significantly reduce both investment costs and fuel and other operation costs in the power indut. Li. In the short term, priority should be given to the reabiltion of exist non-nulear units and the safety upgrades of nuclear plants to improve the efficiency and safety of electricity generation. The implementation of the thermal rehabilitation program of the Ministry of Power would stabilize coal use in the power industry at about 40 mt/year. However, the rehailitation program should be reexamined based on tie application of cost-benefit criteria and only the program components with proven economic viability should be implemented. Lii. If prices are set at levels which are inadequate'to cover costs, the power industry will be unable to generate investment funds intenaly. As a resut, neither domestic bans nor foreign lending agenies will consider the industry creditworthy. Neither will investors be inested in talkng equity positions. Since foreign grants, even under the most optimistic scenario, will cover only a small fraction of the investenat costs, the Govermment will be forced to return to the old practice of financing hin directy from the budget. Due to low prices, consumers will be less interested in energ conservation. Demand will grow more rapidly, necessitating even more investments. Budget subsdies at such a large scale will seriously endanger the success of the macroeconomic stabilization program. Also, financing of the hard currency requrements without access to foreign borrowing will lead to severe hard currency shortages in other sectors of the economy. Liii. In addiion to decreasing investment requrems, higher electricity prices will pernit the profitable operation of the power idustry, leading to the accumulaion of signficant internally generted funds. In tmn, that will ensure access for the industry to both domestic and foreign lending insttutions. Assuming that the necessary insitutional changes are implemented, private investors may be willing to commt some of their funds as equity to support the investment progrm. Due to the transfer of modern technology and knowhow, ths process will result in a more efficiently opating power industry.  -xi- Acton Plan Lw. The cornertn of the proposed medim term energy state are (i) the adjustment of energy prices to reflect fully the cost of imported and domescally produced energy includig ependitures on higb priorit reablitation and invetmet projects; (ii) the development of a domestic capabilty to provide energy efficiency improvement services and new inceives for energy utilities to promote energy saving mea among cutomers; (iii) the sepaion of the Government's policy making, ownerip, and reglatory functions; (iv) the promotion of compeition in oil and gas productin, oil refining and aketing, coal mining and coal distribution and electricity generation; and (v) the ivement of the security of energy supply by diversifying energy imports, mtag the use of domestic coal in power generaton and Improving the operadonal and technical saety of the supply of electricity fom nmclear plants. The action plan in Capter IX of the report suvmmizes the most important measures needed for the implemeation of the proposed medium term enegy strategy. The plan, which iS presented in a tabular format, indicates for each action the responsible agency, whetier there is a need for tedmical assisance and a schedule for implementation.  I. MNTRODUCTiON 1. Ukaine, with an area of 603.7 thousand Ikn, is the second largest county in Europe (after the Russian Federation). Sittd on the southwestern part of the Ea Europen Plain Ukamine is bordered by Russia in the east, Bearus in the north, Poland, Slovakda, Hungary, Romania and Moldova in the west and the Black Sea in the south. 2. Ukrine is a middle income couty with a population of 52 million and an estimated per capita GDP of US$2,500 in 1990.' In 1989, 72.7 percn of the population was of Ukrainian origin and 22.1 percent Russian. 67 percent of the population was urba, compared to 46 percent in 1959. Kiev, the capital city had a population of 2.6 million in 1989. Other large cities are Kharkiv (1,610,000), Dnipropetovsk (1,178,000), Odessa (1,115,000), Donetsk (1,113,000), Zaporizhzhia (881,0C)), Lviv (791,000) and Kryvyi Rih (713,000). 3. On August 24, 1991, Ukraine declared its iqndp e from the poliical and ecomic system of the former Soviet Union. This declaration was radfied by a Decembe 1, 1991 referendum. On December 21, 1991, Ukmaine became a meiber of the Commonwealth of Independent States. 4. Ukraine has the most valuable agrcutural land resce in Europe and has often been referred to as the Soviet Union's "bread basket'. On average, from 1986 to 1990, it produced 24.1 percent of grain, 22.3 percen of meat, 43.8 percent of sunflower and over half of granulated sugar in the former Soviet Union. Based on the Republic's coal and iron ore reserves, several heavy industrial enterises were sited in Ukraine in the 1930s and rebuilt and further developed ater the Second World War. In 1989, Ukraine produced 40 percent of the Soviet Union's steel, 50 percent of iron and 25 pacent of coal. 5. Ukamine was a net exporter of coal, ferrous metals, metal products, tractors and agricultural equipment, militauy equpme suga, vegetable oils, meat and dairy products and a net importer of crude oil, gas, cars, wood, paper and light indutri products. In recent years, exports and imports to/from other repulics were equivalent to 33 and 38 percent of Net Materi Product and 84 and 72 percent of total trade flows, respectively.2 Russia has been Ukraine's largest traing partner, followed by Belarus. 6. The economy has been insulated frm Intrnatonal competi Massive price distortions and state control over resource allocations charcterzed tne coonomic system. Systematic under- pricing of energy and raw materials led to usage per unit of output btntilly higher than in market economies. Prevailing technologies, often out-of-date and inappropriate, produced high volumes of waste. 7. The focus of-the past energy strategy was the filfillmet of production targets in order to meet the ever-increasing demand for electricity, coking coal, naural gas and petroleum products in 1 Soure: Mesuring the Inomes of Eonomics of the Fonner Soviet Union", Policy Research Working Pape No. 1057, World Bank, December 1992. 2 Source: Wodd Bak Report No. 11029-UA, Ukraine - Country Economic Memoradum, 1992.  the productive sectors.3 The practically unlimited availabiity of chea crude oil and naturat gas from Russia sustained an industrial sector dominated by heavy industy whh ried less and less on domestic energy ad raw material. The tripling of electicity consumpIon between 1965 and 1985 was considered a positive development and the yeatbwks announced tXa Ukrae wa on level with the world's most developed countries in terms of per capita electricity production and cosumption. 8. The Cewbyl accident in 1986 gave the first signal that a change of direction was needed. The aftermath of the accident resulted in widespread resentmen of nuclear power and led to public demonstroatios against a number of operating and planned nuclear power stations. These demonstrations culminated in the cancelling of several new nuclar projects and a moratorium on the completion and c i of three almost finished nuclear blocks. However, the Governem's only reaction at that time was to modify exps, un plans by replacing nuclear blocks with thema power plants using natural gas imported from ,ssia and Turkmenist. 9. e disitegraion of the former Soviet Union had a dramatic impact on the enery system of Ukraine. It became obvious that the country's own resources could not possibly support the needs of a,n economy which was so highly energy intensive. The unreliabiity and increasing cost of imported energy made it clear that a new energy strategy was urgently needed. In Janmy 1992, the Cabinet of Ministers requestd the Ministry of Economy and the sectorat ministri to p.epare three long term programs, two in the energy sector and one for the conversion of the militay industry. The fi energy program addressed the development of the coal industry, the second the development of the power sbsector. Both programs were submitted to the Cabinet in the middle of 1992. Although, in many aspects, the two programs reflected a way of thinldng different from the past, they lacked consistency and did not provide an adequate basis for decisions.4 10. A new govremment was formed in October, in the midst of a crisis of gas and oil deliveries from Russia. The Govment anounced that the two cornewstones of the new energ strategy should be more reLiance on domestic resowces and the elimination of wastefu energy use.5 The Government also asked for assistance fom the international development agencies in the formulation of the new enery strategy. It. This report, a product of several month of cooperation between World Bank staff and Ukanian speciaists in goverment agencies and energy sector entrpris, is inded to provide the basis for a comprehensive energy strategy which takes into account the new politca and economic realities in Ukaine. The report utilizes many eommendations of the two recenly developed long term programs mentioned above and also reflects several ideas expressed by Ukrainian experts working in the energy sector. The report presents an action plan, consistng of measures in the area of instiutonal development, reguhtory policy, pricing, trade, investments, and tecnical assistance, which is aimd at developing a modern enewy sector well-sitd to operate in a marke envionmet. The report recognizes that an energy strateg shoudd be based on the priorittion of options, shud be within the limits of financial, technical and institutional capabilities, and should be acceptable to the public in terms of its eavironmental consequences. 3 TIe latest five-year devdopment plan for the power sector (prepmd in 1989, the last year of econmic growt) projected that lectricity demand would incrase 20 per bween 1988 and 1995. Based on what is kw today, a 20 percent decrese seems more lkly. 4 For example, the coal prga offered 33-37 million tons of coal (measured in cod equivalent) for power geeation in the year 2000, while the power progrm plmed to uie aoly 30 milon tons. 5 Source: "The Energy Crisis can be Overcome", an article by Mr. Youkhnovdky (Fir Deputy Prie Ministr) m the September 26 Issue of the newspar Voke of  -3- 12. Chapt er of dh rport descri the roe of tdh ry secr wihin the ecomy of Ukr. Capr m pres a foecast ofagg gat ewr dmand ad a se of non-picg missus to iwpmpo v e nrgy ci . Th sply of erV from domesc sowrcs and Inpot b rviwed in hapter IV. Chbp V aayse .a ar sor. chapter VI decribes th pricgs of ee. Capter V p dead description of ubsetor km=e in the cod, oi, ural gVs, deecit and disrict hea sbecor. Chapter Vm pest cost etmat for do rqured hwvstet in the ener sctor togete wit th discsn of finci op<m. Finay, dt lut chapter la out a actioD plan for fth adoptn of enti nmmes.  - 4 - II. ENERGY AND THE ECONOMY A. OM c Performance 13. The Ukranian economy is facing a serious and rpidly growing crisis. The net matera prduct (N1M) declined 3 percen in 1990 and 11 percent in 1991, dropping below its 1985 level. The NMP experienced a furtier 15 percent decline in the first nine month of 1992 and it is estimated that the decline for the whole year was 15-17 percent. Foreign trade volumes have decased even more since the beginning of 1992. Bilateral agreements, outlining specific quantities of goods that are to be traded, have been signed with thirte republics of the former Soviet Union. However, despite being set significantly below previous trade levels, most of the quotas in these agreements have not been fulfilled. Investment declined by 46 percent between 1989 and 1991. Consumption grew 2.5 percent growth 1990, and then declned 6.7 percent in 1991. 14. Retail prices rose by 84 percent in 1991, immediately followed by a 240 percent increase in January 1992. Inflation continmed at a monthly rate of 15-25 percent during the first half of 1992, rising to a monthly rate of about 30 percent by the end of 1992 and is estimated to have exceeded 1,000 percent for the year as a whoic. Wholesale prices registered a 2,200 percent increase by the end of the third qater. Subsequent to the partal price hberalization in Januaty 1992, the Govemnment introduced extensive and sector specific limits on profit margins in an attempt to control larger then expected price increases. As a result, a small proportion of consumer purchases are subject to fixed prices, but virtally all transactions are subject to margin controls. The state order system, although it has been reduced in scope, is still interfering with the operation of the market. Export quotas are in place for over 200 categories of goods, and, together with the licensing rumnents for inter-republic trade, greatly inhibit the ability of Uknan enterprises to trade with the outside world. The taxation system, in particular the extremely high export taxes, is also acting as a disincenive to efficient operations of enterprises. 15. The state budget deficit was equivalent to 14 percent of GDP in 1991. The 1992 budget targeted a substantial reduction in the deficit to 7 percent of GDP. However, the planned improvement was based on optimistic assumptions regarding revenue performance, which did not materialize.7 In addition, increasing extrabudgety transfers and reliance on the banking system to finance enterprise losses further undemined macroeconomic stability. The excessively expansionary monetary and credit policies have been facilitated by the introduction of the karbovane coupons as an additional means of cash payment in Jamnary 1992. Initially at about 0.2-0.3 coupon per rubles, the exchange rate of cash rubles against coupons has appreciated steadily to a rate of about 1.5 coupon per ruble in October. The kabovanets coupon - US$ exchange rate moved fiom 100 at the end of the first quarter to about 500 by the end of the third quarter. On November 12, Ukraine announced that it was leavig the ruble zone and the krbovanets coupon would be the sole leg tender in the country. During the next two days, th ruble holdings of Ukrainian citizens were converted at a 1:1 rate and subsequently an exchange rate of 1.45 karbovanets per ruble was set by the National Bank. 6 This section is based on World Bank Report No. 11029-UA, Ukraine - Country Economic Memorandum, 1992. 7 According to a tatement made in the Pariament by the newly appointed Prime Minister, the budgt was runmning a deficit at the level of 44 per of the GDP in October. 8 Karh vanat is the UtLainian ennivalent of the Rusdan word ruble.  -5- 16. Ukrine needs to adopt a comprehensive reform Pae for the economy. MacOeonomic stabilization leaing to the estblismet of non-inflationary epectations and the elimination of excess demand is the top priority in the short-run. Removing the root causes of the budget deficit and tightening of the monetay and credit policies will not ondy stabilize the macroeconomy, but will also harden the budget consaints of ste enterprises and increase their responsiveness to market signals. In addition, a refrm package should include further measu to liberalize prices and trade and to implement a demonopolization and privadzatlon progrm. B. The Role of the Ergy Sector 17. industry (including constuction) produced 51 percent of the NMP in 1990. Agriculture produced 30 percent of the NW and services (trwsport, communications, trade and other materal sevices) 19 petcent. In internional comparison, the share of the service sector is very low. Since the services are generaly less energy intensive, their low share in the value added partly explains the high energy itensity of the Ukrainian economy. Within the industdal sector (excluding constuction), 71 percent of the gross industrial output originated from heavy industry in 1990. Mbachine building (30 percent) and metallurgy (12 percent) represented the two subsectors with the hight shares. 18. Time series are available for the share of three groups of energy enteprises (power industry, fuel production and chemical/petrochemical industry) within the total industrial output. Between 1980 and 1990. the share of the power subsector increased from 2.7 to 3.1 percent, and the share of chemical/petrochemical industry stabilized around 6 percent. The share of fuel production (coal, gas and crude oil) grew from the inital 5.7 percent in 1980 to 6.9 percent in 1985, however, it dropped to 5.6 percent by 1990. The increasing share of the power industry signals that the economy was becomig more electricity inteive, while the shrinkng share of fuel production suggests the depletion of domesdc energy sources. The three energ subsectors plus the chemical industry tether produced 14.5 percent of gross industrial output in 1990. 19. Industry employed 31 percent of the total labor force, and 42 peret of the people working in material production in 1990. Employment in the power industry was 137 thousand people (1.9 percent of industrial employment), in fuel production 656 thousand (9.2 percen) and in the chemical/petrochemical industries 325 thousand (4.6 percent).'0 Despite the rapidly decreasing share of fuel production within gross industrial output between 1985 and 1990 (see above), the share of induial employment engaged in fuel production recorded a 0.6 percent increase in the same period. Based on these figures, the three energy subsectors and the chemical industry employed 15.7 percent of the indust labor force in 1990. While the level of salaries in the chemical/powchenical industry were close to the industrial average, the power and fuel subsecors paid 15 and 46 percent higher salaries, respectively. 20. In 1990, 13.4 percent of net industrial assets were in the power subsector, 13.6 percent in fuel production and 9.3 percent in the chemical/petochemical industry, indicating that the energy sector employed more than one third of industrial capital. About 40 percent of industrial investmens were directed to the three subsectors in the 1981-90 period (41 percent in 1981-85 and 39 percent in 1986-9O). 9 Tbis section is based on data from the Ukrinian Minsty of Stadsdcs. 10 It is mport to note that dese figures do not include persone employed in svice establishnts diriwtIv acwhed to the enev enterpris.  -6- 21. n 1990, tb!. nse_ up ony 3 prcen of iterpblic eports compaed to a 2 peen dse of lAds in IntpArec pou. Ih q;posit wa te for rade outside de fom Soviet Unlon: ful nd edctit epot rprentd 24 perce we el hMt only 2 pet of a extend nude. Howevr. It hpotn to note that dh volm of xerndl tre was only about ore- fifth of nmqpblk trad, which was donlated by the l Imbalance of hd Imports. In mue, fols impoed fom oder republics me It possible fbr Ukre to sell put of Its domedtly produced elty, coa and petroleum product for converle curren abroad. 22. Ineiy, dhe same poten cotined in 1991 and 1992. Enr exports were a source of balce of pm ns uppo in convetible currencies, while ener imports wee the pmay mson behind Ukrbwes larg deficit in ruble denminate trade (see Chapter IV). I fueds had been Impord for convertible currency at wrd maet prices in 1992, the enaergy sector would have produced a trade deficit of about US$10 blio. More gely, if al fomer Sovie republics ded to mve to _ aona pdres in their tade with Uraine, Ukine would sufe a 27 per terma"f-trde ics." 11 b.27? porauM Ifirear t- _lt b e a nd I based on l990 trade ics. Sou. Mm Mving to Wor Pic Afht do Tem of Trade in Countie of th Pawne Svit Unioe Poicy Rambd Wakng per No. 1074, Wodd Baxk, auty 1993.  -7- III ENERGY DEMAND A. AgregDe Desmd2 23. Energy demand in Ukrine is chareid by high eegy intensity in relation to industdal outw and the high abare of industry in final energy consumption. Tis is due to the high share of heavy inuty (iron and steel, basic chemicas) and the low thermal effiency of energy consumption techologies. Energy consumption per capita was about 4600 kilogram oil equivalent (koe) in 1990, which is quite high even by Western European standards. The energy intensity of GDP is estimatd at 1.84 koe/US$, which is several tmes higher than in the most developed c -untries. However, energy consumption per unit of GDP usually decreases at a higher level of developmnt. In order to compare Ukrainian enery consumpon to ene consumption in otier countries, it is necessry to quantiy that relatonship. Nineteen counties (see Table 1) were selected on the basis of Table 1: Intena Comparison I7 F E CoW GOP Popuon GDP/cep /SJ En. Cons/GOP COtamY eap. Ikoe.) MI"I) (thousand.) (/10OO Aretina 1801 93260 32300 2887 624 Bulada 4945 19910 8800 2263 2186 POWlad 3416 63590 38200 1665 2052 Ctusb 887 27790 13200 2105 421 Hunary 3211 32920 10600 3106 1034 YuGOstavIa 2409 82310 23800 3648 697 .chadovbva 5081 44450 15700 2831 1796 South Kora 1898 236400 42800 5523 344 Ireland 2653 42500 3600 12143 218 New Zealand 4971 42760 3400 12576 395 Unked Knpdomn 3646 975150 57400 16989 215 Nehmrands 5123 279150 14900 18735 273 Bewgum 4862 192390 10000 19239 262 Austia 3603 157380 7700 20439 171 Frane 3845 1190780 56400 21113 182 Dbnnmuk 3618 130960 6100 25678 141 W. Germany 3491 1488210 62000 24003 145 Sweden 6347 228110 8600 2S524 239 Finand 5650 137250 5000 27450 206 Ukrane 4600 130000 52000 2500 1840 SouRe: uk Statt m for Ukrane, Wodd Development Report (1992) for other countries 12 Official stastical data on energy consumption is vety limied in Ukraine. Staical yearbooks conAi litle absolute numbers and he level of aggrgaon is high. Slightly more detailed imformation an eaer _nsumpdn and pdodon is prepared at the end of each five year period. Detailed energy balances, which falitate oss-cecks, have not been regularly prepaed until now. The analysis below relies on ergy banes (see Tables 1 and 2 in Annex 1) prepared by World Bank stf which suld be treated prdrminaty and are subject to cnge when more Inrmation becomes availbe (A has recenty smae a pogm of tcanical assice to Ukre and other couies of the fonner Soviet Union in the area of ener.y statisrt).  -8- cimatic cotons not drastically eNERY OONUMTO VS *DP different fom that Imo Fi_re - Ukraine i % C*otres of Ukraine and, o ,s using data from Mhe Bank's 1992 World *ws " 8n. Developmto Report, a cross- county dysis of oieW ZdI ii4 the relationship between energ consumdon and Conm r GDP was caied out. The results suggest that Ukraine * ltSnd used about a * South Kaea 60 percent more eergy in 1990 than might be epetd (using the average predictd value) on o to to so e basis of its 0DPw t _ , estaed pe capita ,, Wotod ontOpUtt Rfptt two twtat 7Ubtw a afll 6): Sfi Et UttImOta for Ukrhtin. GDP level (see I Figure 1). F%m 1 24. Despite a 10 percent growth of NM? between 1985 and 1990, total primary energy Compositio of Fna Enery Demand consumption deceased by one percent in the 1990 -1732 Me same period (see Tables I and 2 in Annex 1). As a result, the energy intity of the . I Ukrha economy declined by 11 peret. am l