WORLD BANK REPORTS ON ENERGY OUTLOOK IN EASTERN EUROPE AND CENTRAL ASIA REGION

ARKA
March 19, 2010

YEREVAN, March 19, /ARKA/. The outlook for primary energy supplies,
heat, and electricity is questionable for the Eastern Europe and
Central Asia region, despite Russia and Central Asia’s current role
as a major energy supplier to both Eastern and Western Europe. In
spite of the underlying resource base, the region as a whole will
face an energy crunch unless investments of more than $3 trillion are
made over the next 20 years, according to the new World Bank report,
Lights Out? The Energy Outlook in Eastern Europe and the Former Soviet
Union, launched today.

"The demand for primary energy in the Europe and Central Asia region
is expected to increase by 50 percent by 2030," said Peter Thomson,
Director for Sustainable Development in the World Bank’s Europe and
Central Asia region, "while the demand for electricity is expected
to increase by 90 percent."

"Before the current global financial crisis hit in 2008," Thomson
explained, "several importing countries in the region had begun
to experience difficulties with supplies. The financial crisis has
slowed demand for energy and has created some breathing room to allow
countries to take action to mitigate the impact of the anticipated
energy crunch. But this window of opportunity will only exist for
about five to six years. Mitigating actions are required on both
the supply and the demand side, and without a change in behavior the
region as a whole could face an energy crunch – moving from being a
net energy exporter to a net energy importer by 2030."

Following the break-up of the Soviet Union, the countries of Europe
and Central Asia experienced six years of dramatic economic decline,
followed by vigorous economic recovery, enabling the region to become
one of the most economically dynamic in the world. This economic
performance was reflected in the region’s energy sector – the initial
economic decline was accompanied by a sharp reduction in the production
and consumption of energy. But as the region’s economy recovered,
both production and consumption increased. Investment, however,
lagged, particularly in energy asset maintenance and upgrading,
creating the prospect of an energy crunch.

The region was the hardest hit by the global financial crisis that
began in 2008, dampening energy demand significantly. This created
some breathing room, but this is only a temporary respite before
energy availability again becomes a serious concern. Once growth
picks back up, so, too, will energy consumption.

According to the report, if energy production is to be maintained or
increased to meet Europe’s energy requirements, significant investment
will be required. The projected needs for primary energy development
from 2010 to 2030 are estimated to be on the order of almost $1.3
trillion in order to ensure the availability of oil, gas, and coal. In
addition, the region’s power infrastructure is in desperate need of
upgrading. Electricity capacity has hardly increased since the early
1990s and plants are getting old. Investment needed in power sector
infrastructure over the next 20 to 25 years is on the order of $1.5
trillion, with a further $500 billion required for district heating.

"The deteriorating capacity has not yet become a full-blown crisis,"
said Thomson, "because of the decline in demand during the 1990s and
the current drop off in demand related to the financial crisis. But
construction lead times of several years mean that action is required
now. This level of investment – more than $3 trillion – cannot be
provided in this region by the public sector alone. Attracting private
sector investors will require changing the investment climate to make
it conducive to such investment."

Investing in energy efficiency achieves three goals, simultaneously
and at least cost: lower greenhouse gas emissions, better energy
security, and more sustainable economic growth. According to the
report, an additional $1 invested in energy efficiency may avoid more
than $2 in production investment. But much potential remains untapped
because of the many obstacles to investments in energy efficiency,
including inadequate energy prices and lack of payment discipline,
a lack of information on the latest technologies, too few contractors
and service companies, and financing constraints.

Governments have a major role to play in energy efficiency, not only
in allowing energy tariffs to reflect costs, but by being proactive in
setting and updating energy efficiency standards for homes, equipment,
and vehicles, and in enforcing them. The report recommends that to set
an example, governments should undertake energy efficiency programs
in the public sector, inform the public on energy efficient technology
options, and design cities with alternative means of transport.

The challenge for these countries going forward will be to secure
additional energy supplies quickly and at minimum cost, while acting in
an environmentally friendly fashion to limit the growth of greenhouse
gases.

According to the report, carbon emissions relative to GDP in the
region are among the highest in the world. In 2005, Russia was the
third-largest CO2 emitter in the world, after the United States and
China. The region’s EU members have already started tackling climate
change, improving energy efficiency, developing renewable energy
technologies, and tapping into carbon finance. Other countries in
the region will face increasing pressure to catch up, and quickly.

However, there is a disconnect between the global efforts to reduce
carbon emissions and the region’s national energy strategies for the
next 20 years. The region’s policymakers and businesses will have to
rethink these strategies and engage seriously in the global efforts.

But transitioning to a low carbon economy can be costly. By tapping
into carbon finance, countries in the region can reduce their carbon
footprint and attract critical capital to rebuild their energy
infrastructure and industrial base using efficient and cleaner
technologies. Governments should ensure that national policies
and legislation facilitate the use of carbon finance, foster rapid
technological modernization, and spur a revolution toward energy
efficiency.

The report emphasizes that given the enormous need for investment,
and the long lead times required to implement projects in the
energy sector, countries need to position themselves to secure
funding support for such progress as quickly as they can. Failure
to introduce an enabling environment to support investment in the
sector will translate into a shortfall in investment that, in turn,
could constrain economic activity. A 10 percent shortfall in energy
availability could lead to a 1 percent reduction in economic growth,
and a larger shortfall could have even more detrimental impacts.

"The World Bank stands ready to assist countries in meeting their
energy needs," said Thomson, "by helping them create an attractive
climate for investment, and by helping secure access to various sources
of funding, including carbon finance. However, countries need to act
swiftly – time is of the essence."