Europe and Central Asia Facing Energy Crunch

2010/03/19

World Bank reports on Energy Outlook in Eastern Europe and Central Asia Region

Overview

Before the current economic crisis hit the Europe and Central Asia (ECA) region in 2008, energy security was a major source of concern in Central and Eastern Europe and in many of the economies in the former Soviet Union. Energy importers were experiencing shortages leading to periodic brownouts and blackouts. An energy crisis seemed imminent.
The unexpected fall in economic activity due to the financial crisis staved off the energy crunch. But this is a temporary reprieve. As economic production begins to grow, the energy hungry economies in the region will again face shortages. This is especially true of ECA’s energy importers, who will again be squeezed between their wealthier neighbors to the west and the big oil and gas suppliers in the east.

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Lights Out? Slide-show
Slide-show: Energy Efficiency in Europe and Central Asia
Full Report[1.8MB]
Appendix[74 KB]
Report Overview (in Russian)[562 KB]
1. Introduction

Almost 20 years have passed since the transition process began in the countries of Central and South East Europe (CSE) and the Commonwealth of Independent States (CIS). This transition can be characterized as reflecting three transitions rolled into one:(1) A political transition, from a highly controlled centralized political system to a more decentralized and democratic form of government (in some countries this was combined with conflict and political disintegration);(2) An institutional transition, from the institutional framework of central planning toward the institution of a market economy; (3) An economic transition, involving the disintegration of the highly integrated economic space of the former Soviet Union and the Council or Mutual Economic Assistance (CMEA/COMECON),with resultant disruptions in trade, financial, and labor market connections.
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2. The Impending Energy Crunch

At the end of 2007, the Central and South East Europe/ Commonwealth of Independent States (CSE/CIS) countries faced the prospect of an imminent energy crunch, brought on by the convergence of steadily rising demand and constraints on the growth in supplies. The dampening of energy demand as a result of both the sharp rise in energy prices and the onset of the financial and economic crises in 2008 has pushed back the likely onset of an energy crunch, but it has not eliminated the prospect. The countries of the region face the very real prospect that investment in energy supply will not be sufficient to meet future demand.
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3. The Potential Supply Response
To close the gap between supply and demand, the countries of the region will have to rethink their approach to energy supply. That translates into doing five things: (1) Build the capacity for reliable electricity and primary energy supply, andattract thehugeinvestment the region needs to achieve this—$1.8 trillion in primary energy and $1.5 trillion in electricity by 2030—by creating better market conditions and more reasonable tariff regimes. (2) Deepen regional cooperation on energy development. (3) Reduce the enormous waste on the production side, especially that associated with flared and vented gas. (4) Undertake major energy efficiency measures on both the supply and the consumption sides. (5) Address potential environmental concerns, and minimize the carbon footprint of the new capacity to be added.
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4. The Potential Demand Response: Increasing Energy Efficiency
Investing in energy efficiency achieves three goals, simultaneously and at least cost: lower greenhouse gas emissions, better energy security, and more sustainable economic growth. Energy efficiency is thus a triple-win for governments, end users, market participants (public and private), and society in general.
An additional $1 invested in more-efficient electrical equipment and appliances could avoid more than $2 in supply-side investment. Energy efficiency should therefore be considered as an energy resource, on a par with—and even preferred over—supply-side resources.
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5. The Environmental Conundrum
DConcerns about supply security have caused many countries in the region to start looking at domestic energy resources and diversification options with only minimal consideration of the environmental consequences. This has created an environmental conundrum. The challenge for these countries going forward will be to secure additional energy supplies quickly and at minimum cost while under pressure to act in an environmentally friendly fashion and limit the growth of greenhouse gas emissions.
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6. Creating an Enabling Environment for Investment
The total projected energy sector investment requirements for the region over the next 20–25 years are huge. They amount to about $3.3 trillion (in 2008 dollars), some 3 percent of accumulated GDP during that period (table 6.1).
Although the public sector will have to finance a portion of these investments, it will not have the capacity to meet the full investment needs. The countries in the region will therefore need to call on the financial depth and technical know-how of private sector investors and energy companies. Although the current financial crisis is a serious impediment to private sector investment in any activities or countries seen as high risk, as the financial crisis passes, the prospects for such investment will improve. However, in order to attract these investors, countries will need to create an enabling environment that provides secure ownership rights, is subject to the rule of law, fosters transparency, and enables reasonable risk mitigation. In addition, individual sectors will have to be viewed as financially and commercially viable. This will be particularly critical in those sectors, such as electricity and heat, that are largely dependent on their domestic markets.
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