Belarus Energy Sector Review

ReportNo. 12804-BY Belarus EnergySector Review April 21, 1995 Public Disclosure Authorized Country Department IV Europe and Central Asia Region I~t,~ mrnia; Fm Public Disclosure Authorized It 1 i~ - 93~~~~~~~~~~~~~~~~~~~~~~z4ji l B i ~~~~~~~~.~~ ~ ~ ~ . il ld_ _ 4N WX-*~ A~~~~~~~ Ii ~~~rd Public Disclosure Authorized ~~~~. 2:,~~~~~~~~~~e,,P, -~~~~~~~u t~~~~~~~~4~~ ~~-4~~~~~iIti ~ ~ ~ ~ cn ~~'~~:$U Tr~~~~~~~I eIh A~~~~~~~~~~~~ R"tj,~ , ~ ~ ~ ~ $~i4j Public Disclosure Authorized A~2 ANNEXES 1. Tables and Figures 2. National Household Energy Survey - Energy Demand in the ResidentialSector 3. Electricity GenerationPlanning 4. Boiler ConversionComponent: Terms of Reference 5. Thermal Power Plant RehabilitationStudy: Terms of Reference 6. Transmissionand Dispatch System Rehabilitationand Upgrade Feasibility Study: Terms of Reference 7. District Heating RehabilitationComponent Feasibility Study: Terms of Reference MAPS A. Oil and Gas Transport and Processing Networks B. Power Stations and Transmission Lines ACKNOWLEDGEMENTS TheReview is basedon thefindings of a jointWorld Bank, USAID, EBRD, UNDDS energy missionwhich visited Belarus in November/December1993. The membersof the missionwere L. Lovei(mission leader), A. Adamantiades(power), I. Dobozi(energy demand), T. Joyce (gas transmissionand distribution),S. Marks (oil refiningand marketing),P. Szerenyi(electricity transmissionand distAbution), V. Vucetic (power generation modeling), S. Yoon (energy statistics), S. Zaheer(oil productionand transport) from the WorldBank; Y. Guterman(district heating), M. Hanson(solid fuels), F. Silaghy(power generation) from USAID; A. Thordarson(electricity finance) fromEBRD; and A. Borushko(power supply) from UNDDS.J. Besant-Jonesand J. PortoCarreiro were the two World Bankpeer reviewers. N. Sumardiprepared charts and tablesand was responsiblefor the productionof the report. V. V. Gerasimov,Minister of Power,was the main coordinatorof the missionon the Belarussianside. The Ministry of Power,Gosekonomplan, Ministry of Finance,Ministry of Resources,Committee of EnergySavings and Control, Committee of Oil andChemistry, Ministry of Housingand Communal Services, Goskomekologia, Ministry of Forestry,Beltransgaz, Beltopgaz, Belgeologiaand the staff of severalother energy and industrial enterprises actively participated in the workof the mission. Thefirst draftof thereport was preparedin February1994. A follow-upmission discussed the draftwith the Govemmentin Belarusin April,and prepared a shortand medium term action plan. The Reviewand the Action Plan was presented to the Govemmentin January1995. Based on commentsfrom the Govemment,the Reviewwas finalized in February1995. Thestudy drew on a numberof earlierWorld Bank reports on Belarussuch as the Country EconomicMemorandum, Environment Strategy Study, Forestry Development Project, Rehabilitation Loan,and on theenergy sector reviews for Lithuaniaand Ukraine.We wishto thankthe authors of these reportsfor allowingus to use someof theirfindings. BELARUS ENERGY SECTORREVIEW Executive Summary L. Belarus relies almost exclusivelyon importedfuels to cover its energy needs. As part of the Soviet Union, Belarushad access to crude oil and naturalgas from Russia below world prices. This easy access led to systematicunder-pricing of energy and raw materials that, in turn, led to usage per unit of output substantiallyhigher than in market economies. Out-of-dateand often inappropriatetechnologies produced high volumes of waste. Price distortions and the absence of private property rights created a bias against investmentsin energy efficiency, pollution abatement,adequate maintenanceof plants, and recycling. ii. Recently, it has become clear that Belarus is not able to produce enough exportable goods to support the energy requirements of an economy which is so highly energy intensive and import dependent. At the same time, the Government has recognized that the potential for improving the efficiency of energy consumption is great. It has also recognized that changes are needed in the organization and managementof the energy sector to improve the efficiencyof energy supply. In mid- 1993, the Minister of Power and the Chairman of the Committee for Energy Savings and Control approachedthe World Bank for assistance in revising the country's energy strategy. iii. This report provides the basis for a comprehensiveenergy strategy which takes into account the new political and economic realities in Belarus. Its recommendationsare based on (i) the Government's long term energy program; (ii) new ideas from Belarussianenergy experts; and (iii) the experience of the World Bank and other international agencies. The cornerstones of the proposed medium term energy strategy are: 3 the gradual elimination and improved targeting of energy price subsidies, and the liberalizationof energy prices in those subsectors, that are not natural monopolies; 3 the use of market mechanismsrather than administrativenorms to allocate scarce energy resources; * the developmentof a domestic capabilityto provide energy efficiency services; * the improvementof the security of energy supply by increasingcrude oil and gas reserves, expanding the use of domestic renewableenergy sources, and improvingthe reliability and efficiency of electricity supply from existing thermal power plants; * the separationof the Government'spolicy making, regulatory, and ownershipfunctions; and * the promotion of competition in oil production, refining and marketing, solid fuel production, distributionand marketing, and electricity generation. iv. The main findings and recommendationsof the report are summarizedbelow. Energy Demand v. Energy consumptionper capita was about 4,400 kilogramoil equivalentin Belarus in 1990, which is quite high even by Western European standards. Based on a cross-country analysis of the relationshipbetween energy consumptionand GDP, Belarusused about 40 percent more energy in 1990 ii Executive Summary than might be expected(using the averagepredicted value) on the basis of its estimated per capita GDP level. Over the period of 1991-93, the cumulativedrop in primary energy use was 30%, comparedto the 25 % decline in GDP, suggestingthat some improvementin aggregateenergy efficiency has occurred already. It appearsthat sectoral changes in output, triggeredby the collapse of the ex-USSRmarket for the more energy-intensiveBelarussian products, have been responsiblefor most of the improvementin the energy/GDPratio. There is little evidenceof significantefficiency gains at the sectoral, sub-sectoral and product levels, despite the large untapped reservoir of energy efficiency. vi. In 1993, industrialenterprises focussed their activitieson protectingtheir allocationof energy supplies, instead of using these supplies efficiently. The Government's response was to authorize the Committeeof Energy Savings and Control to extend the use of energy consumptionnorms to previously unregulatedconsumers/processes. The systemof administrativenorms and penalties is a poor substitute for economic cost-basedenergy prices. As soon as energy prices are raised to reflect economiccosts, the penalties for over-the-normconsumption should be abolished. Appropriateenergy prices, together with the impositionof hard budget constraints implyinga genuine threat of bankruptcy, will provide the right conditions for price-drivenstructural change and energy efficiencyimprovements. The supply of gas, heat and electricity to those enterprises and organizationsthat accumulatedlarge payment arrears should be reduced to the technicallysafe minimum. At the same time, the rationing of supply to those enterprises that are able to pay a price based on the full cost of energy should be eliminated. To assist energy saving efforts, the Governmentshould foster the developmentof industrialorganizations whose function is to provide, on a consultingbasis, detailed plant energy audits, to recommendenergy saving measures to individual industrial plants, to assist in putting such measures in place, and to run energy efficiency courses at the plant level. vii. The future evolution of energy demand will depend on the pace of economic reform, includingreal increases in energy prices and the hardeningof the enterprises'budget constraints. Energy demand forecasts based on a dynamic consumption model suggest that primary energy demand will continue to decline in the next few years, and, even after the economy resumesgrowth, it will not reach the 1990 level again before 2010. Primary energy demand is expectedto decline more rapidly under a comprehensivereform scenario, and, despite a higher correspondingGDP after 1998, will be about 5 mtoe/year less than in the slow reform scenario. Under both scenarios, the substitutionof gas for oil continues, and gas consumptionrecovers its historicalpeak before 2005. Electricity demand is expected to behave similarly to primary energy demand, surpassing its 1990 level only 15-20 years later. Energy Supply viii. Domestic resources and supply. Due to the drop in energy consumption, the share of domestically supplied energy in total primary energy consumption increased from 8.1% in 1990 to 11.9%. Belarus is relatively poorly endowedwith non-renewablefuel resources. Availableresources consist of oil, oil shale, brown coal and peat. However, only crude oil resources are significant. There is an urgent need to modernizethe technologicalbase of oil explorationand productionto avoid a decline of crude oil production. Renewableresources, especially wood, are potentiallymore significant.

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