Energy Efficiency Technologies for Central

and Eastern Europe

May 1993

OTA-E-562

NTIS order #PB93-203750

GPO stock #052-003-01321-5
Recommended Citation:

U.S. Congress, Office of Technology Assessment, nergy Efficiency Technologies for

Central and Eastern Europe, OTA-E-562 (Washington, DC: U.S. Government Printing

Office, May 1993).
Foreword

T

he Senate Committee on Environment and Public Works, the House Committee

on Foreign Affairs, the House Committee on Energy and Commerce, the Senate

Committee on Foreign Relations, and the House Subcommittee on International

Development, Finance, Trade, and Monetary Policy requested an assessment of

energy and environmental technology transfer to Central and Eastern Europe. The intent is

to determine how U.S. energy technology can help in resolving the economic and

environmental problems of the region, and the impact of measures to expedite the process.

This report, the first of two from that assessment, focuses on the improvement of

energy efficiency. It reviews how energy is used in the former centrally planned economies.

Then it analyzes the potential effectiveness of modern technology in reducing energy waste

and the factors that constrain improvements. The report also examinesgovernment

programs assisting energy efficiency technology transfer and opportunities for U.S.

businesses. Finally, it discusses congressional policy options to support technology

transfer.

Technology transfer to improve the efficiency of energy use is a highly costeffective way to support economic reform, democratization, and stability in the former

Communist countries. Energy is used very wastefully in Russia, Ukraine, Poland, Hungary

and other formerly centrally planned economies. This waste limits economic development

and contributes to local and global environmental degradation. Thus this report is timely

for congressional deliberations on assistance to the region, on how to increase U.S. exports,

and on how to reduce environmental problems.

The second report, to be released in 1994, will address issues of energy supply

as well as continuing the analysis of energy efficiency.

OTA appreciates the invaluable advice and assistance of the many people who

contributed to this project, including the advisory panel, participants at the two workshops,

reviewers, and contractors.

’+- -

Roger Herdman, Acting Director

. . .

Ill
Advisory Panel

Marshall Goldman, Chairman

Russian Research Center,

Harvard University;

Wellesley College

Margaret Bowman

Environmental Law Institute

Robert Campbell

University of Indiana

William U. Chandler

Pacific Northwest Laboratory

Charles Ebinger

International Resources Group

Robert Ebel

Center for Strategic and International Studies

Richard Jacobs

Newstar, Inc.

Richard A. Liroff

World Wildlife Fund

Simon K. Mencher

Alpha Finance and Management Corp.

John P. Minneman

Chase Manhattan Bank

Espy P. Price

Chevron Overseas Petroleum Inc.

Matthew J. Sagers

PlanEcon, Inc.

Raymond Sero

Westinghouse Energy Center

Ray Snokhaus

Houston Industries, Inc.

Robert Socolow

Princeton University

Richard Spears

Spears and Associates

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel

members. The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility

for the report and the accuracy of its contents.

iv
Peter D. Blair

Acting Assistant Director

Energy, Materials, and International

Security Division

Lionel S. Johns

Assistant Director, OTA

to Feb. 1, 1993

ADMINISTRATIVE STAFF

Lillian Chapman

Office Administrator

Linda Long

Administrative Secretary

Tina Aikens

Secretary

CONTRIBUTORS

Sharon Burke

Michael Krajnak

Adi Mannor

Michael Katz

Preject Staff

Alan T. Crane

Project Director

Joanne M. Seder

Senior Analyst

Paul S. Komor

Senior Analyst

Gretchen Kolsrud

Senior Associate

Joe Raguso

Contractor

CONTRACTORS

Russian-American Science, Inc.

U.S. Commercial Representative

of the Russian Academy of Sciences

Stan Kolar

Kolar Associates

Continuum International, Inc.

Alexandria. VA

Eric Martinet

Lawrence Berkeley Laboratory

Udi Helman

Center for Strategic and

International Studies

Jane S. Zacek

Albany, NY

Steven P. Meyers

Lawrence Berkeley Laboratory

v
workshop Participants

European Perspectives on Energy Efficient Technology, Kaunas, Lithuania,

Lithuania

Vykintas Suksteris

Lithuanian Energy Institute

Stasys Kytra

Kaunas Technological University

Anupras Slanciauskas

Lithuanian Energy Institute

Antanas Juska

Ministry of Energy

Knut Digerud

Asea Brown Boveri

Vytautas Niedvaras

Asea Brown Boveri

Juozas Burneikis

Lithuanian Energy Institute

Mindaugas Krakauskas

Lithuanian Energy Institute

Vidmantas Jankauskas

Lithuanian Energy Institute

Vytautas Martinaitis

Technical University of Vilnius

Matas Tamonis

Lithuanian Energy Institute

Vaclovas Miskinis

Lithuanian Energy Institute

Latvia

Zigurd Krisans

Latvian Academy of Sciences

vi

Oct. 21, 1992

Halina Abramova

Institute of Physical Energetic

Ivars Bekmanis

Institute of Physical Energetic

Dagnija Blumberga

Riga Technical University

Estonia

Mart Motus

Institute of Thermophysics and

Electrophysics

Russia

Tatiana V. Lisochina

St. Petersburg State Technical

University

Ukraine

Nicola Gnidoy

Ukraine Institute for

Energy Saving Problems

Anatolij Usik

Ukraine Institute for

Energy Saving Problems

Michail Kulik

Ukraine Institute for

Energy Saving Problems

Belarus

Leonid Padalko

Belorussian Polytechnical Academy

Leonard L. Vasiliev

Luikov Heat and

Mass Transfer Institute

Poland

Zdislaw Bibrowski

Institute of Fundamental

Tehnological Research

Slawomir Pasierb

Polish Foundation for

Energy Efficiency

Zygmunt Parczewski

Institute of Fundamental

Technical Research

Czechoslovakia

Jaroslav Marousek

Center for Energy Efficiency

Hungary

Laszlo Lennert

Schlumberger-Ganz Meter Co,

Germany

Joachim Stainer

ESAG

Carsten Oder

Institute for Industrial Production

Hans D. Haasis

University of Karlsruhe

Tihomir Morovic

Forschungsgesellschaft fuer umw.

Energie, Germany

Hubert Meiners

ICEU

Denmark

Niels A. Clemmesen

ABB Kraft A/S
Kurt T. Andersen

BWE A/S

Ove Hjuler

SM-Contractors A/S

Erik G. Madsen

A.J. MOE A/S

Magnus Foged

COWIconsult

Arne Levorsen

Danish Power Consult A/S

Switzerland

Daniel Spreng

Gabriel Mamane

University of Geneva

Belgium

Thomas Trumpy

International Legal Counsel

Netherlands

Aad Correlje

Erasmus University

Wolfgang F. Lutz

International Institute for

Energy Conservation

United States

Mark Hanson

Resource Management Associates

Eric Martinet

University of California

at Berkeley

U.S. Perspectives on Energy Efficiency Technology Transfer, Washington, DC,

Sept. 18, 1992

Ronald Bowes

Office of Conservation and

Renewable Energy

U.S. Department of Energy

William U. Chandler

Battelle, Pacific Northwest

Laboratories

Rick Cudahy

Sycom Enterprises

William Fulkerson

Oak Ridge National Laboratory

Udi Helman

Center for Strategic and

International Studies

Mark Hopkins

The Alliance to Save Energy

Philip Israilevich

Regional Economics Applications

Laboratory

Federal Reserve Bank

Stan Kolar

Kolar Associates

Eric Martinet

Lawrence Berkeley Laboratory

Rob Watson

National Resource Defense Council

Robert Socolow

Center for Energy and

Environmental Studies

Princeton University

David Wolcott

RCG/Hagler, Bailly

Shirley Hansen Marc Ledbetter

Hansen Associates American Council for an Energy

Efficient Environment

vii
Reviewers

Robert Archer

Agency for International Development

Washington, DC

Robert Berend

Center for Energy Efficiency

Prague, Czech Republic

Stephen Clifton

Houston Industries, Inc.

Houston, TX

Robert Ichord

Agency for International Development

Washington, DC.

Vidmantes Jankauskas

Lithuanian Energy Institute

Kaunas, Lithuania

Stephen Meyers

Lawrence Berkeley Laboratory

Berkeley, CA

Richard Perez

Westinghouse Energy Center

Pittsburgh, PA

Nikolai Raptsoun

Ukrainian Academy of Sciences

Kiev, Ukraine

James Ryan

The Perkin-Elmer Corporation

Norwalk, CT

Lee Schipper

Lawrence Berkeley Laboratory

Berkeley, CA

Vladimir Tonkal

Ukrainian Academy of Sciences

Kiev, Ukraine

Thomas Trumpy

International Legal Counsel

Brussels, Belgium

Slawomir Pasierb

The Polish Foundation for Energy Efficiency

Warsaw, Poland

. . . Viii
1

2

3

4

5

6

Overview 1

Introduction 5

Economic and Political Context

Overview of Reforms to Date 10

Demographic Characteristics 14

Country Profiles 18

Energy Supply and Demand–

an Overview 33

Energy Supply Picture 34

Technologies for Energy Efficiency

Industrial Energy Use 53

Building Energy Efficiency 62

Transportation 71

Summary and Conclusions 78

Appendix 4-1: Case Studies 81

9

53

Case Study 1: Export of Steam Traps to Bulgaria 82

Case Study 2: Export of Prefabricated Housing and

Related Technology to Russia 84

Case Study 3: Joint Venture To Manufacture

Industrial Energy Devices in Slovakia 86

Case Study 4: Improving the District

Heating System in Moscow 88

Programs To Assist Energy Efficiency 91

The Energy Assistance Efforts 92

Trade and Investments Opportunities 93

U.S. Programs 94

Multilateral Programs 109

European and Japanese Programs 114

Policy Considerations 117

U.S. Policy Options To Increase Technology

Transfer 119

Conclusions 128

contents

ix
Energy Efficiency Technologies for Central and

Eastern Europe

Much of the energy consumed in the former

Communist countries is wasted. Efficiency improvements requiring only modest investments

will permit these economies to operate with

dramatically less energy. However, constraints

such as inadequate capital and expertise are

limiting the implementation of these measures.

Improving the efficiency of energy use would

assist in the transition to a market economy.

Russia is a major producer of oil and gas, and it

could finance much of the rebuilding of its

economy by exporting fuels freed up by reducing

waste. The Baltic nations, Ukraine, Poland, Hungary, and the former Czechoslovakia lack hard

currency for economic revitalization, due in part

to the high costs of imported energy.

It is in the U.S. national interest to see these

countries succeed in the transition to prosperous,

democratic societies because:

● international political stability will increase,

. U.S. defense budgets can drop, and

. commercial markets for U.S. goods and

services will grow.

In addition, increased energy efficiency will

reduce the pressure on world oil markets and

address environmental concerns, notably global

climate change.

overview

Efficiency can be improved through a wide

variety of measures in all energy consuming

sectors. The industrial sector is especially well

suited for rapid gains in efficiency. Implementing

energy-efficient technologies will require incentives to make changes, awareness of the opportunities, and capital for investments. Simple changes,

such as fixing steam leaks, can be done immediately with little capital; improved boilers, process

control systems, and electric motors will take

greater investment. As outdated factories are

replaced with modem ones, major improvements

will be realized because energy efficiency can be

integrated throughout the plants.

In the residential sector, radiator valves can

reduce space heating needs; improved lighting

and appliances can conserve electricity; and

improved controls and insulation can reduce coal

use at district heating plants. However, even

well-retrofitted existing buildings are much less

efficient than properly designed new buildings,

and construction of new buildings is likely to be

slow. Transportation sector efficiency improvements will be even more dependent on the

replacement of existing equipment and on major

system upgrades, which will take many years.

In the long term, economic reform and revitalization will be key to improving energy efficiency.

Modem technology in all sectors offers major

economic and environmental gains, as well as
2 I Energy Efficiency Technologies for Central and Eastern Europe

energy efficiency. Decision-makers must be given

proper incentives to minimize costs, including

energy, and they must have information on their

opportunities. Current energy efficiency assistance is a vital element in creating the expertise

and funds that will be needed to develop a modem

economy.

Technology transfer contributes directly to

development because it builds a foundation for a

country’s capabilities. Industry supplies most

technology transfer through information accompanying the sale of products and services, investments in production facilities, or through the

direct sale of expertise. The government can

expedite industry’s transfers and also supply

information and capital directly through finding

specific assistance projects.

Most energy assistance has focused on supply-

-side projects, i.e., the development and rehabilitation of supply infrastructure (primarily the natural

gas and power industries), but interest in energy

efficiency projects is growing. The United States

is the largest aid source for energy efficiency and

conservation projects, followed by the European

Community. The World Bank and the European

Bank for Reconstruction and Development (to

which the United States is the largest contributor)

have provided the bulk of energy financing, but

very little (as low as 1 percent of energy lending)

has gone to efficiency projects.

The potential market for energy-efficient products is very large if these countries can develop

sufficiently to afford them. One estimate is $20

billion for energy-efficient industrial products.

However, the United States is not well positioned

relative to its competitors to tap this market

because:

1. overall assistance to Central and Eastern

Europe is not large enough to support more

than a small fraction of the potential market;

2. there are few U.S. Government export

assistance programs that support smaller

firms which account for much of the energy

efficiency industry; and

3. energy efficiency companies are not well

organized to export, and relatively few

appear to have the experience or long-term

perspective needed to deal with the uncertainties inherent in Central and Eastern

Europe at this time.

Potential Energy Savings
Overview I 3

The U.S. Government is supporting a variety of

efforts to supply the information and financial

support needed to improve efficiency. Energy

efficiency centers have been established in Poland, Russia and the Czech Republic to provide

advice and assistance. An energy audit program

for industrial facilities is providing recommendations for improvements and limited support for

implementation. Training and demonstrations

also appear to have been effective.

A strong assistance program can be a major

element in helping Central and Eastern Europe

through their present difficulties. Energy efficiency assistance will be beneficial for both the

United States and the recipients regardless of

political developments. If Congress is willing to

increase assistance, substantial increases in several elements of the current program would be

effective. In particular, information programs

such as the energy efficiency centers, technical

demonstrations, and training could be expanded.

In addition, assisting enterprises in purchasing

new energy efficient equipment and upgrade

production and buildings, etc. would address the

problem of lack of investment funds. Increasing

assistance would benefit American companies

and help position them for the future, but it would

be expensive for the U.S. Government. Modifications to the assistance program, particulary

eliminating restrictions (e.g., on procurement),

can make it work more effectively.

Increased export promotion, such as helping

American companies find market opportunities,

would also provide benefits to the American

economy. However, these programs will require

increased Federal funding, even if they provide

net benefits, and must compete with other national needs.
————.—

Introduction

E

uphoria over the dramatic events of the past 3 years in the

former Communist countries of Europe has yielded to a

realization that converting to a free-market economy will

be very difficult. The old economic system focused

almost exclusively on the quantity of production rather than

quality or cost, which resulted in an astonishing waste of inputs

such as labor, materials, and energy, as well as a near total

disregard for the environment.

Introduction of economic reform has had varying degrees of

success. In Hungary, Poland, and the Czech Republic, signs of

progress are clearly apparent, although their economies have not

yet rebounded. Reforms in the newly independent states of the

former Soviet Union and other Eastern European countries are

hampered by problems such as internal political struggles, ethnic

strife, an outdated industrial infrastructure, and a mindset that

finds market incentives an alien concept. Termination of ol d

economic systems without replacement by new, functional

systems has resulted in economic chaos, which itself has made

further reforms more difficult.

The United States has a clear national interest in seeing these

nations succeed in their transition to prosperous, democratic

societies. The trillions of dollars spent over the past several

decades in defense against these same countries underscore the

value of their present friendship. If the reforms fail, particularly

in Russia, authoritarian factions could seize power and start a

new cycle of hostility. Even the smaller countries have enormous

potential for causing harm, especially considering all the nuclear

weapons and expertise that could be unleashed on the world

market. On a more positive note, these countries could become

major markets for U.S. goods and services.

i

u

-.‘2

Parliament Building, Budapest.

5
6 Energy Efficiency Technologies for Central and Eastern Europe

Energy is a key factor in economic reforms.

The Soviet Union was the world’s largest producer of petroleum and a major exporter on world

oil markets. In fact, oil exports were by far the

largest source of foreign exchange and apparently

propped up an otherwise bankrupt system for far

longer than would have been otherwise possible.

Exports have declined along with production over

the last several years, but a turnaround is possible,

especially with western technology. Additional

hard currency revenues from increased exports of

oil are likely to be essential in funding the

rebuilding of the industrial sector. The region,

especially Russia, is also extraordinarily rich in

natural gas, coal, and uranium.

As important as increasing production will be,

the greatest gains, especially over the next 5 to 10

years, are likely to be from efforts to upgrade the

use of energy. The great natural resource wealth

of the region led to the sense that energy was

inexhaustible. Central planners kept energy prices

low in order to facilitate industrial production and

social welfare. The result was what appears by

western standards to be extraordinary profligacy

in the use of energy. For example, radiators in

many buildings cannot be adjusted, so people

open windows to regulate the temperature, even

in bitterly cold weather. At some industrial

facilities, over half the process steam is lost

through leaks; the U.S. norm is less than 5

percent. Reducing this waste means that the

services required can be performed with less

energy, i.e., with higher efficiency.

In the United States, the efficiency of energy

use has improved dramatically since the rapid

price increases of 1973-74. Energy consumption

per dollar of Gross Domestic Product declined by

27 percent from 1973 to 1991.1 This improvement

has been the result of many small changes in each

sector. For example, industrial facilities have

installed equipment to capture heat that formerly

would have been exhausted to the atmosphere;

houses have been insulated; and automobiles are

lighter and have greatly improved engines. typically, some additional investment is required to

improve efficiency of equipment and facilities,

but the energy savings return the investment

several times over.

Such improvements did not occur in the

centrally planned economies. Implementing them

now can eliminate the need for large quantities of

energy. Excess fuel then could be exported from

the region. The increase could be in the range of

millions of barrels per day of oil equivalent,

providing a major increase in revenues to oil

exporting nations, especially Russia. Improved

efficiency would also benefit the oil importing

countries of Central and Eastern Europe, which

now are suffering serious shortages because of an

inability to pay for all their needs. Reducing

energy consumption in all these countries also

will reduce pollution in one of the most polluted

regions of the world. In addition, carbon dioxide

emissions would drop with the reduction of fossil

fuel combustion, significantly slowing global

climate change.

The United States will benefit as well from

these improvements. World energy prices should

decrease with the increase in exports. As the

world’s largest petroleum importer, the United

States will benefit from increased supplies on the

world market.

The market incentives now being introduced as

part of economic reform will help reduce waste.

Energy that could be exported, or must be

imported, costs the nation the full world price.

Subsidizing the price to consumers may be a

necessary short-term social policy during the

transition, but it can be an extremely expensive

policy. As prices rise to the level of real costs,

1 U.S. Department of Energy, Energy Information Administration Annual Energy Review 1991, DOE/EIA-0384(91 ) (Washington, DC:

U.S. Government Printing Office, June 1992), p. 27. About two thirds of this improvement was from improved efficiency and the rest from

structural shifts within the economy, as discussed in Energy Use and the U.S. Economy, OTA-BP-E-57 (Washington, DC: U.S. Government

Printing Office, June 1990).
Chapter I–Introduction | 7

energy users can find ways to provide energy

services with less energy. As economies revive,

modern industrial facilities, designed from the

ground up to minimize costs, will replace outmoded ones. Such facilities can capture all the

advantages of the retrofits applied to old facilities,

plus many more that are fundamental to the basic

processes involved.

However, both energy reform and economic

reform are proving difficult and slow to implement. Energy prices in some countries are still

controlled well below world levels, reducing the

incentive to control waste. Even at subsidized

prices, many attractive efficiency investments are

available, but industrial managers still ignore

them for various reasons, including unfamiliarity

with the entire concept of cost control, lack of

funds to make any changes, or institutional

barriers such as concern that they would not be

able to keep the savings,

Furthermore, it has become clear in the United

States that market incentives by themselves do

not lead to an optimal use of energy, especially

considering externalities such as environmental

damage and security that affect the national

interest. Even in an open market economy, many

barriers to the implementation of economical

efficiency improvements exist. These barriers

include such factors as the higher initial cost of

energy-efficient equipment, poor information about

the availability of such equipment, and the lack of

accounting for external costs such as pollution.

U.S. assistance in promoting energy efficiency

directly can be an effective supplement to economic reform. It can provide financial breathing

room to the new market economies by reducing

costs and increasing exports. It can ease the pain

of economic reform among energy users, thereby

allowing reform to proceed more rapidly. In

addition, these measures may provide tangible

examples of how to implement modem technology and respond to market incentives, which

could create the initiative to pursue other improvements. Furthermore, the increased expertise

should be important in ensuring that energy

Uncontrolled emissions from a combined heat and

power plant in Poland.

efficiency is given due consideration in the design

of new facilities. However, it is possible to

overemphasize energy efficiency. Programs must

be designed in the context of the overall effort to

help the nations of Central and Eastern Europe in

order to achieve optimal, balanced results. Furthermore, there is no guarantee that all these

nations will make a successful transition to free

markets and democracy even with generous

assistance. Some funds may be wasted.

This report presents the interim results of an

analysis of the technologies the United States

could supply to help reduce energy waste, and

what the consequences are likely to be for all

parties concerned. It addresses questions of improving the efficiency of energy consumption,

i.e., using less energy to perform a given service.
8 I Energy Efficiency Technologies for Central and Eastern Europe

The final report, to be published in 1994, will

complete the analysis of energy efficiency and

also address issues of increasing the production of

energy, in particular petroleum and natural gas. In

addition, the energy industry itself wastes large

amounts of energy during production, processing,

and delivery. The final report will analyze technology transfer to reduce this waste. It will also

include nuclear safety and control of pollution in

the energy industry.

Technology transfer, a process of conveying

information necessary to improve some capability to design or produce goods and services, is

likely to be the best help the United States can

offer to promote development in Central and

Eastern Europe. The key is information. Sending

radiator valves and thermostats would help save

energy, but would not add new capability. Examples of technology transfer include design concepts for efficient buildings; manufacturing capabilities for new building materials; training for

energy auditors; even the expertise to design

appropriate building codes. Ultimately, these

countries will have to rebuild their own economies. The West cannot do it for them, but

supplying new capabilities will accelerate the

process.

Technology transfer can be accomplished by

government, industry, or private institutions.

Industry is likely to be the most important actor,

through direct investment, joint ventures, and

training to accompany sales. Education also is

very important. A great many foreign students in

U.S. science and engineering programs return

home with a sophisticated technological background as well as potentially important links with

the United States.

The U.S. Government can supply technology

directly through assistance programs, agency

contacts, and access to databases. However, the

need is likely to greatly exceed available government resources. This report considers how to get

the most out of the funds that will be available. In

addition, U.S. policies can be an important

determinant for industry and other groups through

trade promotion, foreign assistance, export controls, bilateral agreements, tax policies, and other

means.

This study focuses on the Central European

countries Poland, Hungary, the Czech and Slovak

Republics, and Eastern Europe, including Russia,

Ukraine, and the Baltics. All the countries of the

region share some common attributes, including

the problems of making the transition from

command to market economy. However, they

also show great differences. Even the former

Soviet Union is now 15 sovereign nations which

will follow different paths, whether or not the

Commonwealth of Independent States, a loose

alliance of most of them, succeeds. These differences must be considered when designing assistance programs. Thus analyzing the situation is

extremely complex, made more so by difficulties

in getting reliable, up-to-date data. This study is

not an exhaustive survey of all the energy

problems in that region, nor of all the opportunities for U.S. technology transfer. Rather, it seeks

abroad understanding of the problems, the potential role for U.S. technology in addressing them,

and the U.S. interests and options in doing so.
Economic

and

Political

Context 2

T

he 26 former Communist nations are extraordinarily

diverse. l Progress toward democratization and a market

economy is very difficult and depends on a variety of

political, economic, and social factors. These countries

are following similar paths, but they differ in the emphasis given

the elements of economic and political reform, and in the success

achieved. Efforts to assist them must be based on a realistic

understanding of their individual problems and assets. This

chapter provides background for the nonspecialist reader. It

begins with a brief overview of the economic and political trends

in the eight Central and Eastern European countries that are the

main focus of this study. The chapter next summarizes some

basic demographic characteristics of all 26 nations that formed

the former Soviet Union and its satellites.

The remainder of the chapter describes the eight countries in

more detail. Brief statistics characterizing gross national or

domestic product per capita, major industrial activities, and

natural resources are provided. History, energy, and environmental status are briefly sketched. Further detail is provided on

the economic and political reforms summarized at the beginning

of the chapter. Each country description ends with probable near

and longer term outlooks for further reforms.

Interior of the GUM department

‘ This chapter was written in December 1992 and is a snapshot of a region undergoing store in Moscow.

great change where even the number of countries that may emerge is uncertain. For

example, the 26 nations mentioned in the body of the text became 27 as of Jan. 1, 1993

with the division of Czechoslovakia into the Czech Republic and Slovakia.

9
10 I Energy Efficiency Technologies for Central and Eastern Europe

OVERVIEW OF REFORMS TO DATE2

I Economic Reforms

Prior to the collapse of Communist party (CP)

rule in 1989, Poland and Hungary, in rather

different ways, had adopted reforms that reduced

the authority of central planning, provided some

pricing flexibility, and modified policies regarding the role of monopolies in domestic and

foreign trade, and the practice of full or nearly full

employment (but with large underemployment).

Czechoslovak reform efforts were very modest.

The Baltics3 introduced some measures of economic reform several years before they achieved

independence in 1991. Russia passed legislation

decentralizing the economy (within the confines

of the U. S. S. R.) and reducing state subsidies

during 1990 and 1991 before the Soviet collapse.

Ukraine was slow to initiate reforms, concentrating instead on issues of autonomy and independence.

Broad economic reform began in earnest in

January 1990 in the Central European countries;

late 1991 in the Baltics; January 1992 in Russia;

and is just beginning in Ukraine. Thus far, the

elements of reform in each country are similar.

They include: demonopolization, decentralization, price liberalization, elimination of subsidies,

privatization of industry and agriculture, currency

stabilization and convertibility, search for foreign

investment, and modifications to the banking,

insurance, and legal systems to support these

changes.

The process of transformation is not complete

and will not proceed smoothly. Some policies can

be adopted quickly; others may be adopted only

after long negotiation; still others may not be

adopted at all. The breadth and depth of the

reforms planned in each country differ, as does

the commitment and stability of the political

leadership and the resilience of the population.

The pace of reform within each country will

continue to be influenced by a variety of internal

and external factors.

Each country began the transition from a

command to a market economy after a period of

grave economic difficulty. Production levels have

declined in recent years, and most countries had

substantial foreign debt requiring payments that

could not be made, as well as an adverse balance

of trade. Numerous industrial strikes indicated

popular discontent. None of the countries had a

convertible currency, and all were hard-currency

poor.

Instituting market incentives was widely recognized to be the key to economic wellbeing, but

the transition threatened years of hardship and

declining standards of living until the new system

could produce results. Policymakers in some

countries chose to move forward rapidly with

reforms despite the threat, believing that a slower

path would bog down and ultimately doom the

process. But rapid transformation is likely to

engender backlash, demands to slow the pace, and

opposition to additional reform. Some countries

have adopted a slower pace on the assumption

that it will cause less hardship and reduce

concerted opposition.

The breadth of change needed to accomplish

economic transformation guaranteed that the

reformers would confront vested interests from

the old system at every turn. Not only are the

reformers faced with opposition from those who

stand to lose; they are also faced with resistance

to new ways of operating from both individuals

with clout and from groups within the population

at large.

Table 2-1 lists the elements in the transition to

a market economy and summarizes the progress

in each country. The ratings in the table are breed

on when each reform was announced, when

2 The discussions of economic and political refroms in this secction and in the country profiles at the end of the chapter &W heavily on

J. S. Zacek, The Economic and Political Context, contract report prepared for the Office of Technology Assessment, Dec. 1992.

3 Because of the similarities in their efforts at reform, Estonia, Latvia, and Lithuania are grouped together as ‘‘the Baltics" in this section.
Chapter 2–Economic and Political Context I 11

Table 2-l—Movement Toward a Market Economy

Country

Reform Poland Hungay CzS1. * Russia Baltics Ukraine

Freeing wholesale prices

Freeing retail prices

Encourage domestic investment

(including voucher system)

Auctions to sell state property

Privatization of small businesses

Privatization of large enterprises

End state subsidies

Encourage foreign investment

(favorable legal climate)

Restitution of property

Ceiling on wages

“Safety net” for unemployed

Reform tax system

Old (CP) management takeovers

of enterprises

Encourage employee takeovers

of enterprises

Reform bainking system

Loans to pivate sector from banks

Reorient trade from CMEA (or

among former Soviet republics)

Favorable trade balance

Foreign debt management

Bankruptcy laws in effect

Demonopolization laws in effect

Interenterprise (state-owned) debt

IMF membership and assistance

Currency convertibility

H

H

M

NA

H

L

H

M

M

H

H-M

M

[H

M

M

L

M

M

3

L

M

3

H

H

H

H

M

M

H

L

H

H

M

M

H-M

M

NA

L

H

L

H

H

3

M

M

3

H

H

H

H

H

H

H

M

M

H

M

M

H-M

M

L

L

H

L

H

M

1

M

H

2

H

H

M

H

M

L

M-L

L

M

L

M

M-L

L

H

L

L

L

L

L

3

L

L

3

H

L

H

H

M

L

H

L

H

M

M

M

M

M

L

L

M

M

M

M

1

L

M

3

H

H

M

M

L

L

L

L

L

L

M

NA

L

M

NA

L

L

L

L

3

L

L

3

L

L

KEY: H - rapid movement; M - moderate movement; L - slow movement, if at all. NA - no information; 1- not a problem; 2- moderate problem;

3- big problem.

● The Czech and Slovak republics are moving towards reformat different speeds, and the ratings area composite. Generally, Slovakia is privatizing

more slowly with a greater state role in economic affairs than the Czech Republic.

NOTE: The ratings reflect whether and how fast reforms were announced, relevant legislation adopted, and judgments on the degree Of

implementation.

SOURCE: J. S. Zacek, “The Economic and Political Context,” contract report prepared for the Office of Technology Assessment, December 1992.
12 I Energy Efficiency Technologies for Central and Eastern Europe

relevant legislation was adopted, and judgment

on the amount of implementation so far achieved.

It should be noted that thus far, parliamentary

support for passage of transition-related legislation has been far easier than its implementation.

It is difficult to determine how widespread

implementation has been and how much opposition has been encountered.

Two financial problems—the existence and

size of foreign debt, and the size of the debt that

state-owned enterprises owe one another-are

also listed in the table. While not aspects of

reform per se, they are critical to the reform

process.

Several elements tended to be adopted frost.

One was freeing prices in both the wholesale and

retail sectors so that they reflect costs of production as well as supply and demand. Freeing prices

from artificially low levels was directly related to

removing state subsidies on goods, which had

kept prices low. In some instances, especially in

the consumer sector, policymakers have been

reluctant to eliminate state subsidies quickly

because of the personal financial dislocations that

would result.

Price increases triggered inflation, severe and

prolonged in some instances, more carefully

controlled through limiting the money supply in

others. Initially, price increases were coupled

with a ceiling on wages. The wage ceiling limited

inflation, but increased hardship.

Freeing wholesale prices affected industrial

production markedly. Enterprise directors, used

to buying materials at established prices, found

that the real costs of doing business were far

greater than under the old controlled price system.

Unless they could raise the price of their goods,

they would operate in deficit, necessitating borrowing to pay suppliers and distributors. If the

deficits continued, the loans could not be repaid.

One solution is restructuring the enterprise for

increased efficiency, but thus far there has been

substantial resistance to restructuring.

In general, the table shows that there have been

marked similarities in the reform elements each

Apartment house in Moscow.

country legislated during its initial phase of

transition to marketization.

I Political Reforms

Each of the countries moved quickly to hold

competitive elections for the legislature. Political

parties have been formed and consolidated, and

many have begun to establish roots within the

electorate and are building long-term support and

stability.

The rule of law has been reestablished (or

established) and state constitutions are being

rewritten. In most cases, judicial systems are

being strengthened and the legal structure revamped. Civil rights guarantees have been estab-
Chapter 2–Economic and Political Context I 13

lished in principle although they remain to be

tested in practice. Protection of private property is

being established in law and in practice, although

there is still a mind set that favors limits on private

ownership (as well as limits on private sector

profit-making). Citizen participation in building

a democratic order is also developing, more

rapidly in some countries than others. Most of

these reforms are in process and need time to take

root. They are essentail to strengthening the

economic transformation and ensuring its chances

of success.

1 Likely Outcomes

The political leadership in each country has

adopted many of the same strategies to move from

centrally planned toward market-based economies. In some cases, prior reforms had loosened

the hold of central planners on economic decisionmaking, production, distribution, and supply

networks. The post-Communist leaders knew that

undertaking economic transformation at a time

when their economies were in decline would

likely cause further decline and more unemployment, inflation, and other hardships. They were

willing to risk these outcomes because there was

considerable agreement within the polity and

among leadership elites that the old economic

system could not be made to work. There was also

general belief that restructuring to a market

economy was incompatible with central planning,

requiring simultaneous movement to more democratic government, pluralism, and competition.

While opposition to reform has come from a

variety of sources, including (but not limited to)

the old communist bureaucracies still entrenched

in the ministries and other organizations and in

control of most state-owned enterprises, not all of

the old directors and managers want to return to

past ways of doing business. Many of them have

become the new entrepreneurs, drawing on some

of the skills they had developed under the old

system in order to get things done and meet output

requirements. However, under the old system,

they did not need to attend to efficiency and

conservation of resources as capitalist managers

oriented to profit must. They relied on props

(bank credits, interenterprise debt) in order to

cover financial losses, and they generally were

not pressured to restructure and operate more

effectively. Nor was there much incentive to

modernize and adapt to new technologies (many

of which were not available). These elements are

now essential under the new economic conditions, including the need to become competitive

internationally.

To summarize probable outcomes on a country

basis, Poland, the Czech Republic, and Hungary,

as well as the Baltics, are likely to create and

sustain market economies within the next 5 to 10

years. On the way, they all face difficulties in

implementing reforms, will experience slow periods, and will sometimes be guided by electoral

returns. They are also likely to sustain and

strengthen democratic institutions, broadly defined. Slovakia is likely to move more slowly.

Russia and Ukraine are problematic. Both are

likely to retain a strong state presence in the

economy and at best develop a mixed public/

private system. Russia faces internal opposition

from several ethnic minorities as well as proposals for economic and political autonomy from

Siberia. While it is unlikely that Russia will

disintegrate, it is certainly possible that an authoritarian political system will be established to

ensure that the country remains intact. Ukraine

also faces difficulty in maintaining g and preserving a national state and possible military, economic, and territorial disputes with Russia. It is

likely to retain a significant government role in

the economy to ensure a basic level of economic

performance. To meet these needs, the government may seek greater stability through establishment of authoritarian rule.

With respect to energy use, governments in

these countries must take the lead in prodding

both public and private businesses to adopt

energy efficiency measures if these are to occur.

Elimination of subsidies and imposition of taxes
. . . . . . .

14 I Energy Efficiency Technologies for Central and Eastern Europe

Figure 2-l-Central and Eastern Europe

North Sea

Russia

I

/’ /

,

Germany

Czech

Republic

\

avia . . ~

Pi I

\

t

< <

— ‘ \

I

I

Caspian

e . .

SOURCE: Office of Technology Assessment, 1993

would encourage efficient usage and conserva- nations are listed in table 2-2. A map of the region

tion. Because of the initial costs involved, finan- is shown in figure 2-1.

cial credits will be needed. Foreign assistance, Differences among these countries arise from

including technical assistance (linked to progress their history, and the great size of the region. Until

in privatization) is probably indispensable in the boundaries stabilized with the formation of the

initial stages of improving energy efficiency. Union of Soviet Socialist Republics in 1922,

Russia had been annexing territory at the rate of

DEMOGRAPHIC CHARACTERISTICS 18,250 square miles per year for four centuries.4

The 26 countries that were once part of the The result was a union stretching across 11 time

former Soviet Union (FSU) and its satellite zones with more than 100 different nationalities

4 G. J. Demko, J. Agel, and E. Bee, Why In the World: Adventures in Geography (New York, NY: Doubleday, 1992), pp. 101-102.
Chapter 2–Economic and Political Context 115

Table 2-2—Major Demographic and Ethnic Characteristics in the Republics of the

Former Soviet Union and Eastern Europe

|Populaltion *

| Other

14

5

9

4

5

4

9

16

-1

5

10

16

6

14

10

Titular

74

71

71

69

67

68

48

56

68

53

45

40

31

38

58

61

76

63

54

68

36

36

51

54

49

47

EASTERN EUROPE l

East Central Europe |

Poland

Czechoslovakia

Hungary

Southeastern Europe

Romania

Bulgaria

AIbania

Formcr Yugoslavia

Bosnia-Hercegovia ]

Croatia

Macedonia

Slovenia

Yugoslav Repub.

187

347

NA

578

NA

36

90

I ,386

70

267

131

38.4

15.7

1 0.3

23.2 - -

8.9

3.3

4.2

4,6

1.9

1.9

10

29

12

19

28

20

60

NA

NA

NA

NA

NA

German

Slovak

German

Hungari n

Trurkish

Grec k

1

32

?

8

9

8

Other(4%) Hungarian ,

Montenegrln(3%)

L

Yugoslav(5%) +,:.+

acedonian(6%) “

Albanian(8%

Slovene(8%) 9

+>

Muslim(9%) - ,,--., I

M

22/1 3 75

● “x2” - the number of years for the population to double; “<15&>65° - the O/. of the population that is less than 15 years old & is greater than 65

years; “Total” = total population, mid 1992 estimate, in millions.

SOURCES: Population and % Urban data from Population Reference Bureau, 1992 World Population Data Sheet (Washington, DC: Population

Reference Bureau, 1992); FSUNationality data from Directorate of Intelligence, Central intelligence Agency, "The States of the Former Soviet Union:

An Updated Overview,” Report OSE 92-10017, September 1992. FSU % Labor in Agriculture (1990) data calculated from table 1.1. in The World

Bank, “Statistical Handbook; States of the Former USSR,” (Washington, DC: The World Bank, 1992). Eastern Europe Nationality and % Labor in

Agriculture data from Central Intelligence Agency, “Atlas of Eastern Europe,” Report 90-10002, August 1990. U. S.% Labor in Agriculture and racial

data from U.S. Bureau of the Census, “Statistical Abstract of the United States: 1992, Washington, DC, 1992.
. . . . . . . . . .-

16 I Energy Efficiency Technologies for Central and Eastern Europe

speaking different languages and rooted in vastly

different cultures. The addition of the Baltic states

in 1940 and later, the Central European satellites,

increased diversity still further.

Of the 26, Russia is by far the largest, more than

6 times larger than the next largest republic,

Kazakhstan, and about twice the size of the

United States. Russia also has the most people,

with almost 150 million. The total population of

all 26 nations is more than 400 million, considerably more than the U.S. population of 256

million.

Table 2-2 shows basic demographic and ethnic

characteristics of the FSU and its former satellites. Major differences are apparent, especially

among regions. Four of the Central Asian countries, along with nearby Armenia and Azerbaijan,

double their populations in 20 to 40 years, rates

typical of developing countries in Africa, the

Middle East, and Asia (see column 2, labeled

“x2” meaning years to double, in table 2-2).

Ukraine and Croatia, on the other hand, have

highly stable populations, with more than 1,000

years projected as the time needed for their

populations to double.

The proportion of the population that is young

(less than 15 years) or old (more than 65 years)

and hence not counted as part of the labor force

typically reflects population growth characteristics, and these countries are no exception. As

expected from their high growth rates, the Central

Asian countries have populations heavily skewed

towards youth. About 40 percent of their populations are less than 15 years old, and the proportion

of older people is small, about 5 percent, compared to the developed world where around 20

percent are less than 15 and 12 percent are older

than 65. Central Asian population characteristics

spell both promise for labor and productivity, and

trouble if jobs are not available and expectations

not met, especially without the leavening influence of more older people in the population.

Suzdal, a village in Russia.

The percentage of the labor force employed in

the agricultural sector (see column 5 in table 2-2)

ranges from 2 to 20 times that seen in the United

States. These numbers are partly a consequence of

the inefficiencies of the Soviet system of collectivized farming. As farming is modernized, large

numbers of people will swell the ranks of the

unemployed if provisions are not made to ensure

that they have useful work.

The FSU overemphasized industry, especially

heavy industry, at the expense of the service

sectors In Russia, industry accounted for 53

percent of Soviet output compared to 23 percent

in the United States. Conversely, services account

for about 50 percent of U.S. output but only 15 to

20 percent of Russian output.

Most of the 26 countries are less urbanized than

the United States, some substantially so. The

Russian Republic and Czechoslovakia most closely

approximate U.S. levels of urbanization. With the

exception of Kazakhstan, the Central Asian

nations are among the most rural.

Educational levels are high in many of the

countries. In the FSU as a whole, 13 percent of

women and 15 percent of men have at least some

postsecondary education; percentages that exceed

5 J. Sachs, Econom”c Reform of Socialist Countries: Lessons and Prospects, Ernest Sture Memorial Izcture, SAIS, Nov. 5, 1992.
Chapter 2–Economic and Political Context ! 17

those in most European countries6 Many in the

workforce are technically trained and thus can

provide the human resource base needed to

support progress towards a more energy-efficient

economy in the region.

The right half of Table 2-2 shows some of the

ethnic characteristics of the 26 nations. All have

significant ethnic diversity, which in several

countries has led to problems. The former Yugoslavia, shown in the pie chart, has so far separated

into five countries along ethnic lines. Czechoslovakia was about two-thirds Czech and one-third

Slovak, and divided accordingly. In other countries a single titular nationality predominates, but

even small minorities, as in Azerbaijan, Armenia,

and Georgia have led to major unrest.

Noteworthy is the large Russian minority in

many of the republics of the Former Soviet Union.

With the exception of Armenia, Russian nationals

comprise more than 5 percent of the population

and in half the republics, they account for more

than 10 percent. In three of the republics, Estonia,

Kazakhstan, and Latvia, about a third of the

population is Russian nationals. Highly skilled

Russians were long sent to the republics as part of

Soviet policy. This can be seen in the overrepresentation of Russians in more highly paid

job sectors such as transport and industry in

Latvia and Estonia whereas native workers are

over-represented in the lower paying sectors.7 In

some industries in Central Asia, Russians constitute nearly all of the skilled workforce.8

In many republics, the status of Russian

nationals, once the elite, collapsed with the

collapse of the Soviet Union as republics began

establishing independent national identities. The

Baltic nations, for example, beginning with Lithuania in 1988, have each designated the native

tongue as their official language, and in subsequent laws required knowledge of that language

as one condition of citizenship for those who were

not citizens before the forcible annexation of

these republics by the U.S.S.R. in 1940.9 If the

response of Russian nationals to their changed

status is a significant exodus (as appears to be

happening in Central AsialO), their departure will

have a particularly adverse effect on the skilled

labor force, which in turn could affect how fast

energy infrastructure can be upgraded and made

more efficient.

6 See table 16,5 in World Resources Institute in collaboration with The UN Environment Fro gramrne and The UN Development Progmmme,

World Resources Z992-1993 (New York NY: Oxford University Press, 1992), pp. 254-255.

T Library of Congress, Estonia: An Economic Profile (WashingtorL DC: Library of Congress, 1992), p. 4; Library of Congress, Lutvia: An

Economic Profi/e (Washington DC: Library of Congress, 1992), p. 5.

8 Special Correspondent in Dushanbe, “Tajikistan in Trouble, ” The Economist, vol. 324, No. 7770, Aug. 1, 1992, p. 31; Speeial

Correspondent in Dushanbe, “Russian Sahibs Go Home,” The Economisr, vol. 324, No. 7771, Aug. 8, 1992, p. 30. The author points out that

one sector of the economy in Kazakhstan where Russian workers predominate is maintenance andof nuclear weapons. manning

Q V. Bite, Estonia: Basic Facts, CRS Report for Congress 92-223 F, June 30, 1992, p. CRS-2, Lutvia: Basic Facts, CM Report for Congress

92-242 F, Mar. 2, 1992, p. CRS-2, Lithuania: Basic Facts, CRS Report for Congress, Aug. 6, 1992, p. CRS-2.

IO SFM Comawndent in DUSIMIIbe, “Russian Sahibs GO Home, “ The Economist, vol. 324, No. 7771, Aug. 8, 1992, pp. 29-30.
. . . . . . . . .

18 I Energy Efficiency Technologies for Central and Eastern Europe

COUNTRY PROFILES11

| Poland

1989 GNP/capita $US4,500

Industrial activities: iron and steel production,

extractive industries, chemicals, textiles, consumer goods, metallurgy

Natural resources: hard and brown coal, lead, zinc,

large copper deposits

HISTORY

Poland has a history of occupation by its

neighbors, including Austrians, Germans, and

Russians, which obscured its very existence

during the 19th century. Poland enjoyed a single

brief and rocky period of independence, from

1918 to 1939, between the two World Wars.

Soviet liberation of Poland after WWII was

followed by Soviet domination.

The workers’ union, Solidarity, formed in the

1970s, forced the Communist government to

increase freedoms in the late 1980s after the end

of martial law. In 1989, Poland became the first

non-Communist-led country in the Warsaw Pact.

Poland has strongly embraced democratic reforms and today is governed by a president, a

prime minister, and two houses of parliament

whose members are freely elected.

ENERGY

Poland has large coal reserves. Hard coal

supplied about 65 percent and soft coal about 13

percent of primary energy consumption. The

balance comes from oil (13 percent) and natural

gas (9 percent) .12 Almost all of Polish oil is

imported, in the past overwhelmingly from the

former Soviet Union. Behind coal, natural gas is

Poland’s second largest domestic source of energy. This source has been little tapped because of

lack of investment capital and limited incentives

for exploration and development. Poland’s reserves of high-quality hard coal have been a major

source of exports, hard currency, and labor

demand. In 1987, about 11 percent of the

workforce was employed by the coal mining

industry .13

ENVIRONMENT

Poland’s history of coal use underlies its

severely stressed environment. Its rivers have

11 Agencies tit Cornpfie statistics such as thOSe cited at ~beginning of each profde generally do so separately for the countries wit.hm the

FSU and those that were Eastern European satellites. The statistics for the countries profiled here reflect this separation and thus are not always

comparable across all countries. The sources for the introductory statistics are as follows: The World Ba.r& Statistical Handbook: States of

the Former USSR (WashingtorL DC: The World B@ 1992) for these statistics for The Baltics, Russia, and Uhi.ne+ 1990 GDP/capita,

industrial activities, natural resources; Central Intelligence Agency, Atlas of Eastern Europe (WashingtoxL DC: Central Intelligence Agency,

August 1990) for the 1989 GNP/capita in Poland, Czechoslovakia, and Hungary; The American Academic Encyclopedia, online edition

(Danbury, CT: GrolierElectronic Publishing, updated four times yearly) forthesestatistics for Poland, Czechosloval& and Hunguy-industrial

activities and natural resources. For more detail on the History of each country see, for example, The Academic American Encyclopedia

(Electronic Version) (Danbury, CT: Grolier, Inc., 1991). Except where orherwise referenced, the material on Economic unpolitical Reforms

is drawn from J.S. Zacek footnote 2.

12 S. p~ierb, ‘ ‘Energy Ei%ciency Investment Opportunities in Pol~d, ’ executive briefing, The Polish Foundation for Energy Efficiency

(FEWE) and Batelle, Pacific Northwest Laboratories, January 1993.

13 U.S. Conpss, COmmitttX on Energy and Natural Resources, Energy Projiles of Czechoslovakia, Hunga~ and Poland, and rheir

Emerging Free-Market Economies, S. Prt 102-34, June 1991, pp. 43,48.
Chapter 2–Economic and Political Context | 19

extremely high concentrations of toxic chemicals.14 Coal mining has degraded and increased the

salinity of agricultural land. Air pollution poses

the greatest risk to human health in Poland,

because of the high levels of particulate emissions

associated with industry and generation of electricity. The Lenin Steelworks, 10 miles from

Krakow, exemplifies the consequences of environmentally insensitive industrial practices.15

ECONOMIC AND POLITICAL REFORMS

Poland was the frost post-Communist country

to undertake broad economic and political reforms. Reforms began in 1989 and economic

‘‘shock therapy’ began the following year with

the introduction of macroeconomic reform, price

liberalization, privatization of industry, removal

of state subsidies, construction of a social safety

net, and mobilization of international financial

support. 16 Wage increases were restricted to control inflation. Restitution is being made to those

who had valid claims against Communist expropriation.

Progress toward privatization has been difficult

for a variety of reasons, including disagreement

within the government on how to proceed.17 In an

attempt to begin privatization at the local level,

citizens were encouraged to buy into enterprises

owned by local governments. This did not work,

partly because local government had difficulty

calculating what an enterprise was ‘‘worth’ and

the cost of buying into it. Moreover, both capital

and entrepreneurs willing to risk buying into

state-owned businesses were in short supply.

What has worked, in part, has been illegal

takeovers by managers of the businesses they ran

(“spontaneous privatization”) apparently without penalty. However, this practice ended by

1991. Other attempts to privatize include encouraging workers to buy into their workplaces at low

cost, and distributing free vouchers to all citizens

so they can buy into medium- and large-scale

enterprises .18

Much of the privatization that has occurred to

date has been through creation of new businesses.

Poland needs to devise a better plan for privatizing medium- and large-scale enterprises. Foreign

investors have not been interested in these enterprises because of their generally poor financial

condition, outmoded technology, and old physical plant. Progress is being made in creating legal

structures for broad private ownership; this

should attract foreign investors who now may be

reluctant to invest in a country where legal

recourse is vague at best.

A second wave of reform focused on banking

reform and limiting credit and tax exemptions to

insolvent state enterprises. Neither has been

easily implemented. New emphasis was put on

foreign trade and on reorienting trade toward the

West. But the push for more exports resulted in

considerable opposition from management, workers’ councils, and trade unions. Despite establishment of 80 private banks by September 1991, 95

percent of bank credits were granted to state

enterprises. Virtually none were granted to newly

established private businesses.19

14 M. Glenny, The Rebirth of His(ory (Imndou UK: Penquti Books, 1990), P. 71.

15 w, E-.hlC~~~, ~“ghfing the Night, Revolution in Easrern Europe (New York, NY: JVillim Mo~OW ~d CO., 1990).

16 J. D. CJxb, Economic RefOr~ of ~oCia/i$t coun~ie~: ~s~Ons & prospects, ~-tSm M~ofi ~we, Paul H. Nitze School

of Advanced International Studies, Washington DC, Nov. 5, 1992.

17 Willlm u ~md]er, Senior scientist, B~t~ll~, pa~fl~ Nofiwe~t ~~rato~es, perso~ commtication, J~~ 14, 1993.

18 Report on Eastern Europe, Mach 22, 1991, PP. 11-13.

19 Report on Eastern Europe, SCPI. 27, 1991, P. 25.
. . . . .

20 I Energy Efficiency Technologies for Central and Eastern Europe

Benefits of the reforms to date include reducing

inflation from 250 percent in 1990 to 60 percent

in 199120, stabilizing the currency with an accompanying increase in international trade, and shifts

in the supplies of consumer goods from shortages

to surpluses. On the down side, the economy is in

severe recession. A drop in the Gross Domestic

Product of 12 percent in 1990 was followed by a

7 percent drop in 1991. Unemployment was

approaching 13 percent in July 1992. Living

standards are estimated to have fallen 40 percent

between January 1990 and August 1992.21

In the October 1991 parliamentary elections,

the behavior of the electorate (low voter turnout,

few votes cast for the most recent prime minister,

and strong support for the renamed Communist

Party, which received the second highest number

of votes) suggested that enthusiasm for reforms

had waned. Accordingly, Poland’s new government sought to slow the pace and breadth of

economic reform. Yet, parliament refused to

approve the government program that proposed

financial assistance to failing state enterprises

(estimated at 40 percent of the total), lower taxes

and interest rates to stimulate production, and

guaranteed prices for agricultural goods.22 By the

fall of 1992, in the wake of a number of industrial

strikes, some higher wage settlements were negotiated, fueling inflation. Implementation of bankruptcy laws and breaking up monopolies seem to

have stalled during 1992.

Poland’s parliamentary system has suffered

from a proliferation of parties. The current cabinet

is composed of seven parties and has faced

continual challenges maintaining a coalition.

President Lech Walesa, elected by direct vote in

December 1990, has sought additional authority

in his effort to establish a stable government.

Both parliament and the presidency are committed to transformation to a market economy.

The transformation will be aided by regulations of

the International Monetary Fund (IMF), which

limit the deficit in the annual state budget to 5

percent.

During the current period of high unemployment, the social safety net that has been created

will need extending. The strain on the precarious

state budget may be so great that foreign assistance will be needed.

NEAR- AND LONG-TERM EXPECTATIONS

Many of the elements of a democratic system

and a market-based economy have been introduced very rapidly. A period of consolidation in

the near term is likely in order to lock in the

reforms. The economy will continue to move

toward marketization, but in a mixed public/

private form until large state-owned enterprises

are privatized or, if failing, shut down in an

orderly fashion. Poland will make the transition

successfully, probably over a longer time than

anticipated. Continued economic difficulties will

test the fragile democratic structures and could

lead to a more authoritarian system until the

economic transformation has been largely completed, and perhaps thereafter.

Poland does not face the internal ethnic strife of

some of its neighbors. While there are potential

border disputes (stemming from World War II

settlements), these are likely to be quiescent in the

near term. If borders are revised elsewhere in

Eastern Europe, the changes could trigger German demands on Poland’s western border. Poland

in turn could press Ukraine to return some land

ceded to it in 1945.

20s. p~ierb, “Energy Efficiency Investment Opportunities ~ po~d,” Executive Briefiig, ‘he Polish Foundation for Energy Efficiency

(FEWE) and Batelle, Pacific Northwest Laboratories, January 1993.

21 J. hand F. MIKO, pola~, Czechoslovakia, and Hungaq:RecentDevelopments, Congressional Research service issue Btief m9205 1,

Aug. 10, 1992, p. CRS-8.

22 R~io Free l?UrOpe/R~iO Liberty Research Report, mch 13, ~~, p. 45.
I Czechoslovakia (Czech and Slovak

Federal Republic, CSFR)

1989 GNP/capita: $US8,00023

Industrial activities: heavy industry, mining, manufacturing, construction

Natural resources: limited; brown coal, uranium,

lead, copper, iron

HISTORY

With the collapse of the Austro-Hungarian

Empire in 1918, the Czechs of Bohemia were

united with Slovaks to form Czechoslovakia.

Strong nationalist sentiments prevented union

into a single people and set the stage for partition

of the country. In 1938-39, Hungary and Germany

annexed some lands; the remainder were made

into puppet states controlled by Nazi Germany.

With the end of WWII, Czechoslovakia reemerged as a nation. A Communist coup occurred

in February 1948, and shortly thereafter the

country became a Soviet satellite. The short-lived

“Prague Spring” of 1968 ended with Soviet

intervention. Czechoslovakia remained a Soviet

satellite until the peaceful fall of Communism, the

so-called ‘‘velvet revolution’ in November,

1989. 24 Czech and Slovak nationalist sentiments

are strong; a peaceful resolution was implemented on January 1, 1993 by division of the

country into separate Czech and Slovak nations.

ENERGY

Nearly all needs for oil and natural gas are

supplied by pipelines from the FSU; less than 2

percent and 5 percent respectively are domestically produced.25 Coal reserves are extensive and

are the source of more than half the country’s

—

Chapter 2–Economic and Political Context | 21

CZECHOSLOVAKIA

electricity (brown coal; the smaller deposits of

hard coal are used in the iron and steel industry) .26

Nuclear and hydroelectric power are also important to electricity generation, contributing 18

percent and 22 percent respectively, with six more

reactors under construction (presently the total is

eight operating reactors). Electric generating

capacity supported modest export of electricity in

1991. 27

ENVIRONMENT

Substantial air pollution, including S02, CO,

NOX, and heavy metals, arises from burning coal

(especially brown coal) to generate electricity.

Power plants and industrial facilities are concentrated along the northern border with Germany,

and increases in infant mortality rates, decreases

in life expectancy, and other health problems

have been reported. Air pollution in Czechoslovakia contributes significantly to degradation of

Central European soil, water, and forests, which

has focused international attention on the problem. 28

23 wile the GNp/Capita fiWe for Czechoslovakia is almost twice that given for Poland, this does not mean the s~dard of livfig k

Czechoslovakia is twice that in Poland because the values are confounded by exchange rate variations and other problems associated with data

collection. William U. Chandler, Senior Scientist, Batelle, Pacillc Northwest Laboratories, personal communication Jan. 14, 1993.

24 J. K~ ~d F, ~o, Po/a~, czecho$/ovakia) ~~Hu~gq: Recen(D~e/opmenfs, coqgessio~ Res~ch service Issue Brief IB9205 1,

Aug. 10, 1992, p. CRS-10,

25 U.S. Dqartrnent of Energy, US Industrial Briefing Book: US Electn’c Power Technologies conference, cZdtOslOv*a, July ~ggz.

26 Ro@ Dutch Shell Group, The Shall Brid_ing Service, Energy in the Soviet Union and Eastern Europe, bndow 1991, P. 9.

27 u.S. Department of Energy, Op. cit.

28 Ibid.
22 Energy Efficiency Technologies for Central and Eastern Europe

ECONOMIC AND POLITICAL REFORMS

Czechoslovakia was slower to start economic

reform than Poland and Hungary, but then embarked on a strong program in 1991. Like the

other two, Czechoslovakia’s program includes

macroeconomic stabilization, privatization, liberalizing prices, and currency convertibility and has

had the same near-term consequences of price

increases, unemployment, and productivity declines.29 Successes include establishment of a

convertible currency, the koruna; privatization of

more than half of all small businesses in 1991;

and reorientation of trade to the west. Germany

has surpassed the FSU as the largest export

market. Consequences have been greater for

Slovaks than Czechs (e.g., an unemployment rate

of 12 percent compared to 5 percent in Czech

areas at the end of 1991), largely because of

closure of plants to manufacture arms, which

were disproportionately located in Slovakia.30

Demonopolization legislation was one of the

first steps towards reform undertaken in Czechoslovakia. By late 1990, small businesses were

being auctioned and entrepreneurs were encouraged to start their own businesses (although legal

and financial support had not yet been put in

place). Unemployment payments and mandatory

training for laid-off workers were legislated;31

both federal and republic governments were to

provide some of the funding, and state and

privatized businesses the remainder.

Reformers counted heavily on a voucher system to encourage citizens to support and participate in privatization. Voucher holders have been

urged to buy into mutual investment funds, which

have bought shares in state-owned enterprises.

Data are not yet available on the extent to which

this process has been implemented.

Because Czechoslovakia is a federal system,

much of the authority to implement legislation

pertinent to economic transformation devolved to

the Czech and Slovak republics. While the major

public policies regarding marketization were

drawn up at the federal level, it largely remains for

the republics to implement them. Slovakia has

experienced greater economic dislocation, higher

inflation, and higher levels of unemployment than

the Czech republic. Slovak leaders have called for

a slowing of reforms. Their government has taken

a more central role in the economy than in the

Czech republic.

The June 1990 parliamentary elections created

the basis for a democratic system. A second round

of elections (again both at the federal and republic

levels) was held in June 1992. The results led to

the Slovak desire for independence, and the

Czech republic agreed.

NEAR-TERM EXPECTATIONS

In the near term, Czech economic transformation is likely to continue. Economic dislocations

have been less severe than elsewhere, and the

1992 elections indicated wide support for continued reform. Encouragement of foreign investment will likely increase. Foreign trade will move

towards the central Danube and the west.

Economic relations between the two republics

may remain collaborative, based on past practice

of operating as a single economic unit. The two

republics will not erect customs barriers, as

stipulated by the European Community (EC) as a

condition for its recognition of both countries as

associate members in the Community. Czech

trade may draw away from Slovakia as the Czech

republic increasingly orients to the west. Slovakia

is likely to maintain more traditional trading

relationships.

Slovakia will move more slowly toward marketization than its Czech neighbor, and the government will play a more substantial role in the

29 J. ~ad F. ~o, Poland, czecho~l~~~kia, ~~Hungaq: Rec~ntD~e[opments, con~essio~ Reswch service Issue Btief IB9205 1,

Aug. 10, 1992, p. CRS-2.

s“ Ibid., pp. 11-12.

31 Report on Eastern Europe, JUIY 5, 1991J P. 8
Chapter 2–Economic and Political Context | 23

Slovak economy. The country will likely focus

substantial attention on building an independent

state; policies of building national identity may

run counter to the country’s economic interests.

LONG-TERM EXPECTATIONS

The Czech republic is likely to succeed in its

transition to a market economy and will strengthen

its democratic political structure as well. German

economic influence followed by domination is a

distinct possibility. Czech political leaders currently perceive this possibility to be a consequence of both geographic proximity and the need

for foreign capital during the transition period

rather than a threat.

Slovakia may believe its economic interests are

tied to closer relations with the Czech republic

and may seek to develop them. Czechs are likely

to agree, but continued public/private ownership

within the Slovak economy may make close

collaboration difficult. Slovakia may also face

difficulties with its large (12 percent) Hungarian

minority if it is not attentive to minority rights.

Hungary may choose to press the Slovak government for better treatment of Hungarians or,

potentially, for border revisions. If Slovakia feels

its independence is threatened, it may permit a

more authoritative political system.

| Hungary

1989 GNP/capita: $US6,000

Industrial activities: manufacturing, construction,

engineering, pharmaceuticals, chemicals

Natural resources: limited; some bauxite, coal,

iron, uranium, oil, and natural gas

HISTORY32

Hungary traces its beginning to the migration

of the Magyar people from Western Asia in the

ninth century. It was a battleground between

Turks and Austrians for 200 years, eventually

becoming part of the Austro-Hungarian monarchy in the 19th century. After the monarchy was

defeated with Germany in World War I, Hungary

lost well over half its territory. World War II

brought complex relationships with Nazi Germany and the beginning of Soviet control. In the

4 years beginning in 1945, elections changed

from free to a single slate of Communists or CP

sympathizers; by 1949 control was complete. In

1956, a student demonstration sparked a revolution that required Soviet intervention to quell.

Attempts at economic reform (see below) initiated in the 70s and 80s stimulated attempts at

political reform that accelerated in the late 80s as

the Communist Party was increasingly under

attack. Free multiparty elections were held in

March 1990 and Communism was defeated.

Political fragmentation from myriad small parties

was prevented by a requirement that a party

receive at least 4 percent of the popular vote, a

criterion agreed on in pre-election discussions.

Other supporting actions gave Hungary a stable

political framework within which to develop a

market economy.

ENERGY

Domestic production of crude oil and natural

gas supplies about 40 percent of primary energy

needs. About half of domestically generated

electricity (and a third of total supplies) comes

32 Sources for tie Histov and Economy sections are: J. Zacelq footnote 2; I. T Berend, “Hungary: Eastern Europe’s Hope?” Currenf

Hisrory, vol. 91, No. 568, pp. 381-384; Central Intelligence Agency, World Fuctbook 1991 (Washington DC: Central Intelligence Agency,

1991); The Encyclopedia Americana: International Edition (Danbury, CT: Grolier, Inc., 1986).
. . . .— . . . — . . -—

24 I Energy Efficiency Technologies for Central and Eastern Europe

from the Paks nuclear power station located south

of Budapest, a station considered one of the

region’s most safe and efficient. About a quarter

of electricity is imported. The balance depends

almost entirely on thermal generation using coal,

oil and gas, especially coal. Hydro supplies a tiny

fraction (less than 1 percent) .33

ENVIRONMENT

Environmental degradation in Hungary is great,

largely due to many years of generating electricity

from indigenous high-sulfur (brown) coal.

ECONOMIC AND POLITICAL REFORMS

As in political reform, Hungary’s approach to

economic reform has been more gradual and

methodical than in the other satellite nations. The

country’s economy was healthier than the economies of Poland and Czechoslovakia when reforms

began in earnest. Changes dating back to 1968

reduced central planning, began marketization of

the agricultural sector, and moved the economy

towards decentralization, market pricing, and

privatization. By the mid 1980s, private or

semiprivate firms primarily in agriculture, services, and construction produced about a third of

the GNP. Small-scale privatization has been

brisk, but medium- and large-scale enterprises

remain largely state owned. 34 By 1992, the

National Bank of Hungary had been granted

autonomy from state control; it is to supervise the

commercial banking system and accelerate loan

availability to privatizing and privatized businesses. Besides a slower approach to privatization, there has also been greater reliance on

foreign investment in Hungary. Unemployment

has leveled off at 6 to 7 percent. There is a limited

social safety net, but an estimated 30 percent of

the population lives at or near poverty levels

because of continued inflation and low wages.35

Other problems are outmoded capital plant, a

GNP that declined by 1 percent in 1989 and about

6 percent in 1990, and foreign debt that has

doubled (to more than $20 billion) since 1985.

Hungary’s political system has been quite

stable since the free elections for parliament in the

spring of 1990. The ruling coalition has retained

power, and there has been a single prime minister

since the elections. Thus far, the prime minister

and cabinet have directed the legislative agenda,

and efforts to create a strong presidency have not

emerged.

NEAR- AND LONG-TERM EXPECTATIONS

In the near term, Hungary is likely to continue

its measured pace toward a market economy.

Once the reprivatization claims have been settled

(restitution), the State Property Agency will turn

its attention to new privatizations. More favorable

tax laws for private ownership as well as bank

credits should encourage greater domestic investment, and the country should continue to attract

foreign investors.

Parliamentary elections are scheduled for 1994.

The Hungarian Socialist Party (formerly the CP)

will probably do better than the 10 percent of the

vote it received in 1990. The main opposition

party, the Alliance of Free Democrats, may fare

better too, because of popular dissatisfaction with

continued decline in living standards. The Democratic Forum, leader of the current coalition, may

be held responsible for present difficulties. The

Alliance initially favored a more rapid approach

to marketization and has been critical of the

cumbersome reprivatization process.

Hungary’s small size geographically and demographically (10.6 million people) may make

the transition process less difficult than in larger

countries. Hungary’s minority populations are

not likely to present major internal strife. The

country stated concern for Hungarians living

33 Nucle~ Engineefig International, Datajile Hungary, VO1. 37, No. 452, pp. 50, 51.

~ R~io Free EUrOpeJlladiO Liber~ Research Report, Jan. 24, 1992, p. 43.

35 Business Eastern Europe, Aug. 3, 1992, p. 380.
Chapter 2–Economic and Political Context | 25

elsewhere (Slovakia and Romania) could result in

boundary disputes.

In the longer term, Hungary will manage the

economic transition successfully. If parliament

develops a more focused approach to consideration of legislation, an authoritarian system maybe

avoided.

| The Baltics (Estonia (E), Latvia (La), and

Lithuania (Li)

1990 GDP/capita (current rubles): 5,039 (E), 4,542

(La), 3,561 (Li)

Industrial activities: fish & fish products, textiles,

furniture (E); machinery, food products, textiles, chemicals (La); machinery and parts,

processed foods, light industrial products (e.g.,

textiles, apparel, furniture, household appliances) (Li)

Natural resources: limited-timber, oil shale, limestone (E); peat, dolomite, limestone, gypsum,

amber, gravel, sand (La); agricultural land,

forests (Li)

HISTORY36

In the last several hundred years, the autonomy

of the three Baltic countries of Estonia, Latvia,

and Lithuania has been compromised by invading

Germans, Poles, Swedes, and Russians. In 1918

the Baltics achieved independence, only to lose it

under forcible annexation by the U.S.S.R. in

1940. Fifty years later, Lithuania was the first of

the three to declare independence from the Soviet

Union, on Mar. 11, 1990. Estonia and Latvia

followed on Aug. 20 and 21, 1991 during the

Soviet coup attempt that began Aug. 19, 1991.

Shortly thereafter the international community

recognized all three as independent countries.

(U.S. recognition came on Sept. 2, 1991.) Each of

the three countries is now governed by a parliament (the Supreme Council) for legislative funcPoland

~

Belarus

tions and by a Prime Minister and set of departmental ministers for executive functions.

ENERGY

Of the three, only Estonia has a significant

energy resource, oil shale, which supplies most of

its energy needs. Latvia meets some of its energy

needs with hydroelectric power; plants on the

Daugava River generate a third of the country’s

electric power. Most of Latvia’s energy comes

from Estonia and other countries. Some oil and

natural gas deposits occur in Lithuania, but the

country meets most of its energy needs by

importing these fuels and from its large nuclear

power generator near Ignalina.

ENVIRONMENT

Soviet economic policies brought pollution of

Baltic air, water, and soil. Although the Baltic

countries took action in the 1980s to limit further

damage, a great deal of expensive and difficult

environmental cleanup remains to be done.37

36 F~~ ~~ and me foIlowlng text on tie B~tics, s~ V, Bite, E$[onia. Basic Facff, ~~ia: Basic Facl~, ~d Lithuania: Basic Facts, CRS

Reports for Congress 92-223 F (June 30, 1992), 92-242 F (Mar. 2, 1992), and 92-313 F (Aug. 6, 1992) respectively. Also The American

Academic Encyclopedia, online edition (Danbury, CT: Grolier Electronic Publishing, updated four times yearly), and Library of Congress,

Estonia: An Economic Projlle, and Lutvia: An Economic Profile, July 1992 and August 1992, respectively.

37 v. Bite, The Ba[fic states: U.’j, Poliq Concerns, as Issue B~ef JB90075,” Sept. 29, 1992, p. CRS-8.
26 I Energy Efficiency Technologies for Central and Eastern Europe

ECONOMIC AND POLITICAL REFORM

GDP/capita is greatest in Estonia, least in

Lithuania. The countries have limited natural

resources; Estonia is the most resource rich and

most industrialized. All were heavily integrated

into the Soviet economy which supplied raw

materials and provided markets for goods. The

disintegration of the Soviet Union has disrupted

the supply of raw materials with consequent loss

in economic production and in the standard of

living.

Until recently, all continued to use the ruble as

currency. In June, 1992, Estonia became the first

of the Baltics to establish its own currency, the

kroon.

While there are differences in the manner and

speed with which the three have set about creating

market economies, common patterns emerge. All

moved quickly to strengthen and broaden earlier

reforms that had been partially put in place

(freeing prices, ending state subsidies) before

independence. Many of the same strategies employed elsewhere have been followed in the

Baltics.

Privatization of small businesses and services

has proceeded steadily. Outside the small business and service sectors, privatization has been

slow to occur, in part because restitution claims

are being processed slowly. Estonia has had some

success encouraging foreign investment; the other

two republics were initially reluctant to permit

100 percent foreign ownership, but they now do.

Bank credit decisions still favor state-owned

businesses. Foreign trade is being successfully

reoriented toward Finland, Sweden, and Germany, although the Baltics are still tied to nearby

Russia for raw materials and for sale of some

finished goods. Estonia’s new currency is based

on the German mark, and the other two are

scheduled to introduce their own currencies,

which will not be based on the ruble either. The

three currencies will be stabilized by the International Monetary Fund and partially backed by

gold. Lithuania has introduced a voucher system

to stimulate privatization of medium- and largescale enterprises, and Latvia plans to do the same

(although implementation needs to be worked

out). 38

Politically, democratic systems are being restored. Competitive parliamentary elections were

held in spring 1990 and many non-Communists

were elected to office. Both Estonia and Lithuania

held a second round of elections in fall, 1992.

Right of center parties formed the new governing

coalition in Estonia, continuing support of the

reforms. In Lithuania, the governing coalition, led

by former Communists, is committed to reform

but at a slower pace. Political parties have become

more organized and parties are building support

within the electorate. Other democratic reforms

are being put in place.

NEAR- AND LONG-TERM EXPECTATIONS

In the near term, the Baltics are likely to

strengthen democratic institutions. They will

continue the marketization process, but probably

more slowly (certainly in Lithuania). They will

establish currency convertibility, will continue to

reorient their trade towards the west, and will

probably apply for EC associate status.39 The

Baltics are likely to create a customs union and

work collaboratively to bolster their economies.

Estonia and Latvia have large Russian minority

populations and are likely to treat these populations carefully, as the Russian government has

expressed concern over their treatment. Russian

troop withdrawals have been halted and economic

sanctions could be imposed.

In the longer term, the Baltics are likely to

reestablish themselves as independent, democratic, market-based countries whose place in

Europe is secure. They will be EC associate

JS Business Eastern Europe, July 27, 1992, P. 367.

39 ~ere is ~ I@yeN ~wement ~~=n he fiono~c CommU@ ~d i~ ass~~te mem~~. III tie first 5 ye~, the EC reduces its tiuiffs

on nonagricultural goods. Associates follow suit in the second 5 years.
Chapter 2–Economic and Political Context | 27

members and will seek regular membership. They

will continue trade relations with Russia and

other ex-Soviet countries. The Russians who opt

to remain in Estonia and Latvia (and most will)

will have satisfied citizenship requirements. Latvia’s lengthy residence requirement for nonLatvians prior to citizenship may be revised

downward. If an authoritarian Russian regime

emerges, it will likely try to extend its political

and economic influence over the Baltics, which

could limit the options of these nations.

| Russian Republic

1990 GDP/capita (current rubles): 4,224

Industrial activities: oil, natural gas, machinery,

chemicals

Natural resources: coal, oil, natural gas, diamonds,

gold, phosphorites, potassium salts, uranium

HISTORY40

200 years of Mongol rule over a collection of

principalities that partially overlapped what is

Russia today ended when the prince of the

principality of Moscow declared himself Tsar

(ruler) of all Russia in 1481. Successive tsars

expanded the empire until the overthrow of

Nicholas II in 1917, Shortly thereafter, the

Bolsheviks consolidated power and forcibly reincorporated into the new U.S.S.R. the nations of

the former Russian empire (such as Georgia and

Ukraine) that had enjoyed a brief period of

independence after the Tsar’s demise. A succession of leaders; Lenin, Stalin, Krushchev, and

Brezhnev between 1917 and 1982, established

and refined Communist rule but were unable to

correct increasing economic problems. Mikhail

Gorbachev was the last to attempt economic

reform within the structure of the Communist

Party. The U.S.S.R. came to an end in December

1991 and its 15 republics, including Russia, have

since sought and received international recognition of their independence.

ENERGY

Russia is the world’s largest producer of oil,

primarily in Western Siberia, with export to

Eastern Europe mainly by pipeline and to Western Europe via tankers. Russia contains the

world’s largest reserves of natural gas, with

production also concentrated in Western Siberia.

Gas is exported to Europe by pipeline. Russia also

has coal reserves and produced more than half of

all Soviet coal.41

ENVIRONMENT

Radioactive waste, including radioactive pollution of ground water, is one of many environmental problems in Russia.

42High levels of air,

water, and soil pollution occur in many regions.

Many coastaI waters are highly polluted, including those of the White, Barents, and Kara Seas,

the Pacific and Arctic Oceans, and the Gulf of

Finland. Agricultural and industrial pollutants

have eliminated nearly all fish in the Sea of Azov

and the fish in the Caspian Sea are similarly

threatened. 43

@ see J. Ni~h~l, R~~~ian Federation: Basic Facts, CRS Report for Congress 92-137 F, Feb. 6, 1992.

41 U.S. Dep~ent of Ener~, Enern ~o~tion A&s&atioq E[A Analysis Brief: The Former Soviet Republics.

42 M+ Feshbach and A. Friendly, J~, E~ocide in the USSf/:ffealth andNa~re UnderSiege @Jewyo&, NY: Basic Books, 1992), pp. 175-176.

43 R. A. ~ts=u Environmenra/&gaq of rheForrnerSovietRepub/rcS, center for Hu~&oIogy, hstitute of ECology ad Resource

Management University of Edinbur@ 1992.
.. .

28 I Energy Efficiency Technologies for Central and Eastern Europe

ECONOMIC AND POLITICAL REFORMS

In 1991 GDP fell by 17 percent and consumer

prices rose 140 percent, precipitating the collapse

of the Soviet economy and the end of the U.S.S.R.

The transition to a market economy and to

building a democratic political system is proving

much more difficult in Russia than in the countries just reviewed (with the exception of Slovakia). Part of the problem is that Russia has not

fully committed to political reform, and this in

turn has limited economic reform. Many of the CP

apparatchiks remain in positions of power politically and economically and would like to slow the

pace of reform, if not return to the old status quo.

Nonetheless, President Yeltsin initiated an economic reform program in the fall of 1991 and

intensified it in January 1992. Recent (December

1992) Yeltsin setbacks with the Congress of

Peoples’ Deputies have dimmed prospects for

Yeltsin’s programs.44

Economic czar Yegor Gaidar (former Minister

of Finance and acting Prime Minister) sought to

implement a form of ‘shock therapy’ similar to

Poland’s, with many of the same elements. Less

than widespread commitment to a program of

rapid change has helped limit the effectiveness of

‘‘shock therapy ‘‘ in Russia. The battle over the

speed of reform is tied to issues of political

structure: will Russia preserve and strengthen its

current strong presidency or will parliament

become the dominant institution in political

affairs? Most of the relevant statutes promoting

rapid economic transformation have been issued

as executive decrees rather than emerging from

parliamentary processes.

Russia has received IMF approval for its

reform plans, although its current budget deficit is

beyond IMF-established limits; adjustments will

be needed before additional loans are forthcoming. Russia has substantial foreign debt (inherited

from the U.S.S.R.), and the debt service needs to

be renegotiated and rescheduled.45

Thus far, privatization outside the service and

retail trade sectors has scarcely begun. There is

limited domestic capital available, and the government has not decided whether it wants to

encourage substantial foreign investment and

how best to do so. (100 percent foreign ownership

is still prohibited.46) The State Property Agency,

granted extensive authority as the key agency for

privatization, was charged in July 1992 with

acting as creditor for state enterprises with

significant debt. The size of interenterprise debt is

estimated at 3.3 trillion rubles.47

Gaidar’s reform package called for creation of

a social safety net to provide a cushion against

severe economic dislocations, but there is little

evidence that much funding has been provided.

The voucher system has been announced, but

mutual investment funds have not yet been set up

nor have state enterprises been organized as joint

stock companies.

48 Overall, there was little new or

different in the Gaidar plans from what has been

proposed and adopted in the countries surveyed

above.

What is different is the sheer size of Russia

geographically and demographically, the extent

of opposition to ‘‘shock therapy’ reform on both

the central and local levels (although some

localities have moved toward privatization faster

than the central government), and the antiRussian hostility of small ethnic groups that

comprise the Russian Federation (including several republics that refused to sign the Treaty of

44 sees. D, Gol~W Russia, CRS Issue Bfief, IB92089, Aug. 3, 1992; and J. D. Sachs, Economic Reform of Socialist Counmies: ~ssons

& Prospects, The Ernst Sturc Memorial hcture, Paul H. Nitze School of Advanced International Studies, Washington DC, Nov. 5, 1992.

45 Kei~ Bmdsher, * ‘~oil inE~ope; T* onReschedu~g MOSCOW’S Debt pit U.S. and Russia Agtit Germany, ’ ‘The New yOrk 7’imeS,

Sept. 21, 1992, p. A9.

46$ ‘~t’s New In Your kdustry CIS,’ Business Eastern Europe, Sept. 14, 1992, p. 450.

47 Foreign Broadcast Information Service, NOV. 14, 1992, p. 12.

48 Celestine Bohlen, “Citizens of Russia To Be Given share of State’s Weal@” The New York Times, Oct. 1, 1992, p. Al.
Chapter 2–Economic and Political Context | 29

Federation and claim independence). There is

also a notable lack of the supervisory authority

that the central government wished to establish

over the provinces and localities but has been

unable to achieve.

Russian reformers have introduced many reform elements without taking time to devise

appropriate implementation strategies. There is

less consensus for reform than in the other

countries discussed in this section, with the

exception of Ukraine (see below). No East

European leader found it necessary to request or

receive emergency powers, as Yeltsin did. Granted

by parliament for one year, these powers ended in

December 1992. It seems unlikely that parliament

will agree to extend them, in light of the

institutional struggle between it and the presidency.

NEAR AND LONG-TERM EXPECTATIONS

In the near term, Russia is likely to slow the

pace of transformation. Civic Union, an umbrella

organization of groups of industrialists, trade

unions, and several political parties, favors a

slower approach but not a reversal of reforms.

One component, the Union of Industrialists and

Entrepreneurs, has called for greater financial

support for state enterprises and reinstitution of

some price controls at this phase of the transition .49

Directors and managers at the enterprise level are

pressing for a slowdown as well. The military

industrialists, who oppose conversion of military

factories to civilian use, support the go-slow

approach at best. So do the professional military

who prospered under the old system.

The reform leadership will continue to contend

with-right wing Russian nationalist groups, dissatisfied ethnic minorities, regional pressures for

autonomy in a newly decentralized system (in

Siberia, in particular, with its vast resources), and

opposition from the old Communist-controlled

bureaucracies that still operate within the ministries, the banking system, the state-owned sector,

and elsewhere. All of these will act as brakes on

the reform process.

Political strife is likely to hamper economic

reforms whatever is the outcome of the current

crisis. Yeltsin may remain for the immediate

period but has declared that he will not be a

candidate for election when his term is up (but he

could change his mind). The future course of

establishing a functioning democracy will be

affected greatly by Yeltsin’s successor. Thus far,

implementation of democratic reforms has been

limited: local elections have been postponed,

independent newspapers find it difficult to obtain

newsprint, and substantial self-censorship is still

practiced. Political parties are still in formation

and are not yet grounded in the electorate.

Reforms in the 1egal structure and judicial system

are just getting underway. With continued economic difficulties in addition to the special

problems cited above, a reversion to authoritarian

rule is a distinct possibility.

At best, Russia will establish some form of

mixed economy in the near term, some private,

some cooperative, and a majority still stateowned. Unless Russia can attract substantial

foreign assistance directly tied to privatization,

modify its legal and tax framework to support

privatization, and create a climate favorable for

foreign investment, the capital needed to privatize

and modernize its industrial plants will not be

available.

In the longer term, a limited democracy at best

is likely to emerge. The desire to keep the country

together and to continue as a significant power in

Europe and Asia will encourage strong central

leadership. That leadership will need military

support and may not be tolerant of organized

opposition. The tradition of a strong state role in

the economy (which was a feature of 19th century

Russia as well as the Communist experience) may

carry on. Russia is likely to continue to have a

mixed public/private economy and may well not

49 Celestine Bohlen, “Sliding Ruble Seen As Omen of Another Price Explosion, “ The New York Times, Sept. 5, 1992, p. 3.
. . . - -- - - - - . .- .

30 30 I Energy Efficiency Technologies for Central and Eastern Europe

● Kiev

UKRAINE

establish predominately private ownership in the

industrial sector.

| Ukraine

1990 GDP/capita (current rubles): 3,177

Industrial activities: heavy industry, food processing

Natural resources: agricultural land, bitumen, hard

coal, natural gas, oil, iron ore, manganese, uranium

HlSTORY50

With its declaration of independence on Aug.

24, 1991, and ratification of that declaration in a

referendum approved by a 90 percent majority on

December 1, 1991, Ukraine became a sovereign

nation for the frost time in centuries. Previously it

was partitioned in various ways by Poland and

Russia and by Russia and the Hapsburg Empire.

There was also a period of occupation by the

Nazis beginning in 1941. Soviet occupation under

Stalin was particularly brutal; a Sovietengineered famine when Ukraine resisted collectivization of agriculture killed millions in 1932-

33.

Besides ratifying independence in December,

voters elected a president, former Communist

leader Leonid Kravchuk. The Ukrainian Supreme

Soviet (parliament) was formed after competitive

elections in 1990.

Major disagreements exist between Ukraine

and the Russian republic. One concerns control of

nuclear weapons. Ukraine, Russia, Kazakhstan,

and Belarus are the four republics that were sites

of nuclear weapons in the former Soviet Union

and remain sites of such weapons today. Another

disagreement is the disposition of the Black Sea

fleet. A third is the Crimea where two-thirds of the

population is Russian and where support for

independence dropped to 54 percent in the

December vote.

ENERGY

The largest coal producing area in the FSU is

the Donets Basin in Ukraine .51 Nonetheless, natural gas is the most widely used energy source in

the country, accounting for 41 percent of total

energy consumption in 1991 (compared to 31

percent for coal). Domestic gas production lags

consumption and gas is imported, typically from

Russia and Turkmenistan.52. Nuclear energy is

also important, and was the basis of 25 percent of

total electric power generation in Ukraine in

1991. Oil needs are heavily dependent on imports; in 1991, less than 10 percent of oil required

was domestically produced.53

ENVIRONMENT

Ukraine has severe environmental problems.

One such is radioactive contamination. Chernobyl left 180 tons of radioactive fuel encased in

50 see S. Woehl, Ukraine: Basic Facts, CRS Report for Congress, 92-138 F, May 14, 1992; Ukraine, CRS Issue Brief, ~92072, J~Y 24,

1992; and The Amen”can Acaderu”c Encyclopedia, online edition (Danbury, CT: Grolier Electronic Publishing, up&ted four times yeaxly).

51 Energy Morrnation ~“ “stratiow EIA Analysis Brief: The Former Soviet Republics, Sept. 1991.

52 I. YukhrlOVSkiy, ‘‘What Are We-Rich or Poor? On the Question of Reorganizing the Structure of Production in Ukraine,’ Vercherniy

Kiyev, Kiev, Ukraine, May 19, 1992, pp. 3-4.

53 us ~p~en~ of Ene~, US [ndus~ial Bn”efing Book: US Electric Power Technologies COnferOI% “~tie,”~~Y ~~.
concrete walls up to 59 feet thick, as well as at

least 50,560 square miles contaminated with

Cesium- 137.54 The major rivers carry raw sewage,

agricultural chemical runoff, and industrial waste

to cities such as Odessa and on to the Black Sea,

which is in danger of eutrophication .55 The level of

air pollution from factories in part of southeastern

Ukraine has been described as “catastrophic.”56

ECONOMIC AND POLITICAL REFORMS

Of the FSU, Ukraine’s economic potential is

second only to Russia. Ukraine accounted for 16

percent of the total GNP of the Soviet Union in

1991, and is rich in both mineral and agricultural

resources. Steel production and coal mining are

major industries and the manufacturing base is

well-developed and diversified, producing machinery, industrial equipment, and chemicals.

Often referred to as the breadbasket of the FSU,

Ukraine produces quantities of grain and sugar

beets.

A coupon currency system, somewhat parallel

to the ruble, was introduced in January 1992.

There is disagreement on how rapidly to proceed

on economic reform, with rival plans under

consideration; progress so far is slow.

Price controls have been lifted only partially

and privatization legislation is not yet in place.

Russian officials have urged Ukraine to lift price

controls because cheaper Ukrainian goods are

being sold in Russia, while Russian goods are left

unsold on shop shelves.

57 Ukraine plans to lift

price controls slowly. The country has begun to

seek foreign investment, having put some tax

incentives and registration regulations in place,

but successes are limited. Most of the reform

elements described earlier have not yet been

legislated or, if legislated, have barely gotten

under way. Ukraine has not yet produced a

Chapter 2–Economic and Political Context | 31

marketization plan and a state budget satisfactory

to the IMF and is not yet eligible for assistance

through that organization. Clearly, Ukraine’s

leaders have chosen a slow pace to economic

transformation.

Politically, a partial democratic structure has

been put in place. The current parliament was

elected in spring 1990 and still has a number of

ex-Communists in it. Both the current and previous prime ministers are ex-Communists who held

important positions prior to 1992. President

Leonid Kravchuk, elected by direct popular vote

in December 1991, was second secretary of the

Ukrainian CP until he resigned his membership

after the August 1991 coup attempt. He joined the

movement for national independence in 1991.

Despite the country’s measured approach to

reforms, parliament recently secured the resignation of a prime minister because the pace of

economic reform under his guidance was too slow

at the same time that the economy was continuing

to deteriorate.58

Ukraine wants to avoid return to Russian

domination and seeks to align itself with the

Central European countries considered here. To

avoid provoking Russia, Ukraine has been careful

thus far to attend to the concerns of its 20 percent

Russian minority.

NEAR- AND LONG-TERM EXPECTATIONS

In the near term, Ukraine is likely to target a

mixed public/private economy, with the state

continuing to have a major role. The pace of

reform is likely to remain slow, IMF membership

will be granted once a satisfactory budget is in

place and assistance will be forthcoming. Ukraine

will continue to seek foreign assistance and will

create the necessary legal and financial fiame54 M, Fe~hbaChmd A Fri~~dl~, Jr., Ecocid~ in the USSR: H~~lth ~ndNa~re Undersiege (New yo&, m: Basic BOOkS, 1992), pp. 146-7.

55 Ibid., pp. 124-125.

54 Ibid., p. 93.

ST Business Eastern Europe, Sept. 28, 1992, p. 474.

58 speci~ correspondent, “Arms Maker Is Named Premier By Ulmine,” The New York Times, Oct. 14, 1992, p. A7.
. . - . .- . . . - - - - - - -

32 I Energy Efficiency Technologies for Central and Eastern Europe

work to attract foreign capital, which in turn may

help to speed up the reform process.

Relations with Russia could deteriorate over

military issues (the Black Sea Fleet, which the

two nations agreed to control jointly in 1992;

Ukrainian reluctance to hand over nuclear weapons to Russia; the size of the Ukrainian military)

and territorial issues (the autonomy of Crimea and

Russian insistence on its return; Crimea was

ceded to Ukraine in 1954 by the Soviet government without Russian government approval).

There will be economic difficulties between the

two (insistence on payment for imports with hard

currency only, possible creation of tariff barriers,

unwillingness to supply needed resources, including Ukrainian agricultural goods). While these

disputes are not likely to degenerate into military

confrontations, they may strengthen the case for

a strong executive and pave the way for authoritarian rather than democratic rule in the interests

of national security.

Over the long term, political transformation to

democracy will likely remain incomplete because

of belief that a strong central government and

strong executive is essential to preserve independence. Economic transformation to a market

economy is also likely to remain limited as the

government will maintain a strong presence in the

economy and at best will support a mixed

public/private ownership system.
Energy

Supply and

Demand:

An Overview 3

F

or many years, energy production was a cornerstone of

centrally planned economies of Central and Eastern

Europe (CEE). Leaders relied on expanding energy

supplies to foster rapid industrialization, particularly of

heavy industries. In fact, energy production fueled an impressive

economic growth rate in the former Soviet Union (FSU),

averaging 5.8 percent annually between 1950 and 1989. During

this period, energy supplies increased six times (averaging 4.7

percent/year).l

Despite the increase in energy supplies, the FSU experienced

several slumps in energy output. Each time, authorities reacted

to the situation by throwing more money and resources at the

problem. For example, in the early 1980s, when oil production

declined, the Soviets increased funding for development drilling,

substituted natural gas for oil, and accelerated their nuclear

power program to fill the gap. Few efforts were made to conserve

energy supplies or to use energy more efficiently.

These supply-oriented solutions required the massive infusion

of capital resources. During the 1970s and 1980s, annual

investment in energy industries doubled every 10 years. In 1988,

capital investment in energy industries accounted for 15 percent

of the total Soviet budget and 40 percent of all industrial

investment.2

The tremendous increases in energy production investment,

however, did not result in commensurate gains in supply. While

capital outlays grew 105 percent between 1980 and 1988, the

amount of energy produced rose by only 23 percent.3

Oil shale plant in Estonia.

‘ United Nations, Economic Commission for Europe, Energy Reforms in Central and

Eastern Europe--The First Years, ECE Energy Series, No. 7 (New York NY: United

Nations Publications, 1991), p. 5.

2 Central Intelligence Agency, Directorate of Intelligence, Sovief Energy Data

Resource Handbook, SOV-9O-1OO21, May 1990, p. 15.

3 Ibid.

33
34 | Energy Efficiency Technologies for Central and Eastern Europe

Over the last two decades, capital investment

among FSU energy industries shifted in several

important ways that favored oil production over

other energy sources and over other sectors of the

economy. In 1970, the oil industry received 30

percent of total energy investment; its share grew

to more than 50 percent in 1988.4 Moreover, the

allocation of capital was geographically imbalanced. Capital flowed mainly into one province,

the Tyumen Oblast in Western Siberia, contributing to capital shortages elsewhere. Investment in

Ukraine and other areas west of the Urals declined

or stagnated. Finally, the emphasis on oil production resulted in the neglect of oil and gas

exploration, a decline in coal output, and a slow

down in the expansion of electrification.s

Given the emphasis placed on energy production and related capital investment strategies, plus

low energy prices, it is not surprising that energy

conservation practices were largely ignored. As a

result, countries of the FSU are among the most

energy intensive in the world. In 1985, energy

intensity, defined as the ratio of primary energy

consumption to GNP,6 in the FSU was about 37

percent higher than the U.S. ratio and more than

twice as high as Japan’s.7 In 1990, the FSU’s

energy intensity was 70 percent higher than the

United States and about 2.5 times that of Western

Europe. The gap is especially evident in the

industrial sector where energy use per unit of

output was 3 times higher than in the U.S. and 3.5

times higher than in Western Europe.8 L ow

energy prices, the structure of the industrial

sector, and the slow rate of technological improvements are largely responsible for the sector’s high energy intensity.

There are enormous opportunities to save

energy in this region. Russia’s potential is one of

the greatest in the world. Recent economic

reforms and structural shifts will have a strong

influence on energy use. Throughout the region,

energy prices have increased substantially over

the last year, and further increases are certain.

Technology also will have a significant impact on

energy efficiency. One expert estimated that

replacing energy-using technologies in the FSU

with Western European models could lower

intensity by 25 to 40 percent.8 For a more detailed

discussion of energy savings potential by sector,

the reader is referred to chapter 4.

Improving energy efficiency will have enormous

environmental benefits as well. This region is

responsible for about 20 percent of carbon dioxide emissions worldwide and most of Europe’s

SO2 emissions.

ENERGY SUPPLY PICTURE

The former Soviet Union commands a large

share of the world’s total energy supplies. How

these supplies are developed and utilized will

influence global energy markets in the future. It is

likely that Europe will require substantial energy

imports to meet growing domestic demand. Much

of these imports will come from the FSU.

Russia, in particular, has great oil and gas

resources. Other former republics, such as Ukraine,

have substantial coal reserves. Of the Central

‘t Ibid.

5 Leslie Dienes, “The Energy System and Economic Imbalances in the USSR,” Soviet Economy, vol. 1, No. 4, 1985, pp. 340-372

s Caution must be used when estimating primary energy consumption to GNP in CEE countries. For example, much of CEE countries’

historical economic data are based on plans mther than on actual output. Moreover, the value of nonconv@ible currencies is difllcult to translate

into meanir@d economic output. Structural differences in the economy, output mix, and climatic differences effect energy intensity as well.

7 Albina Tretyakova and Matthew Sagers, “Trends in Fuel and Energy Use and Progr ammes for Energy Conservation by Economic Sector

in the USSR” Energy Policy, vol. 18, October 1990, p. 726.

8 Igor Bashmalcov, “Energy Conservation Costs and Benefits for Russia and the Former USSR” Moscow Center for Energy Efficiency,

Visiting Scientist, Pacific Northwest Laboratov, Battelle Memorial Institute, April 1992, p. 6.

g Lee Schipper, ‘‘Improving Energy Use in the Soviet Union: Opportunities for the West?, ’ paper prepared for the Fritjiof Nansen Institute,

0s10, January 1992, p. 4.
Chapter 3-Energy Supply and Demand–An Overview | 35

European countries, only Poland has large energy

resources, mostly coal. The following provides a

brief description of energy supplies in the FSU,

Hungary, Poland, and the former Czechoslovakia

(CSFR).

| Oil

RESERVES

The former Soviet Union is rich in oil reserves,

In 1990, the FSU had proven oil reserves of 57

billion barrels (B/bls), which is about double that

of the United States, but dwarfed by Saudi

Arabia’s 260 B/bls. (See figure 3-l.) The potential for new oil discoveries is great. The U.S.

Geological Survey (USGS) estimates that undiscovered recoverable oil resources in the FSU

range from 46 to 187 B/bls, with the most likely

amount at 101 B/bls.10 Because some of these

resources are located in remote areas and/or

hostile environments, future exploration and production will be technically more difficult and the

costs will be higher.

About 90 percent of FSU’s proven reserves

(51.4 B/bls) are located in Russia. Western

Siberia and the Volga-Urals have the largest

fields. Kazakhstan and Turkmenistan together

rank second with 3.3 B/bbls, most of which is

located in the northwestern region of Kazakhstan

near the Caspian Sea. The discovery of the Tengiz

oil field may add another 5 B/bbls to Kazakhstan’s oil reserves. However, development of

the field has been hampered by inadequate

chilling and production equipment, challenges

presented by abnormally high downhole pressures, and the highly corrosive characteristics of

the oil-field associated gas. Next in oil reserves is

Azerbaijan with 1.2 B/bbls. Most of Azerbaijan’s

oil resources are offshore in the Caspian Sea.

Other former republics have only small amounts

Figure 3-1—1990 Oil Reserves—

Selected Countries

‘“”r-””-”– ‘-”1

250;

200 ;

5 0

0 -

k

Russia U.S. Saudia Mexico Vene- Iraq Iran

Arabia zuel a

SOURCE: Energy Information Administration, U.S. Department of

Energy, Annual Energy Review 1991, DOHEIA-0384(91), June 1992,

p. 267.

of oil.11 Romania is the only former Soviet

satellite country that has significant oil reserves.

The FSU lacks the financial wherewithal and

the technical expertise to develop these reserves.

Several years ago, the Soviet Union opened its

doors to foreign investment, and the international

oil industry showed considerable interest in

acquiring joint venture exploration and development rights. However, many joint venture negotiations have been and continue to be embroiled in

political and legal difficulties. Uncertainties about

who’s in charge, export taxes, rate of return,

currency stability, legal issues, and the economy

in general have plagued U.S.-Russia negotiations.

In recent months, however, the outlook for

Russian/American joint ventures looks a little

brighter. Conoco, for example, recently started

developing oil fields north of the Arctic Circle

and west of the Ural Mountains. This joint

venture, called Polar Lights, is the frost new-field

10 Joseph p RIV~, Jr, Ru$~~Q ~~ the co~nwealth ~fI~ePe~&~tStote$:OilReSO~CeS, ~RS Report for congress, 92-78 SPR, Jim. 16,

1992, pp. 2-4.

11 Joseph p. WV% Jr., 011 production ~~ Resene~ in the Soviet Republics, CRS Rq)ofl for Conwess, 91-674 SPR, Sept. 12, 1991, p. 1.
. . - . . . . . . - -- - - .- —. . - —- -

36 I Energy Efficiency Technologies for Central and Eastern Europe

development project in Russia to include a U.S.

partner. 12 And in late October, Occidental Petroleum Corp. exported its first oil shipment from

Western Siberia. Oxy’s joint venture has a license

to export 367,647 barrels of oil during the 4th

Quarter 1992.13 These few successes, however,

belie the daunting uncertainties that still remain

on taxes, royalties, etc. In particular, the introduction of an oil export tax ($5 to $6/barrel) in 1992

has altered project economics and delayed negotiations on a number of proposals. The White

Knights Joint Venture Enterprise, for example,

has put on hold its second project, Golden

Mammoth. Moscow has waived the tariff for

projects agreed on after January 1, 1992. ConOCO’S Polar Lights project has been exempted

from the tax. It is likely that the export tax will

remain in effect until energy prices reach world

market prices.

The situation in Kazakhstan is different. Kazakhstan has made it clear that foreign investors

are welcome. There is no confusion about who

has authority to negotiate and sign deals. Moreover, oil industry taxes are light. Deals with

Chevron, British Gas, Italy’s Agip, and France’s

Elf should bring about $38 billion in foreign

investment to Kazakhstan’s oil industry over the

next 40 years.14

PRODUCTION

The former Soviet Union was the world’s

largest producer of oil and natural gas and the

second largest consumer. In 1990, the FSU

produced 11.4 million barrels per day (MMB/D),

primarily from Russia.

15 Much of Russia’s oil

production facilities are located in Western Siberia, particularly the Tymen Oblast. Kazakhstan

and Azerbaijan are also major oil producers,

ranking second and third. Kazakhstan produces

about 500,000 barrels per day, and Azerbaijan,

about 240,000 barrels per day.l6 (See table 3-1 for

a breakdown of FSU production and consumption

data.)

Table 3-l—Energy Production and Consumption, Selected Countriesa

(thousand barrels per day oil equivalent)

—

Production Consumption

011 Gas Coal Electrlclty oii011 Gas Coal Electrlcity

Azerbaijan. . . . . . . . . 244 140 — 38 215 279 2 33

Kazahkstan. . . . . . . . . 502 110 1,164 141 450 175 583 153

Russia. . . . . . . . . . . . . 10,328 9,956 3,503 1,744 4,982 7,417 3,155 1,518

Ukraine. . . . . . . . . . . . 100 451 1,463 492 1,111 1,804 1,316 411

Estonia. . . . . . . . . . . . 0 0 0 28 62 25 4 15

Latvia. . . . . . . . . . . . . 0 0 0 9 111 48 5 15

Lithuania . . . . . . . . . . 0 0 0 40 173 86 10 24

I Total FSU. . . . . . . . 11,394 12,665 6,235 2,784 8,400 11,078 5,245 2,424

I Poland. . . . . . . . . . . . 3 63 2,232 6.5 324 183 1,871 9

Hungary. . . . . . . . . . . 55 95 105 7 185 188 145 92

t

Czechoslovakia. . . . . 3 13 836 136 306 184 827 143

I

a Source for FSU dataa is EIA, International Energy Outlook 1992, p.43 (1990 data); source for Poland, Hungary, and Czechoslovakia data is

International Energy Agency (1989 data).

,

12 ‘‘Russian View of Ventures Brightens, ” Oil and Gas Journal, Aug. 3, 1992, vol. 90, No. 31, p. 20.

13 ‘‘R~sian I-Jpstrearn Joint Ventures bgghlg Pro&?ms, ’ Oil and Gas Journal, vol. 90, No. 44, Nov. 2, 1992, p. 28.

14 ‘iTomo~w’s GI@I~,” The Econom”st, VO1. 324, No. 7769, Jdy 25, 1992, p. 72.

15 Energy hIfOrmdiOn ~- “stration, Department of Energy, Interrurtional Energy Outlook 1992, DOE4EL4-04S4(92), April 1992, p. 10.

lb Ibi& p. 43.
Chapter 3–Energy Supply and Demand–An Overview | 37

As noted earlier, the FSU experienced several

downturns in oil production. Production stagnated from 1980 to 1983, then fell slightly in 1984

and more sharply in 1985. This slump was caused

by policy decisions that favored short-term production goals at the expense of exploration and

discovery. Exploration investment as a share of

total oil and gas investment decreased steadily

from 1971 to 1985. As a result, there was a decline

in the number of exploratory wells completed and

new deposits identified. At the same time, old

fields output declined more sharply than expected. Soviet leaders stabilized the situation by

increasing and shifting funding to new fields

development drilling in Western Siberia.17

Production recovered in 1986 and continued to

grow until mid-1988, peaking at nearly 12 MMB/

D. Since then, oil output has been on a downward

slide. In 1991, production declined to 9.8 MMB/

D, with Western Siberia reporting the greatest

losses. l8 In the Tyumen area, a third of all oil

wells are idle.19 Production in 1992 production

declined even further to about 7.85 MMB/D.20

The initial cause stemmed from a failure to

improve productivity. The use of outmoded

technology, overreliance on waterflooding recovery techniques, and poor maintenance and repair

were largely responsible. Inadequate exploration

also played a role. The dissolution of the Soviet

Union and the resultant economic and political

changes are central to the continued decline.21

EXPORTS

The majority of FSU oil exports are destined

for European countries. Oil is transported to

Eastern Europe via pipelines and to Western

Europe by tankers. In 1988, East European

countries received about 40 percent of total oil

exports from the FSU. About one-half went to

Western Europe, which earned the FSU about $10

billion in hard currency. In 1990, the FSU reduced

oil supplies to Eastern European Countries to

about 36% of total oil exports. The region is

attempting to diversify its oil supplies to include

those from the Middle East and North Afica.22

| Natural Gas

RESERVES

The FSU has 40 percent of the world’s natural

gas reserves-about 1,750 trillion cubic feet (tcf).

In comparison, the U.S. share of world natural gas

reserves is 175 tcf, or 4 percent of the total.23 (See

figure 3-2.)

Between 80 and 90 percent of the FSU’S

reserves are located in Russia. The largest fields

are found in the ~men Oblast of Western

Siberia. In addition, vast amounts of natural gas

are thought to lie beneath the Arctic Ocean.

lldcrnenistan also has significant natural gas

reserves located along its border with Iran.24

Ukraine’s natural gas deposits are either depleted

or uneconomical to explore and produce.

17 We GLI.s~.so~ Cnsls Amid plenty (Princeton: Princeton University Press, 1989).

16 Energy Information ~“ “stratio~ Department of Energy, Annual Energy Review Z991, DOE/EIA-0384(91), June 1992, p. 259.

19 { ‘ne Soviet Energy Industry POWERLESS, ” The Econom”st, vol. 319, No. 7702, Apr. 13, 1991, p. 68.

20 C~Fo~er Comtist Bl~ Oil ~~uction Shows Record Slide for 1992,” Oil ad Gas JourM/, VO1. 91, No. 10, h%x. 8, 1993, p. 17.

z] Ibid.

22 cen~~ ~tefligence A~e~y, Sol,iet Energy Data Resource Ha~book, ~p~ note z, p. 19; ~dlnter~tiO~[Energy Outlook 1992, SUp17i

note 15, p. 36.

23 EIA, ~te~tion~ Energy Outlook 1992, Supra note 15, p. vii.

~ Ibid, p. 42.
38 I Energy Efficiency Technologies for Central and Eastern Europe

Figure 3-2-1990 Gas Reserves—

Selected Countries

1,600 ———– —

r

1,400

1,200

400

200

0 1

Russia U.S. Saudi Mexico Vene- Iran Iraq

Arabia zuela

SOURCE: Energy Information Administration, U.S. Department of

Energy, Annua/ Energy Review 1991, DOE/EIA-0384(91), June 1992,

p. 267.

Poland has proven natural gas reserves as well.

One source estimates proven reserves at 12 tcf.

However, much of its highly dispersed reserves,

which have low Btu (British thermal unit) value,

remain untapped because of a shortage of financial resources to explore and develop them.25

PRODUCTION

The FSU is the largest natural gas producer and

consumer in the world. In 1990, natural gas

production totaled 29 tcf, with about 79 percent

(23 tcf) coming from Russia. Russia’s production

facilities are situated in Western Siberia, particularly in the Urengoi and Yamburg fields. Turkmenistan, the second largest gas producer in the

FSU, produced about 3.1 tcf of gas or nearly 11

percent of the 1990 tota1.26

Unlike the oil industry, the natural gas industry

has maintained fairly stable production levels,

despite the political turmoil. In 1992, for example, Russia produced about 22.6 tcf. The natural

gas industry is relatively young and requires less

sophisticated technologies than does the oil

industry. Thus, the industry may not require large

amounts of capital to maintain present production

levels. Transport of gas to markets could be a

greater problem than production. Many pipelines

and compressors are deteriorating and in need of

repair. Losses of gas from leaky transmission and

distribution lines are a serious problem.

In world energy markets, natural gas is expected to provide an increasing share between

now and 2010. The abundance of the resource,

technological advances in gas-fired equipment

and processes, environmental problems associated with other fossil fuels, particularly coal,

nuclear safety concerns, and costs, all contribute

to enhancing the future prospects for natural gas

production and use.

Increases in natural gas production in Russia

are possible. However, many problems and concerns need to be addressed. Much of the increase

would have to come from new fields located in

remote and difficult production areas, requiring

huge investment. Transportation is also problematic. Increased production will require the construction of extensive new pipelines. At a time

when financial resources are scarce, the money

needed to maintain and/or increase gas production may not be there.

EXPORTS

The Soviet Union exports considerable amounts

of natural gas. In 1990, for example, the U.S.S.R.

provided about one-third of all internationally

traded natural gas,27 much of it to Europe. Russia

and Turkmenistan are expected to continue to be

major exporters for the near future. In recent

months, Central and Eastern European countries

—

2S U.S. Agenq for ~t-tio~ Development OKlce of Ener~, Pola&: An Energy a~Enviro~ental Overview, prepared by ArgOIW!

National Laboratory, October 1990, p. 19.

26 Em, lnter~tio~l Energy Outlook 1992, supra note 15, pp. 41-43.

27 Ibid, p. 35.
Chapter 3-Energy Supply and Demand–An Overview | 39

has shown interest in importing gas from other

countries, such as Algeria and Norway, to reduce

their dependence on FSU exports. Concerns about

Ukrainian/Russian tensions have forced Eastern

European customers to look elsewhere for gas

supplies. Russia’s major natural gas export pipelines pass through Ukraine, now an independent

country. On a number of occasions, Ukraine has

threatened closure of the gas pipelines that cross

its territory.

Ukraine itself is very dependent on Russia for

much of its natural gas supplies. In recent months,

the liberalization of fuel prices has created

tensions between the two countries, which resulted in Ukraine briefly shutting down gas

pipelines to Western Europe. Ukraine is now

trying to build closer ties with Iran, partly to

diversify energy sources. In April 1992, Iran

agreed to supply Ukraine 4 to 5 million tons of oil

and 25 billion cubic meters of gas this year. Also,

Ukraine and Iran agreed to build gas pipelines

from Iran to Western Europe through Ukraine.28

| Coal

RESERVES

The FSU has huge coal reserves, estimated at

263 million short tons. Together, the FSU, United

States, and China account for two-thirds of total

world reserves.29 Immense reserves are scattered

throughout the FSU. Ukraine’s Donets Basin,

located in the southern part of the country, is the

largest coal producing region in the FSU, and a

valuable source of coking coal.30 In Kazakhstan,

the northeastern Basin near western Siberia yields

substantial coal resources. Also, substantial reserves are located in Western and Southern

Siberia.

Table 3-2—Coal Reserves and Production,

Selected Countries (million short tons)

Recoverable

Country reserves a Production b Consumption

U. S. S. R.. . . . . . . . . 263,470 694 661

Poland. ... , . . . . . 43,728 289 253

Czechoslovakia. . . 5,91 8’ 118 119

Hungary. . . . . . . . . 4,91 6’ NA NA

United States. . . . . 265,173 1,029 896

Total World. . ....1,167,346 5,211 5,171

a source for reserves data is British Petroleum Statistical Review of

World Energy, June 1991 (1990 data).

b includes anthracite, bituminous, lignite, and brown coal.

c source for Czechoslovakia and Hungary reserves data is World

Energy Council Survey of Energy Resources (1987 data).

SOURCE: Energy Information Administration, Anual Energy Review

7997, June 1992, pp. 291, 293, and 297.

Poland’s recoverable reserves are estimated at

about 44 billion short tons.31 Its substantial hard

coal reserves are found primarily in the Upper

Silesian Basin in the South. Lignite reserves are

scattered throughout central and western Poland.

The former CSFR (mainly the Czech Republic)

and Hungary also have coal reserves, but far less

significant than the FSU and Poland. Lignite is

prevalent. (See table 3-2.)

PRODUCTION

Over the last few years, coal production has

been declining. In 1989, the FSU produced 761

million short tons (MST), which declined to 694

in 1990.32 Labor unrest contributed signficantly

to declining output. Unlike the oil and gas

industries, coal industry output is closely linked

to social issues. Low morale and salaries and

wretched working and living conditions led to

miners’ strikes in the FSU in 1989, 1990, and

1991.

28 Steven Woetil, Ukraine, CRS Issue Brief, IB92072, July 2A, 19% p. CRS-9.

29 EM, Annual Energy Review 1991, supra note 18, p. 261.

30 Em, lnter~tiona[ Energy Outlook 1992, supra nOtf3 15, p. 37.

31 Annul Energy Review 1991, SUpm note 18, p. 291.

32 Ibid, p. 293.
40 I Energy Efficiency Technologies for Central and Eastern Europe

Table 3-3—Nuclear Power Reactor Statistics (August 1992)

Operable Under construction Planned Nuclear generation in 1991

Country Units MWe Units MWe Units MWe TWh % of total

Bulgaria. . . . . . . . . . . . . . 6

CSFR. . . . . . . . ........8

Hungary. . . . . . . . . . . . . . 4

FSU. . . . . . . . . . . .......56

Kazakhstan . . . . . . . . . . 1

Lithuania. . . . . . . . . . . . 2

Russia. . . . . . . . .......39

Ukraine. . . . . . . .......14

Total. . . . . . . . .. .....74

3,760

3,488

1,810

36,899

150

3,000

20,941

12,808

45,957

0

6

0

0

0

9

3

18

0

3,788

0

0

0

6,600

3,000

13,388

0

2

2

o \

0 *

4*

0*

●

o

2,028

2,000

0 .

o*

4,000”

0*

●

13.2

23.8

13.7

210

NA

NA

NA

NA

34.0

28.6

46.1

8.1

NA

NA

NA

NA

● Plans very uncertain.

NA = not available

SOURCE: Nuclear Engineering International, World Nuclear Industry Handbook 1993, pp. 10 and 14.

Poland is a major coal producer, ranking fifth

in the world. In 1990, Poland produced 289 MST.

Also, the former CSFR is a major coal producer;

however, its output has declined in recent years

from 130 MST in 1989 to 118 MST in 1990.33

EXPORTS

Despite the decline in production, the FSU and

Poland remain major coal exporters. In 1989, the

FSU and Poland supplied 8 percent and 7 percent

respectively of the world’s total exports, most of

which went to Europe.34

The outlook for the coal industry is uncertain.

The coal industry is in need of extensive modernization. The use of old, inefficient technologies is

commonplace, resulting in low yields. In addition, production costs are escalating rapidly and

transportation costs are high, when compared to

natural gas. Some restructuring of the coal

industry in Hungary, the former CSFR and Poland

has already begun. In Hungary, for example,

several coal mines have been closed, prices

raised, and subsidies canceled; Czech coal production is being reduced by 40 percent.35

Associated environmental problems further

cloud the outlook. The burning of low-quality

lignite (brown coal) is largely responsible for the

alarming degradation of the environment in CEE.

Poland is taking steps to retrofit power-plants to

burn coal more efficiently and cleanly. Technological advancements in clean coal-burning technologies and pollution control equipment could

stimulate coal production.

| Nuclear

As of August 1992, there were 74 operating

nuclear power reactors in Central and Eastern

Europe and the former Soviet Union. (See table

3-3 for a breakdown of the number of plants and

capacity, by country.) Ukraine has a heavy

concentration with fourteen.36

About 35 percent of these reactors are the older

Soviet-designed units-the RBMK (Chernobyltype) and VVER/440-230 models.37 The VVER

is a pressurized light-water-cooled reactor. The

33 Ibid.

34 EIA, International Energy Outlook 1992, supra note 15, p. 37.

35 “A New Role for Nuclear Energy ?,’ The OECD Observer, No, 170, June/July 1991, p. 20.

36 Nuclear Engineering International, World Nuclear Industry Handbook 1993 (Sutton, England: Nuclear Engineering International, 1993),

p. 10.

37 Ibid.
Chapter 3-Energy Supply and Demand–An Overview | 41

RBMK is a light-water-cooled, graphite moderated pressure-tube power reactor that is unique to

the FSU.

Concerns about the safety of the RBMK and

older VVER/400 models has prompted some

anti-nuclear sentiment in this region. The RBMK

and older VVER/440 models elicit the most

concerns. The RBMKs have serious problems

with electrical systems instrumentation and fire

protection, and- they lack western-style containment structures. The Ukrainian Parliament voted

to shut down the RBMK reactor at Chernobyl in

1993 and placed a moratorium on new construction. Some VVER/440-230 models lack emergency cooling systems and protective structures

to contain radioactive materials. Expensive improvements are needed to make them safer.

In the interest of safety, a number of organizations and individuals believe that the RBMKs

should be shut down. The European Community

is particularly concerned about the condition of

these aging plants and has offered financial

assistance to correct problems. In addition, the

G-7 countries have recently agreed to create a

fund to improve the safety of reactors in the FSU

and Eastern Europe. The European Bank for

Reconstruction and Development will manage

the fund. France and Germany together pledged

$80 million; the United States has not yet

committed to a specific funding amount. The first

country recipients will be Bulgaria and Slovakia.

Ukraine and Russia are also slated to receive

funds. 38

Despite safety concerns, some countries are

reluctant to shut down nuclear plants. The need

for power supplies to fuel economic growth and

the desire to reduce consumption of polluting

fossil fuels are two major reasons these plants

continue to operate. Many of these countries have

energy supply deficits, and nuclear energy would

help fill the gap. However, the independence that

nuclear may provide is tempered by the fact that

most CEE countries are dependent on Russia for

nuclear fuel supplies and fuel management.

Hungary depends on nuclear power for about

half of its electricity needs. The former CSFR

derived about 28 percent of its electricity from

nuclear sources.39 In addition, it has one of the

biggest nuclear industries in Eastern Europe. It is

the only non-FSU country to build and export

Soviet-designed nuclear reactors. Also, Ukraine

and Lithuania are heavily dependent on nuclear

power. For the time being, there are no nuclear

power plants in Poland. However, nuclear power

may contribute to Poland’s electricity capacity

after the year 2005. One source estimates that

nuclear power can contribute up to 34 Terawatthours/

year.

40

OUTLOOK

The prospects for nuclear power development

in Central and Eastern Europe are uncertain. After

the Chernobyl accident, concerns about nuclear

safety heightened, mistrust of Soviet technology

and expertise grew, and construction slowed.

Nuclear power development programs were scrutinized and re-evaluated to determine whether

plants should be modernized or decommissioned or

plans scraped. In the FSU, for instance, about

106,000 megawatts (MW) of planned nuclear

capacity were deleted from energy plans after the

Chernobyl accident.41 It now appears that the

moratorium on nuclear powerplant construction

in Russia has been lifted. Recently, the Russian

government approved an ambitious nuclear program that would add at least 30 new nuclear

powerplants and double Russia’s nuclear energy

capacity by 2010. This decision reflects the

government’s need to export oil and gas for badly

38 Ma.rlise Simons, “Major Powers Back a Fund for Soviet-Design Reactors, ” The New York Times International, Jan. 29, 1993, p. A2.

39 Ibid, p. 10.

@ perso~ cou~catiom Slawomir Pasierb, The Polish Foundation for Energy Effklency, Jm Q, 1993.

d] RoM reel, sAxs confcrc~cc on World Oil in the 1990s-Soviet Union and Eastern Europe, Wtigto% D. C., NOV. s, 1991.
42 I Energy Efficiency Technologies for Central and Eastern Europe

needed hard currency and a resurgence of the

atomic energy industry .42

Many difficulties lie ahead. The financial costs

of upgrading and/or decommissioning enormous,

overcoming public opposition will be challenging, and the need for Western expertise and

technology is sizable. Many Western companies

are courting Eastern European countries for

orders to modernize or construct new plants. In

the meantime, the industry must manage and

operate its nuclear enterprises safely and economically to regain public confidence. With the

decline of cheap Soviet energy exports and

environmental concerns about the use of highly

polluting coal, some countries may feel they have

no choice but to pursue nuclear power.

| Renewable

In Central and Eastern Europe, renewable

energy sources contribute only a small share of

total production. Hydroelectric power is the most

developed renewable resource. In 1990, the FSU

had 64.6 gigawatts of hydro capacity, which is

about 19 percent of total installed capacity.43

Biomass fuels may be a signnificant energy

resource in rural areas. Consumption is difficult

to measure because so much of it never enters the

commercial market. Wood, for example, is gathered by individuals and families as the need

arises.

Wind and solar energy hold promise for the

future, particularly in rural areas. Their roles

could expand substantially as their production

costs decline. Moreover, the need to diversify

energy supplies may spur the development of

indigenous renewable energy resources. Several

U.S. companies, such as Integrated Power, are

interested in marketing wind and photovoltaics to

the FSU.

OVERVIEW OF ENERGY DEMAND

The FSU is the world’s largest consumer of

natural gas, the second largest consumer of

petroleum, and is second only to the United States

in total energy consumption. From 1974 to 1988,

both the FSU and Eastern Europe experienced

higher growth rates in energy consumption than

the Organization for Economic Cooperation and

Development (OECD) countries.44 As mentioned

earlier, energy intensity is also high compared to

the United States, Japan, and Western Europe.

The emphasis on heavy industries and energy

production and transmission losses have contributed substantially to the high energy requirements

in this region. Major energy production facilities

often are located in remote areas, particularly

Siberia, far from major consumers. In the FS, oil

and gas transport distances have increased dramatically. During the 1975-85 period, the average

distance gas was transported doubled to 2,000

kilometers. The greatest natural gas losses occur

during transmission. Decrepit pipelines and inefficient compressors are largely responsible for

this situation. Moreover, natural gas production

losses are high. About 30 percent of associated

gas is flared because there is a shortage of gas

processing equipment for oil-field associated

gas. 45

The other former republics vary in their patterns of energy use. Ukraine, for example, has one

of the largest coal-producing regions in Eastern

Europe--the Donets Basin, and thus relies extensively on coal. Poland, also relies on coal for a

large percentage of its energy needs. This reliance

is unlikely to diminish before the end of the

42 Fred wtt, ‘‘Ftussia pl~ TO Build More Reactors, ” Washington Post, Jan. 13, 1993, p. A19.

43 Em, Annul Energy Review 1991, supra note 18, p. 299.

44A ReWrt to fie U.S. wortig Group on GlobaJ Energy Efficiency, Energy Efficiency, Developing Nations, and Easrern Europe, Jwe

1991, p. 2.

45 he sCfippa ~d R.c. cwpr, ~mnce Berkeley ~borato~, Energy Use and conse~afion in the U.s.s&.: patterns, prospects, and

Problems, LBL-29830, April 1991, pp. 8-9.
Chapter 3-Energy Supply and Demand–An Overview | 43

Table 34-1989 Sectoral Final Energy Use, Selected Countries

FSU Poland CSFR Hungary Us.

Sector Petajoules % Petajoules % Petajoules Petajoules % Petajoules %

industry. . . . . . . . . . . . . . . 18,619 49 421 40 1,064 49 358 40 17,518 31

Transport. . . . . . . . . . . . . 6,180 16 135 13 168 8 119 13 20,470 37

Residential/Commercial. 9,488 25 446 42 665 30 336 37 17,233 31

Agriculture. . . . . . . . . . . . 3,853 10 45 4 144 7 56 6 656 1

Other. . . . . . . . . . . . . . . . . 2441 1 — — 140 6 34 4 173 —

Total. . . . . . . . . . . . . . . . 38,385 100 1,046 100 2,181 100 903 100 56,051 100

SOURCE: OTA estimates based on IEA, Energy Statistics and Balances of Non-OECD Countries 1988-198% Energy Balances of OECD

Countries 1989- 1990 Energy Balances or OECDCountries 1987- 1988; and World Bank, Greenhouse Gas Strategy for Eastern Europe and the FSU,

August 1992.

century. Hungary’s energy use is diversified

compared to other Eastern European countries

and its energy intensity is the lowest in the region.

However, Hungary is still a very energy-intensive

nation because of its emphasis on heavy industry

and its low productivity levels. Hungary imports

about half of the energy it uses. In the former

CSFR coal and lignite comprise a significant

percentage of total primary energy use, accounting for almost 60 percent. Much of the coal is of

poor quality, and its use has resulted in significant

environmental degradation.

There is a huge potential for improving energy

efficiency in Central and Eastern Europe. In fact,

this potential may be the greatest in the world.

However, there has been little experience in

exploiting this potential to date, Identification of

the most promising energy-saving technologies,

projects, and policies has just begun. The lack of

or uncertainty about energy-use data is just one of

several stumbling blocks to developing rational

energy efficiency policies. The following section

briefly describes energy use in the various sectors

of the economy (see table 3-4) and barriers to

using energy more efficiently. Chapter 4 provides

a more indepth discussion of the energy savings

potential in Central and Eastern Europe.

| Residential/Commercial Sector Demand

Data on existing FSU building stock are

uncertain, and residential/commercial sector energy use data are scarce. This is particularly true

for housing in rural areas, where individuals or

families directly obtain fuels, such as wood, for

much of their energy needs. Despite the uncertainty and availability of the data, some observations can be made about residential/commercial

sector energy use.

Residential and commercial energy use accounts for about 25 percent of total energy

demand in the FSU. (See figure 3-3.) Space

heating dominates sector demand. Sources include district heat, direct fuel use (for heating and

cooking stoves), and electricity.

District heating46 is used primarily in urban

areas. Its feasibility is dependent on the size and

location of the city. In rural areas, fuel usually is

used directly. Natural gas, kerosene, wood, and

coal are the most frequently used fuels. According

to Lawrence Berkeley Laboratory (LBL), in 1985

about one-quarter of rural families in the FSU

used coal or wood for heating, 59 percent used

natural gas, 9 percent used LPG, and 1 percent

used heavy oil.47

Electricity use per capita and/or per household

is quite low in the former Soviet Union. In 1987,

homes and buildings accounted for only 9 percent

46 Hat (~ ~~ fom of hot water or Sta)is pr~uc~d at a central p~t and dis~buted dir~fly to buildings through underground pipes.

AT Schipper and Cooper, supra nOte 45, p. 21.
44 | Energy Efficiency Technologies for Central and Eastern Europe

| —

20

10

Residential/

commercial

Transport

Industry

SOURCE: R. Caron Cooper and Lee Schipper, “The Efficiencyof Energy Use in the USSR—An International Perspective,” Energy, Theternatiorra/

Journa/, vol. 17, No. 1, 1992; “The Soviet Energy Conservation Dilemma,” Energy, Policy, vol.19, No. 4, May 1991; Lee Schipper and Steve Meyers

et al, Energy Efficiency and Human Activity: Recent Trends, Futilee Prospects (Cambridge University Press, 1992).

Coal ash pile behind apartment house in Kracow,

Poland. This building is being modernized as apart of

an AID demonstration project.

of electricity use, compared to 25 percent in the

United States and 20 percent in Western Europe. 

48In the FSU, electricity is primarily used for

lighting and motors. Air conditioning is not

widely used in this region but is becoming more

popular in commercial buildings, particularly in

Southern areas. Its growth will contribute substantially to increasing electricity use in the

buildings sector in the future. (See figure 3-4 for

home electricity use in the U.S.S.R. and other

countries.)

The energy intensity of buildings is quite high.

Windows are not sealed properly, insulation is

poor, and there are few thermostats or controls to

regulate temperature. Moveover, typical appliances and lights are extremely inefficient.

In Poland, the buildings sector is the leading

energy user but only by a small margin. It

accounts for about 42 percent of final energy

demand. More than half of this sector’s energy is

derived from coal and lignite. Coal is used

primarily in homes to produce hot water and heat.

Natural gas and oil provide more than 25 percent

48 Ibid, pp. 19-21.
of sector energy; and electricity, 8 percent. The

buildings sector accounts for about a 45 percent

share of total electricity use.49

The residential/commercial sectors in Hungary

use district heating and coal extensively. Household electricity use is low compared to western

industrialized countries. However, residendential/

commercial electricity use has been growing

since the 1980s. The increases in electricity

demand were spurred by service industry growth.

This growth reflects a shift away from heavy

industry and materials production.50

Common inefficiencies found throughout Central and Eastern Europe include lack of insulation

in roofs and walls, energy-inefficient lighting,

poor quality motors and appliances, inadequate

construction and high infiltration. Low-cost/nocost measures can provide significant energy

savings. A few examples are thermostats to

regulate heat, properly sealing windows, and

providing adequate roof insulation. Behavioral

changes are another important factor in achieving

energy savings in this sector. Chapter 4 provides

a detailed discussion of the technical potential for

saving energy in the buildings sector.

| Industry

In most Central and Eastern European countries (Poland is the exception), industry commands the largest share of the energy pie. Cheap

and abundant energy sources fueled the tremendous growth in the industrial sector, particularly

of energy-intensive heavy industries, over the last

40 years. Some of the high-output industries

include iron and steel, chemicals, cement, and

fertilizers. The FSU, for example, is the world’s

largest steel producer. It produces 50 percent

more than Japan.

51 In Ukraine, Coal mining and

ferrous metallurgy are the dominant industries. In

Figure 34-Home Electricity Use in 1986 U.S.S.R.

and OECD Countires

. --- KWH/capita/vear

1,500

1,000

500

0

I

Space heating

Water heating+

Cooking

Other appliances

Refrigeration

Lighting

U.S.S.R. Italy Japan FRG France France Den- U.S. Sweder

(1985) mark

● Water heating includes washers

SOURCE: R. Caron Cooper and Lee Schipper, “The Efficiency of

Energy Use in the USSR-An International Perspective,” Energy, The

Internatiomd Journal, vol. 17, No. 1, 1992; "The Soviet Energy

Conservation Dilemma,” Energy Policy, vol. 19, No. 4, May 1991; Lee

Schipper, Steve Meyers et al, Energy Efficiency and Human Activity:

Recent Trends, Futile Prospects (Cambridge University Press, 1992);

and Lee Schipper and Dianne V. Hawk, “More Efficient Household

Electricity Use: An International Perspective,” Energy Policy, vol. 19,

No. 3, April 1991.

1990, these two industrial sectors accounted for

40 percent of industrial assets and 20 percent of

output in Ukraine .52 Throughout the region,

finished goods production, such as autos, appliances, clothing, etc. was very low.

Many industries are very energy intensive.

They require more than twice the energy per unit

of output than do similar activities in Western

49 us. AID, pola~: An Energy and Environmental Overview, SUpm note 25, p. 39.

M ~temtio~ En~~ Agen~, Energy Policies: Hungary, 1991 SUTWV, 1992, PP. 26, ~85.

51 Sc~pPr ~d Cwper, supra note 45, P. 13.

52 Steven Woeh], Ukraine, supra note 28, p. crs-7.
46 I Energy Efficiency Technologies for Central and Eastern Europe

industrialized nations.53 The most energy intensive industries are iron and steel, chemicals,

cement, and petroleum refining. Because industrial production contributes a large share of GNP,

industrial energy use greatly contributes to the

overall high-energy intensities of these countries’

economies. Thus, much attention has been focused on this sector to reduce energy demand.

In the industrial sector, structural changes are

likely to make a big difference in energy use.

Moving away from heavy industry to less energyintensive consumer products will do much to

reduce energy use. Diminishing the role of the

iron and steel industry in the economy is key to

structural change. This can be accomplished by

reducing metals use, either absolutely or by

substituting other lighter-weight materials and by

better matching production with demand, rather

than planned targets. The metal intensity of

Eastern European goods is higher than comparable products in the West. One estimate indicated

that equipment in the FSU is 10 to 70 percent

heavier. 54

Another way to reduce energy use is to upgrade

technologies and processes. The steel industry in

the FSU, for example, relies heavily on old

technologies, e.g., the open-hearth furnace, that

are inefficient. Continuous casting, which can

provide significant energy savings, is used in only

17 percent of FSU castings, compared to 53

percent in the United States and 90 percent in

Japan. Substantial energy savings can be realized

in other industries as well. The dry process

method of cement production uses 20 to 30

percent less energy than the wet process. In the

FSU, only about 15 percent of cement is produced

using the dry process.55

It is important to note that none of these

measures is likely to succeed unless economic

reforms, especially of the pricing system, are

supported. The effectiveness of these reforms will

largely determine the potential to save energy.

See chapter 4 for a discussion of industrial sector

energy savings potential.

| Transportation

Transportation plays an important role in the

economy of the FSU. The size and diversity of its

resources and population require an extensive

transport network.

Freight accounts for the largest share of total

transport sector energy use. Long distance rail and

pipeline dominate. (See figure 3-5.) In the FSU,

freight intensity is very high--28,000 tons-kilometer/

capita.56 Since the 1960s, shipping distances have

increased steadily. Transport of energy, particularly coal and oil from Western Siberia, is largely

responsible for the increase in freight activity.

Poland’s extensive railway system played a

major role in moving freight between the FSU and

Western Europe and between Czechoslovakia

and Polish ports. In 1985, nearly 1 billion tons

were hauled by freight, compared to 289 million

tons in Czechoslovakia, and 127 million tons in

Hungary .57

Truck use is slowly rising in this region. The

use of diesels has improved truck fuel economy

but not to the level of Western European countries.

Passenger mobility is very low compared to

Western countries. Bus is the most frequently

used mode of passenger travel, followed by rail.

There are few private automobiles in Central and

Eastern Europe--about 50 per 1,000 people in the

FSU, compared to about 600 in the United States.

Among its neighbors, Poland has the lowest ratio

53A Report to tie U.S. Working Group on Global Energy Efficiency, supra nOte 44, p. 3.

M sc~pwr and Cooper, supra note 45, p. 26.

55 Ibid, p. 28.

56 mid, figure 16, p. 53.

57 U.S. ~, pola~: An Energy u~ Envlron~ntal Ovemiew, SUpm note 25, odO&r 1990, p. 45.
Chapter 3-Energy Supply and Demand–An Overview | 47

(about 127 cars per 1,000 people) .58 In recent

years, travel by private auto has been rising and

probably will continue to rise. This is particularly

true in urban areas.

The efficiency of automobiles is low. LBL

estimated average automobile fuel consumption

to be about 12 liters/100 km or 20 miles per gallon

(mpg) in 1985, which is high by European

standards. In the United States, automobile fuel

economy averaged about 27.5 mpg in 1985. Some

of the factors besides poor design that impact fuel

economy include poor maintenance and fuel

quality, traffic congestion, and cold weather

conditions .59

The energy intensity of passenger air travel is

comparable to that in the United States. The

primary reason is that Soviet-designed aircraft are

packed with passengers. According to LBL, they

have an average load factor of 97 percent.

60

However, the aircraft are inefficient if measured

in energy use per seat/km. While the efficiency of

U.S. aircraft improved significantly over the last

two decades, no improvements in aircraft efficiency were noted in the FSU.

In this sector, fuel use has changed over the

years. For rail transport, electricity and diesel

have replaced coal and residual oil. Diesel is

slowly replacing gasoline use in trucks and buses.

For pipeline transport, gas provides more than

one-third of the end-use energy; electricity, 5

percent; and liquid fuels about 60 percent.

6l

There is huge potential for growth in this

sector, particularly personal travel. However,

there is also significant potential for improving

efficiency as well. Improvements in auto design

and technologies, traffic control, and increased

use of computers will do much to increase

automobile fuel economy.

Structural changes in the economy, i.e., a shift

away from heavy industry, will likely decrease

Figure 3-5-Freight Movements in the U.S.S.R.

by Major Mode

25

20

15

10

SOURCE: R. Caron Cooper and Lee Schipper, “The Efficiency of

Energy Use in the USSR—An International Perspective,” Energy, The

International Journal, vol. 17, No. 1, 1992; "The Soviet Energy

Conservation Dilemma,” Energy Policy, vol. 19, No. 4, May 1991; and

Lee Schipper, Steve Meyers et al, Energy Efficiency and Human

Activity: Recent Trends, Futile Prospects (Cambridge University Press,

1992).

freight activity. But a rise in demand for finished

goods may increase truck transport. Also, higher

quality, longer lived products will reduce waste.

These and other topics are discussed in chapter 4.

REASONS FOR INEFFICIENCY

Energy efficiency can save dollars and reduce

environmental impacts associated with energy

production and use. Yet, many opportunities to

improve energy efficiency have not been tapped.

There are a number of reasons why this is the case.

One of the primary barriers to using energy more

efficiently is the pricing system.

In the U. S. S. R., internal oil prices were set by

the central government and were neither based on

the cost of production nor tied directly to highly

volatile world market prices. Rather, they were

58 Ibid, p. 42.

59 Sctipper and Cooper, supra note 45, p. 19.

@ Ibid.

61 Ibid, p. 17.
48 I Energy Efficiency Technologies for Central and Eastern Europe

Integrated steel plant near Katowice, Poland. Up until

recently, one of the its largest customers was the Soviet

Army.

tied to past world market prices. Oil prices, for

example, were based on a rolling average of world

prices over the previous 5 years, later changed to

3 years. This pricing system, called the Bucharest

Formula, helped to isolate the former Soviet

Union and its Eastern European customers from

the oil price shocks of the mid 1970s and early

1980s, while allowing gradual price increases or

declines. 62

In recent years, as costs of fuel extraction and

power generation increased, actual energy costs

moved further away from prices. When transportation and distribution costs are taken into account, energy prices become even more distorted.

In the residential sector, heat, hot water, and

gas are not metered. The consumer pays a charge

based on apartment size. Electricity use is metered, and payments are determined by the

consumer who reads the meter and sends in the

payment. These practices provide little or no

incentive to use energy more efficiently.

The predominance of energy-intensive heavy

industries in the economy also hampered efficiency gains. Historically, the Soviets emphasized large-scale, heavy industries, like iron and

steel. The availability of enormous oil and coal

resources near major urban centers fueled the

development of the industrial sector. In addition

the use of “value of output” targets encouraged

the production of metal-intensive goods because

they have a higher value. Soviet data suggests that

the economy uses twice as much metal as the

United States per unit of national income.

Yet another impediment to energy saving

improvements is the use of old and obsolete

technologies. In the FSU, technologies in basic

industries have changed slowly. There were no

incentives to develop new, more efficient technologies prices were low and energy abundant.

Limited capital resources further constrained

technology replacement rates, which were already low.

The lack of access to foreign technologies and

expertise also may have been a limiting factor in

pursuing conservation strategies. Even today,

simple technologies that offer significant energy

savings are not available in Central and Eastern

Europe.

Management also hampered the efficient use of

energy. Factory managers were concerned with

meeting planned production targets at all costs.

Little or no attention was given to energy use.

Managers who met or exceeded production targets received bonuses; those who saved energy

could be penalized by having their allocation

reduced. In order to avoid being penalized,

managers overestimated raw materials requirements, which contributed to the high metal energy

intensities of CEE economies.

Today, managers are most concerned about

keeping the business/plant open and workers

employed. In the FSU, profits are given little

consideration because taxes are so high (50

percent), and inflation (about 25 to 30 percent/

month) quickly makes any profit worthless.

The lack of consistent and reliable information

on energy use has been cited as another impediment to energy efficiency. Data collection is

62 she~ B1-ief@ Semice, Energy in the Soviet union a& Eastern Europe, No. 2, 1991, p. 1.
Chapter 3-Energy Supply and Demand–An Overview | 49

uneven and uncertain. Reporting is often dispersed among various reports and publications. In

many cases, basic data on energy consumption are

missing. According to LBL, few Soviet publications analyze energy-intensity indicators, such as

energy use per kilometer for autos, per square

meter for space heating, etc. In addition, it is not

clear whether data refer to actual energy use or

how the fuel was allocated. Moreover, little

information is available on the link between the

relationship of structural changes in the economy

to energy use. Structural changes include shifts

toward less energy-intensive industries such as

services, technology advances in production processes, and changes in consumer spending patterns. There is no doubt that ignorance about

energy savings has limited investments in energy

efficiency.

LINK TO ECONOMY AND ENVIRONMENT

Energy efficiency and conservation strategies

must be considered within the context of the

economic transition that is underway in this

region. How the governments manage the transition will play a major role in determining the

importance of energy efficiency in the economy.

Clearly, the governments are moving toward

market-oriented economies, some more rapidly

than others. However, social considerations, such

as unemployment and providing for basic needs,

constrain the pace. The scarcity of capital also

constrains the pace of the transition in general and

investment in energy efficient technologies and

measures in particular. What little capital is

available is used to increase production. Investments that reduce expenses only, such as many

energy efficiency measures, are given lower

priority. (This can be true in Western countries as

well.)

Nevertheless, changes in energy use will have

an effect on CEE economies. Reductions in

energy demand could free up capital required for

energy development and cut expenses in every

sector. Also, oil saved can be exported to generate

badly needed hard currency and ease pressure on

world markets. Energy efficient technologies also

can improve productivity, which in turn can spur

economic growth.

Energy efficiency measures offer environmental benefits as well. High energy intensity

coupled with the low priority given to environmental considerations have left Central and Eastern Europe with serious air and water degradation. The transboundary nature of air pollution

has heightened Western European concerns and

underscored the importance of CEE fuel use on an

international level. Moreover, this region is a

major contributor to greenhouse gases. In 1985,

the FSU and Central Europe accounted for about

22 percent of global greenhouse emissions.63 The

United States is also a leading contributor of

greenhouse gases, accounting for about 20 percent of the world’s warming commitment. Improvements in energy efficiency could reduce

global greenhouse gas emissions and other pollutants that have more regional and local effects.

Cleaning up pollution will require many years

of effort and large infusions of capital. The Polish

Government, for example, estimates that $260

billion will be needed to attain European Community (EC) environmental standards and reach reach

sustaninable economic de velopment. 64 The same is

largely true for other countries in the region. A

United Nations report estimates that capital

requirements on the order of about $1,200 billion

over the next 2 to 3 decades are needed to

modernize the energy sector and introduce acceptable environmental standards in this region.65

6J Omlce of Tahno]ogy Assessment Changing By Degrees. Steps to Reduce Greenhouse Gases, OTA-0A$82 ~astigton, D.C.: U.S.

Government Printing OffIce, February 1991), p. 5.

64 s~cy J. fib~% < ‘me Environmental Morass in %tem Emopet “ Current Histov, vol. 90, No. 558, November 1991, p. 388.

65 u~[ed Natiom, Energy Refonns in Central and Eastern Europe-the First Year, supra note 1.
50 I Energy Efficiency Technologies for Central and Eastern Europe

Many measures can improve air and water

quality and reduce greenhouse gas emissions.

Energy efficiency improvements may be the most

effective means of reducing emissions. For example, the potential to reduce carbon emissions

through energy efficiency exceeds that of fuel

switching by a factor of 2.66

Air Quality—Air quality is considered poor in

many areas of Central and Eastern Europe. Heavy

reliance on fossil fuels production and consumption, especially coal, has had a significant impact

on air quality. In addition, limited availability of

pollution control equipment and the questionable

performance of equipment in place contributes to

the high pollution levels experienced in this

region. The FSU produces about 70 percent more

emissions from stationary sources per unit of

GNP than does the United States.67

When fossil fuels are burned, significant quantities of sulfur dioxide, nitrogen dioxide and

particulate are released into the air. Sulfur

dioxide emissions are responsible for damaging

large areas of forest. About 82 percent of Poland’s

forests show damage, 73 percent of the former

CSFR’s, and 36 percent of Hungary’s.68 I n

Northern Siberian oil fields, thousands of gas

flares bum all day, every day. The SO2 from these

flares helped ruin 1,500 square miles of Siberian

timber. 69

In the heavily industrialized areas of Poland’s

Upper Silesia and the Czech Republic’s Northern

Bohemia, industrial byproducts are regularly

pumped into the air. The concentration of smoke

in parts of Upper Silesia exceed EC standards by

600 percent.70 The situation is much the same in

Russia, where about 70 million people in 103

cities breathe air that is five times above the

allowed limit for dangerous chermicals.71

Water Quality—Water quality has deteriorated dramatically in this region. Industrial and

agricultural activities are major sources of pollution. Raw sewage and industrial effluents that

contain heavy metals and chemicals are pumped

daily into rivers and streams. Some rivers are so

polluted that they cannot be used for drinking or

even for industrial purposes. About half of all

Polish cities, including Warsaw, do not have

wastewater treatment facilities.72 In the FSU,

about half of all sewage is improperly treated, and

about 20 percent is dumped untreated into the

environrment. 73 Many large cities in the Baltics,

such as Kaunas, Lithuania, and Riga, Latvia do

not have sewage treatment facilities.

Polluted rivers eventually wind their way to the

sea. The Caspian, Black and Baltic Seas are

polluted. As a result, plant and animal life is

threatened. Fish populations are declining and

beaches are closed periodically.

Ground water contamation is increasing as

well. Farms are the primary culprit. Fertilizer,

pesticide, and animal waste runoff are major

contributors. Because fertilizer and pesticide

prices were subsidized, more and more of these

products were used, regardless of whether crop

yields increased. The inappropriate use of pesticides also presents health concerns. In the FSU,

66 pac~lc No fiwest ~borato~, llner~ Conservation: The Main Factor for Reducing Greenhouse Gas Enu”ssions in the Fortner Soviet

Union, PNI.AA-20400, December 1991.

67 ~~ew J. sagas and Wallace A. Reed, “News Notes, ” Soviet Geography, vol. 30, No. 6, June 1989, pp. 513.

68 Org anization for Economic Cooperation and Development, Refom”ng the Econom”es of Central and Eastern Europe, 1992, p. 98.

69 U.S. News am-i World Report, “lbxic Wasteland, ” vol. 112, No. 14, Apr. 13, 1992, p. 40.

70 Richd Aekerrnanq “Environment in EC: Despair or Hope?, ” Transition: The Newsletter About Refow”ng Econonu”es, vol. 2, No. 4,

April 1991.

71 U.S. News and World Report, supra note 69, p. 42.

72 world RMowce~ ~ti~te, ~ ~o~~mtion Mm he United Natio~ Environment Prograrnme and the United Nations Development

Programme, World Resources 1992-93, A Guide to the Global Environment (New York: Oxford University Press, 1992), pp. 64-65.

73 H@ F~nch * ‘Environmen~ problems and Policies in the Soviet Union, ” Current History, vol. 90, No. 558, October 1991, p. 333.
Chapter 3–Energy Supply and Demand–An Overview | 51

about 30 percent of foods have high concentrations of pesticides.74

Health—Environmental factors appear to be

one of several causes of deteriorating health in

Central and Eastern Europe. Among 33 industrialized countries, life expectancy is shortest in this

region. (See figure 3-6.)

In addition, infant mortality rates are high

relative to other countries. In Czechoslovakia, for

example, infant mortality was 11.9 per 1,000 in

1988; in Hungary, 15.8, and 16.2 in Poland. For

comparison, the rate was 7.5 in Germany, and 8.8

in Japan.75

The impact is most acute in the heavily mined

and industrialized areas of the northern Czech

Republic and southwestern Poland. In the most

polluted areas of the former CSFR, for example,

life expectancy is reported to be 5 years less than

in other parts of the country. (Life expectancy also

suffers from much heavier smoking prevalence

rates. ) In addition, high levels of SO2 emissions

has been related to a 5-fold increase in respiratory

disease among preschoolers and a 3-fold increase

among school-age children compared to western

CSFR. In Hungary, environmentally related

Figure 3-&Life Expectancy at Birth, 1985-90

Japan

North America

Europe

Western Europe

Central Europe

U.S.S.R.

Hungary

Romania

Czechoslovakia

Poland

Albania

Bulgaria

Yugoslavia

Germany

60 65 70 75 80

Years

SOURCE: World Resources Institute, in collaboration with the United

Nations Environment Programme and the United Nations Development

Programme, World Resources 1992-93, A Guide to the Global

Environment, (New York: Oxford University Press, 1992).

health problems are estimated to account for

about 13 percent of health and social welfare

expenditures. 76

74 Ibid, p. 335.

75 World ReSoumS Institute, supra note 72, p. 62.

76 Org anization for Economic Co-operation and Developmen~ supra note 68, pp. 97-98.
H

Technologies

for

Energy

Efficiency 4

eavily subsidized energy prices and incentives to meet

production goals regardless of costs have resulted in

high levels of energy waste in Central and Eastern

Europe (CEE). This has in turn contributed to environmental damage, high operating costs, loss of foreign exchange,

and energy shortages. Fortunately, highly efficient technologies

are available that can provide needed energy services (such as

light, heat, and motor drive) while using less energy. In many

cases these technologies are widely used in the West, and their

use in CEE would have substantial benefits.

This chapter provides an overview of energy efficient technologies. How energy is used, the relative efficiency of that use,

technologies for improved efficiency, and what would be needed

to implement these technologies in CEE are reviewed for each of

the three major energy-consuming sectors—industry, buildings,

and transport. It is shown that there are numerous opportunities

for significant energy savings through the use of simple,

low-cost, retrofit technologies. In many cases these technologies

offer paybacks (the amount of time required for the value of the

energy savings to exceed the initial cost) of less than 1 year.

INDUSTRIAL ENERGY USE

Beginning with the first 5-year plan in the former Soviet Union

(FSU) in the late 1920s, and in the former East Bloc countries in

Central and Eastern Europe in the late 1940s, the centrally

planned economies focused on large-scale industrial developments in basic materials production and fabrication. The former

Soviet economy achieved rapid growth in the 1930s, largely due

to construction of numerous industrial complexes concentrated

around several iron ore and coal mining areas. Similar, though

less rapid, growth took place in Central and Eastern Europe after

53

The use of coal for residential

heating is common.
54 | Energy Efficiency Technologies for Central and Eastern Europe

Table 4-l—Energy Use by Sector in Selected Countries, 1989

FSU Former CSFR Hungary Poland West Germany U.S.A.

PJ Percent PJ Percent PJ Percent PJ Percent PJ Percent PJ Percent

Industry. . .............18,620 49 1,060 49 360 40 1,240 40 2,800 35 17,520 31

Transport. . . . . . . . . . . . . 6,180 16 170 8 120 13 400 13 2,050 25 20,470 3 7

Agriculture. . . . . . . . . . . . 3,850 10 140 7 60 6 130 4 100 1 660 1

Commercial Buildings. . . 3,910 10 290 13 70 7 220 7 1,010 13 6740 12

Residential. . . . . . . . . . . . 5,570 15 380 17 270 30 1,100 35 1,900 23 10,500 19

Other. . . . . . . . . . . . . . . . . 240 1 140 6 30 4 0 0 240 3 170 0

Total. . ...............38,390 100 2,180 100 900 100 3,090 100 8,100 100 56,050 100

NOTES: Excludes conversion losses. Data are uncertain. FSU refers to the Former Soviet Union. Former CSFR refers to the former Czechoslovakia.

West Germany refers to the former West Germany. Data for West Germany are for 1988. PJ-petajoule - 1015 joule.

SOURCES: OTA estimates, based on International Energy Agency, Energy Statistics and Balances of OECD Countries 1987-1988, OECD (Paris,

1990; International Energy Agency, Energy Statistics and Balances of non-OECD Countries 1988-1989, OECD (Paris, 1991 ); International Energy

Agency, Energy Statistics and Balances of OECD Countries 1989-1990, OECD (Paris, 1992); World Bank, “Greenhouse Gas Strategy for Eastern

Europe and the Former Soviet Union,” August 1992, draft.

the end of World War 11. Heavily subsidized Industry is currently the single largest energyenergy supplies, lack of market incentives, and consuming sector, accounting for almost half of

the importance given to fulfilling quotas and state energy use in the FSU and the former CSFR, and

plans resulted in little attention to energy effi- about 40 percent of energy use in Hungary and

ciency. The result today is a technically outdated Poland (see table 4-1, and box 4a).

and energy inefficient industrial infrastructure.

Box 4-A-How Does the Industrial Sector Use Energy?

At present the industrial sector in CEE, as in the United States, covers thousands of different products,

processes, and technologies. Several specific industries, however, account for the bulk of industrial energy use.

The iron and steel industry is the single largest industrial energy user in CEE, accounting for 20-25 percent of all

industrial energy use. This industry uses most of its energy in two forms: coal is used as a feedstock (meaning

the coal is used as a raw material input) to produce coke (which is then used to form steel), and coal and other

fuels are used to produce heat. The second largest industrial energy user in CEE is the chemical industry, which

produces a wide range of products including plastics, rubber, paint soap, fertilizers, and pesticides. Feedstocks

account for about half the energy used in the chemical industry-for example natural gas is a principal feedstock

for the production of ammonia, which is used as a fertilizer. The remainder is used for process heat motor drive,

and a variety of other uses. Machinery and transport equipment is generally the third largest energy user, largely

for motor drives. Other significant sectors include the minerals industry, whose principal products are cement and

glass, and the non-ferrous metals and food and tobacco industries.

An alternative perspective on industrial energy use is in terms of services rather than industries (table 4-2

shows such a breakdown for the United States, as data for CEE are not available). Steam is used for

lower-temperature heating, such as in cooking

and various chemical processing systems. Table 4-2—Breakdown of Industrial Energy Use

Process heat, typically produced from coal or by End-Use in the United States, 1985

natural gas, is used for a variety of purposes Service Percent Of lndustrial Energy Use including heating, drying, curing, and melting.

Motor drive is used in every industry for pumps, Steam . . . . . . . . . . . . . . . . . . . . . . . 33

fans, compressors, and other purposes. Finally, Process Heat.............,... 27

Motor Drive . . . . . . . . . . . . . . . . . . 22

energy is used as a feedstock in many indus- Feedstocks. . . . . . . . . . . . . . . . . . 13

tries, notably natural gas for fertilizer production other. . . . . . . . . . . . . . . . . . . . . . . . 5

and coal for coke used to make steel. SOURCE: Office of Technology Assessment, 1993.
Chapter 4-Technologies for Energy Efficiency | 55

I How Efficient Is Industrial Energy Use in

CEE?

Industries in CEE typically require much more

energy to produce one unit of output than do

industries in Western Europe, Japan, or the

United States. For example, ammonia production

in Central Europe uses 25 to 75 percent more

energy to produce one ton of ammonia than is

used by U.S. or Japanese ammonia plants (see

table 4-3). Similarly, the iron and steel industry in

the FSU requires about 50 percent more energy

per ton of iron output than is required in the

United States (see box 4b).

There is also case-study evidence documenting

the low energy efficiency of many industries. A

series of industrial energy audits in Czechoslovakia found that, ‘‘obvious energy wastes (such as

steam leaks) are present in most plants, and

simple low-cost improvements have not been

implemented. "1

The FSU still uses energy inefficient open hearth furnaces to produce the bulk of

its steel,2 although these furnaces require about 60

percent more energy per ton of output than do

oxygen converter furnaces. 3 A study of eight

industrial facilities in Hungary found that basic

equipment such as boilers, turbines, and pumps

was often old, obsolete, and in need of repair.4

The potential for industrial energy efficiency

improvements in CEE is in some ways analogous

to the situation faced by U.S. industry in the early

Table 4-3-Approximate Energy Intensity of

Ammonia Production in Selected Countries

Energy Intensity of Ammonia

Country Production (GJ/tonne)

Former CSFR*. . . . . . . . . . . . . . . . 51

Hungary. . . . . . . . . . . . . . . . . . . . . 47

Poland. . . . . . . . . . . . . . . . . . . . . . 36

United States. . . . . . . . . . . . . . . . . 29

Japan. . . . . . . . . . . . . . . . . . . . . . . 28

“ The former Czechoslovakia.

SOURCE: S. Kolar, “Industrial Energy Efficiency in Central and

Eastern Europe,” contractor report prepared for the Office of Technology Assessment, September 1992, p. 7.

1970s. From the late 1950s to 1970 industrial

energy prices in the United States were flat (or

decreasing in real terms5

), and during this time

aggregate energy intensity in U.S. manufacturing

(defined as energy use in manufacturing per unit

of production) was essentially flat as well.6

However beginning in 1972 energy prices in the

United States generally increased, and due both to

these price increases and to technical advances,

aggregate energy intensity in manufacturing

dropped by about one-third from 1972 to 1985.7

By one estimate, about two-thirds of this sharp

drop in intensity was due to changes in the output

mix—a shift away from energy-intensive products, such as iron and steel; and towards more

material-intensive products, such as computers

and electronics. 8 The remaining one-third was

due to improved technical energy efficiency.

1 RMA (Resouree Management Associates, Inc.), “Finat Repo@ Phase Four: Industrial Energy Efficiency Componen4 Policy and

Institutional Analysis of Industrial Energy Efficiency in Czechoslovakia,” contractor report for U.S. AID, May 30, 1992, p. 19.

z Ln 1986, 54% of steel made in the FSU made use of open-hearth furnaces. M. Sagers and A. Tretyakova, “Fuel and Energy Use in The

Soviet Metallurgy Industries,” Center for International Research Staff Paper No. 28, U.S. Bureau of the Census, July 1987, p. 14.

3 Ibid, p. 33.

4 RCG/Hagler, Bailly, Inc., ‘‘A Profile of Energy Efficiency in Hungarian Industry,’ contractor report for U.S. AID, Dec. 20, 1991, p. 7.

s Energy prices to manufacturers were generally dropping, in real terms, from 1945 to 1970. See R. Marlay, “Trends in Industrial Use of

Energy,” Science, vol. 226, Dec. 14, 1984, p. 1,279.

s M. Ross, “Improving the Efficiency of Electricity Use in Manufacturing, ” Science, vol. 244, Apr. 21, 1989, p. 311. Others have argued,

however, that manufacturing intensity, ad@sted for structural change, dropped consistently from 1958 to 1985. See for example R. Howart.iL

“Energy Use in U.S. Manufacturing: The Impacts of the Energy Shocks on Sectoral output Industry Structure, and Energy Intensity, ” The

Journul of Energy and Development, vol. 14, No. 2. The discrepancies between these two results are due in part to whether or not structural

change is controlled for, and in part to the use of different definitions and data sources to measure intensity.

7 M. Ross, supra note 6, p. 311.

8 R. Marlay, supra note 5, p. 1,282.
56 | Energy Efficiency Technologies for Central and Eastern Europe

Box 4-B-The Iron and Steel Industry

Iron and steel is the single largest energy consuming industry in CEE, accounting for about 20-25 percent

of industrial energy use.1 This industry is quite inefficient. The FSU, for example, uses about 50 percent more

energy to produce 1 ton of iron than is used in the United States (table 4-4). Much of this difference is due to the

use of outdated and inefficient technologies.

Table 4-4-Energy Intensity of Selected Iron and Steel Processes (GJ/ton, 1989)

Process FSU Czech Hungary Poland USA Japan

Iron Making . . . . . . . . . . . . . . . . 21 15 21 17 14 15

Steel Refining . . . . . . . . . . . . . . 4 8 4 7 3 NA

Aluminum Production . . . . . . . . 59 NA 53 58 45 NA

NA. Not available.

SOURCES: S. Kolar, Industrial Energy Efficency in Central and Eastern Europe,” contractor report prepared for the Office of

Technology Assessment September 1992, p. 7; Energetic, Inc., “Industry Profiles: Final Report-Steel,” contractor report for the

U.S. Department of Energy, December 1990, pp. S-9.

The U.S. steel industry, in response to Table 4-5-Energy Intensities of Steel Production

rising steel imports and other pressures, went Description/Method Intensity (GJ/ton)

through a drastic downsizing and modernization in the 1980s. In just 8 years the U.S. steel 1. U.S. average, 1980. . . . . . . . . . 38

2. U.S. average. 1989. . . . . . . . . . 24

industry reduced its energy intensity by over 3.2010 ‘State-of-the-Art’ . . . . . . . . 15

one third by shutting down inefficient plants and Includes conversion losses for electricity.

investing in new technology (table 4-5). A SOURCES: Energetics, ho., “Industry Profiles-+inal Report: Steel,”

further improvement of over one-third, relative contractor report for U.S. Department of Energy, December 1990, p. 6;

to current levels, is thought possible with use of Office of Technology Assessment, 1993.

advanced technology. The steps that permitted

the U.S. steel industry to sharply reduce its energy intensity are, for the most part applicable to CEE. These include

dosing down of older inefficient plants, retrofitting of existing plants with improved technologies and practices, and

building new, highly efficient plants. Improved technologies include dry coke quenching, heat recovery, continuous

casting, direct steelmaking, and increased scrap recycling.2

1 internatiwal Energy Agmq, Energy Statistics and Ba/ances ofnon-OECD Countries 1988-1989, OECD

(Paris, 1991).

z For a more complete discussion of these technologies see U.S. Congress, Office of T*nologY ASWSSrnent, I%Wng Deve/opmenL OTA-E-516 (Washington, DC: U.S. Government Printing Office, April 1992), pp. 117-123.

The industrial sector in CEE has long paid little market economy, and must now make allocation

attention to energy costs and energy efficiency. and production decisions based on financial

Seemingly overnight, however, there has been an analysis rather than on externally imposed quotas.

abrupt change in the operating environment. In responding to these new market pressures,

Energy prices are rising rapidly, and will probably CEE industries can utilize the considerable techcontirme to rise until they reach world levels. This nica.1 and operational advances that have been

makes numerous energy efficiency irnprove- discovered and fine-tuned in the West in the last

ments, long neglected, suddenly very attractive. 20 years.

In addition, industries are moving towards a
Chapter 4-Technologies for Energy Efficiency | 57

The following section reviews just a few of

these industrial technologies. A more comprehensive review of industrial technologies can be

found in other OTA reports.9

| Energy Efficient Technologies for

Industry

This section reviews generic technologies that

could be used to improve energy efficiency in

industry. These include housekeeping, improved

measurement and control, improved steam systems, and improved motors.

HOUSEKEEPING

There are many simple, low cost measures such

as insulating pipes, plugging leaks, turning off

equipment when not in use, and maintaining

equipment that can result in large energy savings

in industry. For example, a study of energy

efficiency improvements in Canadian industry

estimated that 40 percent of the improvements in

industrial energy efficiency occurring from 1973

to 1985 were due to low or no-cost housekeeping

measures.

l0 Energy savings and paybacks will

vary depending on the specific measures and

applications, however case studies are illustrative

of the savings potential. An audit of a metalworking plant in Budapest, Hungary found that 40

percent of compressed air was lost through

leakage; locating and patching these leaks was

predicted to save 135 kW with a payback of less

than one year.11 Low cost/no cost measures,

notably steam trap maintenance and leak repair,

reduced energy consumption per ton of product

by 15 to 20 percent at a pharmaceutical plant in

Czechoslovakia. 12 A series of industrial audits in

Hungary found the level of maintenance to be

below Western levels,13 suggesting that many

such opportunities remain.

IMPROVED MEASUREMENT AND CONTROL

Improved measurement and control of industrial processes using electronic sensors and monitors, switches, and computers offers large potential energy savings. Examples include combustion analyzers for furnaces and boilers, energy

management systems to automatically operate

energy-using equipment, and improved sensors

and controls to allow for fine-tuning of temperatures and controls. Savings are site-specific, but

generally considerable. For example, the installation of an energy management and control system

at a chemical plant in Budapest, Hungary was

predicted to reduce energy consumption by 15 to

20 percent, with a payback of less than 6

months.14 Similarly, thermostatically controlled

valves for a hot water system at a machining plant

in Czechoslovakia offered considerable savings

with a payback of less than 3 months.15

STEAM SYSTEMS

Steam is probably the single largest industrial

end-use (as shown in table 4-2, steam accounts for

about one-third of all industrial energy use in the

s U.S. Congress, OffIce of Technology Assessment, Fueling Development, OTA-E-516 (wdingto% m: U.S. GOV ernment Printing

Office, April 1992); U.S. Congress, OffIce of Technology Assessment, Industrial Energy Use, OTA-E-198 (Washington DC: U.S.

Government Printing Office, June 1983).

10 Marbek Resomce Consultants, ‘‘Energy Demand in Canada, 1973-1987; VOIUme 1,’ contractor report for Energy, Mines and Resources,

March 1989 (Revised AugusL 1989), p. B-34.

11 RCG~agl~, Badly, Inc. and EGI Contracting and Engineering, “Energy Eftlciency Audit Report: Csepel Muvek Femmu Metalworks

Plan~” contractor report for U.S. AID, Mmch 1992, pp. 30-31.

12 Rw (Reso~e Management Associates, Inc.), supra note 1, p. 20.

13 RcG/Hagla, Btiy, hIC,,SUpra note AI p. 20.

14 RcG~gla, Bailly, Inc. and EGI Contracting and Engineering, “Energy Efficiency Audit Report: Budapest Chemical Works, ”

contractor report for U.S. AID, March 1992, pp. 18-19.

15 Resource Management Associates, Inc. and Energoprojekti “Energy Efficiency Audit Report: Prazske Pivovary Br~ Prague,

Cz.echoslovaki%” Contractor report for U.S. AID, January 1992, p. 16.
58 | Energy Efficiency Technologies for Central and Eastern Europe

Steam traps, indicated by the arrow, save energy in

industrial steam systems. One American company has

successfully exported these devices to the region (see

the appendix of this chapter).

United States; the fraction in CEE is probably

larger). There are several technologies that can

improve the efficiency of steam systems. The

first, discussed above, is housekeeping-insulating tanks and pipes, repairing steam leaks,

installing and maintaining steam traps (see app.

4-l), operating boilers at optimal temperatures

and pressures, and general tune-up and cleaning

of burners. By one estimate, increased insulation

alone can reduce boiler fuel use by 8 Percent.l6

Higher first cost-but typically very cost-efffective--

options include adding electronic temperature

controls and installing improved burners (which

alone can increase efficiency 3 percent17). Installation of a new high efficiency burner with

automatic controls on a 20-year old boiler in a

fabric plant in the former CSFR was estimated to

Table 4-6-Age Distribution of Boilers (1989)

Fraction of Capacity

Age Former CSFR United States

50+ years. . . . . . . . . 11 5

30-50 years . . . . . . . 26 30

10-30 years. . . . . . . 52 52

0-10 years . . . . . . . . 11 13

SOURCE: S. Kolar, “Industrial Energy Efficiency in Central and

Eastern Europe,” contractor report prepared for the Office of Technology Assessment, September 1992, p. 29; RCG/Hagler, Bailly, Inc.,

“Combustion System Technology and Application Assessment: ndustrial Boiler Combustion Systems,” contractor report for the Gas

Research Institute, October 1988, p. 26.

increase efficiency by 3 to 6 percent, with a

payback of 7 months.18

Many boilers in CEE (and in the United States

as well, see table 4-6) are quite old, and may soon

need replacement. Fluidized-bed boilers are a

particularly promising advanced boiler technology. Many boilers, particularly in Poland, are

fueled by coal. Fluidized-bed coal-fired boilers

can increase efficiency, reduce emissions, and

increase tolerance to low quality coal.19 Tests of

fluidized bed boilers have shown that they can

operate with very high ash coal-up to 40

percent.

2O This could be a significant advantage in

the former CSFR, where wide-spread use of coal

with high water and ash content contributes to the

low operating efficiency of boilers.21

The use of cogeneration systems can also yield

significant gains in efficiency. Cogeneration refers to the simultaneous production of heat

(typically steam) and electricity. In industries

with an onsite need for both steam and electricity,

the overall efficiency of a cogeneration system is

16 Jhergdics, Inc., “Indus~ PfOfdes —Final Report: Steam Generation and Cogeneratio~” contractor report for U.S. Department of

Energy, December 1990, p. 11.

17 United Natio~, Easr-West Energy Eficiency, ECE Energy Series No.1O, New Yor~ 1992, P. 101.

I

IS Reso~e -gement Associates, Inc. and Energopmjek6 “Energy Efficiency Audit Report: Cemy Dul Fabric Plant, Horice,

Czechoslovaki&” contractor report for U.S. AID, January 1992, pp. 14-15.

19 us. Congess, offiu of WCIUIOIOW Assessment Fueling Development, OTA-E-516 (WashingtO@ DC: U.S. Government ~ting

OffIce, April 1992), pp. 191-192.

I Z“ Ibid, p. 192.

21 S. Ko~, “1ndush-ial Energy Efficiency in Central and Eastern Europe, ’ contractor report prepared for the Office of ‘Ikchnology

Assessment, September 1992, p. 26.
-—

Chapter 4-Technologies for Energy Efficiency | 59

typically much higher than that of a steam-only

system.22 By one estimate there is a potential to

provide 6 percent of the former CSFR’s electricity needs with cogeneration systems.23 The relatively low penetration of cogeneration in CEE is

due in part to a history of low electricity prices

(which have made self-generation less financially

attractive) and to the difficulty faced by private

power producers in selling electricity to the grid.

These issues have been addressed in part in the

United States by the Public Utility Regulatory

Policies Act (1978), which requires electric utilities to purchase electricity from cogenerators at a

reasonable rate. Since passage of the Act, cogeneration installations in the United States have grown

rapidly, from 12 GW installed capacity in 1980 to

25 GW by the end of 1989.24

MOTORS

Electric motors consume the bulk of industrial

electricity in CEE. In the former CSFR, for

example, electric motors are responsible for over

two-thirds of industrial electricity use.25 These

motors are used for pumps, fans, compressors,

materials processing (crushing, grinding, etc.),

and materials movement (cranes, elevators, etc.).

Recent technical advances allow for significant

improvements in motor efficiencies.26 Standard

motors typically operate at efficiencies of 77 to 94

percent, while high efficiency motors operate at

84 to 96 percent. These high-efficiency motors

make use of both better design and better materials to reduce internal electric and magnetic losses.

High-efficiency motors typically cost about onethird more than standard motors, but depending

on usage, electricity rates, and other factors, this

investment often pays back rapidly. Another

technical improvement in motors, adjustablespeed drives, allows for better matching of motor

speed and load and thereby can provide electricity

savings of 30 to 50 percent in fans.27

| Industrial Energy Use: Conclusions and

Implementation

Industry is the single largest energy user in

CEE. Although data are scarce, it is fairly clear

that much of this energy is wasted, and that there

are many cost-effective opportunities for improved energy efficiency. In the past, industry

neglected energy efficiency as energy costs were

low and the focus was on meeting production

goals. Now, however, energy costs are rising

rapidly and economies are moving towards a

market-based system. When faced with rapidly

rising energy prices, U.S. industry responded by

retrofitting industrial facilities with simple housekeeping and maintenance measures, closing down

old inefficient facilities, and investing in new

technologies. Most of these actions could be

applied in Central and Eastern Europe; furthermore, industry can make use of the many imroved technologies discovered and refined in the

West in the last 20 years.

In the short term, the first priority for industry

is to implement the numerous low and no-cost

retrofit measures described above. These include

insulating pipes, installing steam traps, installing

simple electronic meters and controls, and providing basic maintenance. These measures offer

very short paybacks (usually less than 2 years,

and in some cases less than 6 months) and

significant energy savings.

22 Cogeneration is dis~ssed in de~ in U.S. congress, OffIce of lkchnology Assessment Industrial and Commercial Cogeneration*

OTA-E-192 (Washington DC: U.S. Government Printing Office, February 1983).

23 S. Kolar, supra note 21, p. 29.

~ Energetic, Inc., supra note 16, p. 2.

25 S. Kolar, supra note 21, p. 21.

26 For a deailed dl=mslon of ~gh ~fflciency motors see U.S. Congress, Offim of ~~o]ogy Assessment, Fueling Development,

OTA-E-516 (Washington DC: U.S. Government Printing Office, April 1992), pp. 107-115.

27 Ibid, p. 113.
60 I Energy Efficiency Technologies for Central and Eastern Europe

Implementing these low cost measures will

require all of the following:

. awareness of their availability and energy

savings potential;

● incentives to take the time and effort to

install them;

. hardware, or the capital to buy them; and

. knowledge of where and how to use them.

A recent study of industrial energy use in

Poland found, ‘‘most responsible personnel

lacked awareness of the specifics and extent of

energy wasted and of the measures necessary to

use energy more efficiently. ”28 The frost step in

implementing energy efficiency is to make sure

those who can make investment decisions are

aware of the opportunities. Awareness of availability and energy savings potential can be spread

through professional journals, training, word-ofmouth, demonstration programs, exhibitions and

trade fairs, and other informal communication

channels.

One complicating factor is determining jus t

who to target for new information. Many industries are in transition from public to private

ownership, and the responsibility and authority to

make investments of any type may be spread

among the government (which in many cases

retains part ownership), the new part-owners, the

plant manager, and the energy manager (if there

is one). Furthermore in many Hungarian industries, for example, decision making is very

hierarchical and centralized,29 requiring energy

efficiency to compete with many other issues for

the attention of senior management.

Technology transfer from the United States to

Central and Eastern Europe to date has been

largely in the form of private sector efforts to sell

U.S. technologies (see app. 4-l). These efforts

have benefited from U.S. programs to build

awareness and understanding of energy efficiency

through meetings, trade fairs, and audits. Although these efforts are difficult to evaluate, their

relatively low costs and case-study evidence of

their benefits suggest that they are worthwhile.

For an individual or an industry to take the time

and effort to focus on efficiency requires some

incentive to do so. For the simple low-cost

measures discussed above, it might seem that the

rapid paybacks (corresponding to financial returns of well over 100 percent in many cases)

should be sufficient. However if the energy

savings do not flow to the plant or to the

individual making the decision, then there is little

incentive to invest. In Russia, for example, there

is some concern that reducing energy consumption may lead to reduced energy allocations in the

future. Similarly, profits in Russia (e.g., those

resulting from energy savings) are taxed at a 50

percent rate.30 Providing decision makers with the

correct price signals, and allowing the benefits

(and costs) of efficiency to flow to those making

the decisions, will help provide the needed

financial incentives.

The countries of CEE must make their own

decisions on price reform and abolition of production quotas. However the United States can play

a role by sharing information on the effectiveness

of alternative pricing structures (e.g., off-peak

electricity rates), providing foreign aid during the

difficult time of adjustment to new price levels,

and making it clear that appropriate financial

incentives are absolutely necessary for a market to function properly. This is conceptually

straightforward but quite difficult in practice. In

the face of rapidly increasing energy prices, some

industries are forced to either not pay their utility

bills (causing financial problems for the utility) or

28 International Resources Group, Ltd., “Poland: Policy and Institutional Analysis, Final Report, ” contractor report for U.S. AID, May 1992,

p. 11<

29 RCGfiglfi, Baitty, Inc., supra nOte 4, p. 16.

30 E. Martinet, “Energy Efficiency in Russia, Belorus, and Estonia: programs, Perspectives, and Western Assistance,” contractor report

prepared for the Office of lkcbnology Assessmen4 Dec. 9, 1992, p. 17.
Chapter 4-Technologies for Energy Efficiency 161

simply pile up debt with suppliers, banks, and

others. Calls for price reform must be tempered

with the reality that, at least in the short term, the

money just may not be available.

The use of low-cost retrofit technologies is, in

many cases, straightforward. One does not need a

highly trained engineer to install steam traps and

insulation. What is needed, and is presently in

short supply, is the required hardware. There are

already some efforts being made by U.S. companies to export these devices to CEE (see app. 4-1).

Many of these efforts, however, are hampered by

lack of capital. CEE industries may recognize the

energy-savings potential and have a financial

incentive to make the investment, yet not have the

needed capital.31

Several innovative financing schemes could be

used to supply capital to CEE industries for

energy efficiency investments. Performance contracting, in which the company supplying the

hardware shares the financial savings resulting

from the decreased energy use, is being investigated (see app. 4-1). One project is even considering payment in the form of natural gas. This

avoids problems of currency convertibility, which

have hampered several projects.

In the United States, utilities sometimes supply

the capital for efficiency when it is less expensive

than new electricity generating facilities. Some

have argued that CEE utilities could supply

capital for efficiency. However these utilities are

generally overcapacity due to the economic

recession, and therefore cannot easily justify

short-term efficiency investments in terms of

avoided new supply. Furthermore, many of the

short-term retrofit options save primary fuels

rather than electricity. If, however, a utility is

considering investing in capital equipment to

reduce pollution from an existing plant-such as

retrofitting scrubbers to a coal-fired plant-it is

certainly worth investigating whether it would

require less capital to invest in efficiency and

thereby reduce electricity demand, which would

in turn reduce coal consumption.

There are several ways the U.S. Government

could assist efforts to provide capital and hardware for energy efficiency. Joint ventures between U.S. and CEE industries could be encouraged through export promotion and riskreduction prograrms.32 The United States could

provide low-interest loans directly to CEE industries for energy efficiency retrofits, to be repaid

through the energy savings resulting from the

retrofit .33 The Federal Government could institute

a‘ Green Exports program, whereby U.S. companies transferring energy efficient technologies to

CEE get positive publicity and technical assistance from the government. The multilateral

banks could be encouraged to supply capital for

energy efficiency retrofits.

Technical knowledge of how to evaluate,

install, and maintain energy efficiency technologies is needed as well. Although most retrofit

technologies are relatively simple, some expertise

is needed to decide where and how to use them.

Methods to provide this expertise include audits,

general educational materials such as videotapes

and books, technical courses, and exchange

programs.

In the long term, major increases in energy

efficiency will come not just from retrofits but

from replacement of technically outdated industrial facilities with new facilities using modem

technologies and practices. Investments in new

industrial facilities most likely will be made for

reasons other than energy efficiency (e.g., to

reduce overall costs or to increase product quality), nevertheless large efficiency and environmental benefits will result from investments in

new industrial equipment and processes.

q] In -y ~mes ~api~ is ei~er uvailable, or available only at very ~@ ~ter~t mtes.

32 my such ~ro~~ &ady efit_see c~pter 5 of WS repo~ also, me aance to Save Energy, ‘‘A Resource Guide for fipofig

Energy-Eftlcient Products, ” Washington DC, July 1991.

33 For e=ple, a revo]v~g lom ~d is u~d by ~s~te of Wxas to SUpply Capital for retrofits of state-owned btiltigs.
62 I Energy Efficiency Technologies for Central and Eastern Europe

Most people live in apartments. Single-family houses

are less common than in the West.

The capital requirements for rebuilding industrial facilities will be enormous. Given the relatively constrained foreign aid budget in the

United States, it would be difficult for the U.S.

Government to cover a significant fraction of the

costs to rebuild industrial facilities. An alternative

role is for the U.S. Government to support and

encourage private sector investment through information, risk-sharing and risk-reduction programs, and to encourage CEE country governments to provide an attractive investment climate.

BUILDING ENERGY USE

Energy used in buildings-to heat, cool, light,

and provide other important energy services—

accounts for about one-fourth to one-third of all

energy used in Central and Eastern Europe. As

with the industrial sector, there is great potential

for increasing the efficiency of energy use in

buildings through use of commercially available

technologies already widely used and accepted in

the West.

| Physical Description

Most urban and suburban housing is in the form

of large, multifamily apartment buildings. These

buildings are considerably less expensive to

build, per unit, than single-family buildings; and

therefore provide basic housing services at a

lower frost cost. Only in rural areas are singlefamily homes common. This is in contrast to the

United States, where single-family homes are the

dominant housing type (table 4-7). Apartment

units are relatively small, providing about onefourth as much floor space per person as housing

in the United States (table 4-7). Appliance saturation is presently close to that of the United States

for major energy uses such as refrigerators and

washing machines (table 4-8); however, residential air conditioning is almost unknown, in

contrast to the United States where over twothirds of households have air conditioning.34 (See

also box 4c).

Commercial buildings (i.e., offices, stores,

schools, and so on) are much less common in CEE

than in the United States. By one estimate, the

FSU has less than 1/5 as much commercial

building floorspace per capita as does the United

States.35 There is very little information available

34 U.S. Con=ess, OffIce of lkchnoIogy Assessmen4 Building Energy Eficiency, OTA-E-5 18 (Washington DC: U.S. Government ~nfig

OffIce, May 1992, p. 41); includes central and room units. Note that much of CEE lies north of the U. S., and therefore does not need air

conditioning.

35 L. Sctipprmd R.C. COOp~, “Energy Use and Consemation in the U. S. S.R.: Patterns, Prospects, and Problems, ” LBb29830 (Berkeley,

CA: Lawrence Berkeley Laboratory, April 1991), p. 23.
Chapter 4-Technologies for Energy Efficiency | 63

Table 4-7-Comparison of Housing in the FSU

and the United States, 1989

Indicator FSU United States

Percent of new units that are

single family houses. . . . . . . . . . . 15 72

Average floor space per person

(all units, m2/person). . . . . . . . . . . 16 61

SOURCES: U.S. Bureau of the Census, American Housing Survey for

the United States in 1989, H150/89 (Washington, DC: U.S. Government Printing Office, July 1991 ), p. 38; U.S. Bureau of the Census,

USA/USSR: Facts and Figures (Washington, DC: U.S. Government

Printing Office, August 1991), pp. 2-7,2-8.

Table 4-8-Appliance Holdings in t he United States

and in the FSU

% of households having 1 or more

Appliance United States(1990) FSU (1989)

Television (color). . . . . . . . . . . 96 44

Refrigerator and/or Freezer. . . 99 92

Clothes washing machine. . . . 76 72

NOTE: About 15% of U.S. households have more than one refrigerator,

and 50% have more than one color television set.

SOURCES: U.S. Bureau of the Census, USA/USSR: Facts and

Figures (Washington, DC: U.S. Government Printing Office, August

1991), p. 8-4; U.S. Department of Energy, Energy Information Administration, Housing Characteristics 1990 (Washington, DC: U.S. Government Printing Office, May 1992), pp. 104, 106.

Box 4-C--A Typical Residence in CEE

Residential buildings in Central and Eastern Europe are quite different from those in the United States. One

way to illustrate these differences is by describing atypical residence in CEE-a unit in a large multistory apartment

building. The design and construction of the building emphasizes Iow construction costs and simplicty. Steel and

concrete are the principal materials, windows are poorly sealed and caulked, and building insulation is lacking or

very thin. At present the building is publicly owned (that is, owned by a local or regional government agency),

however the movement towards privatization has affected the buildings sector as well, and in the near future the

units may be sold to the tenants. The building is in relatively poor shape; funds and parts for repair are limited,

and only when components totally break down are they repaired or replaced. The apartment itself is quite small,

providing only about 1/4 the floor space per person found in the typical U.S. residence. Within the apartment are

a small refrigerator, a washing machine, and several small appliances including a sewing machine, a black and

white TV, and a radio. Space heating is provided by radiators, which usually provide plenty of heat even on the

coldest days-in face it is often necessary to open some windows, even in the winter, to keep from overheating.

There is no thermostat or working valve on the radiators, and therefore no way to control the temperature other

than by opening the windows. Hot water for washing is plentiful as well, winter and summer. Assummers are rarely

hot, there is little need for air conditioning. Cooking is done on a natural gas-fired range.

SOURCE: Office of Technology Assessment.

on these buildings, but they are probably similar | How Do These Buildings Use Energy?

to residential buildings in that they offer only Space heating is the single largest energy user

basic services--i.e. poorly controlled heat, few in CEE buildings, accounting for over threeappliances, very little air conditioning, low light- fourths of all building energy use in the FSU.36 Of

ing levels, and poorly insulated shells. the energy used for space heating in the FSU,

about 40 percent37 comes as hot water from a

36 M. swer~ ad A. Tre~&ov& “USSR: Ener~ co~~ption iII tie Housirlg ~l$l@CipaJ sector, ” Center for hlte=tiOIld Research

Staff Paper No. 30, U.S. Bureau of the Census, September 1987, p. 21. mote: this figure may include some water heating].

37 Ibid, p. 21.
64 I Energy Efficiency Technologies for Central and Eastern Europe

district heating plant-a large heat or combined

heat and power plant providing hot water or steam

to more than one building.38

The remaining 60 percent of energy use for

space heating comes from onsite fuel use. Smaller

buildings and those in rural areas without access

to a district heating grid often use small coal-fried

residential boilers, which typically are manually

stoked and fired. These small coal burners have

no emission controls and are extremely dirty,

producing much more pollutants (notably particulate, CO, and SOX

) per unit of heat output than a

well-controlled large boiler with pollutant controls. A variety of other space heating technologies, including those fired by wood, natural gas,

and oil are found in some areas as well.

Water heating is a significant energy user as

well. In those buildings served by district heat,

hot water is often supplied centrally from the

district heating system.39 Buildings with access to

natural gas service often use natural gas to heat

water.

Significant energy uses after space and water

heating include cooking, lighting, refrigeration,

and various appliances. Over three-fourths of

households in the FSU use natural gas for

cooking,

40 the remainder use a variety of fuels

including wood and electricity. Few data are

available on lighting, but most household lighting

is supplied by incandescent lamps; and lighting

levels are often relatively low. Refrigerators in

CEE are typically smaller and simpler than those

in the United States—with an interior volume

about half that of the typical U.S. model,41 and

manual rather than automatic defrost. As discussed below, their energy efficiency is quite low

as well.

| How Energy Efficient are Buildings in

Central and Eastern Europe?

There are two ways to assess energy efficiency:

relative to a standard or to other countries, and

relative to opportunities for improvement. This

section discusses energy use in Eastern European

buildings relative to that in other countries, and

the following section discusses specific technical

opportunities for improvement.

Comparing aggregate energy use in buildings

across countries can be misleading. Considering

only, for example, building energy use per capita

across countries fails to consider climatic differences (a country in a colder climate will of course

use more energy to heat buildings, this does not

mean it’s less efficient) or service differences

(U.S. households use more electricity than CEE

households because they are larger and have more

energy-intensive appliances such as air conditioners, similarly this does not mean they are less

efficient). A better indicator that controls for

some of these effects would be, for example,

space heating energy use per square meter of floor

space per heating-degree-day .42

Data for such a measure are difficult to obtain,

however researchers at Lawrence Berkeley Laboratory have estimated that households in the FSU

use about 190 kilojoules per square meter of floor

space per heating degree-day. For comparison

buildings in the United States use about 125; that

is buildings in the FSU use about 50 percent

more energy to heat one square meter of

38 Disrnct hea~g is rare but not unknown in the U.S. At present, about 1 IYo of commercial building f100r space ~ tie U.S. is suppfi~ heat

from a district heating plant (U.S. Congress, OffIce of Technology Assessment, Building Energy Efi”ciency, OTA-E-518 (Washington, DC:

U.S. Government Printing Office, May 1992), p. 49). District heating of residential buildings in the United States is very rare.

39 me hot Watm from tie ~s~ct hea~g p~t is not ~ed ~ctiy, but ra~er fre~ water is heatd k a hat exchanger which uses the dktict

heating system as a heat source.

40 us. Bueau of me CemW, Us#USSR: Fa~r~ and Figures (was~gtoq DC: U.S. ~ve~ent mtig OffIce, August 1991), p. 2-8.

41 L. sc~pwr ~d R.C. Cmpr, supm note 35, p. 22; us. congress, Office of T&hology Assessment, Building Energy Eficiency,

OTA-E-518 (Washington DC: U.S. Government Printing Office, May 1992), p. 61.

42 Degee@ys me ~ic~y m~~d re~tive to a base tempera-, us~y 65 dep~ ~, M tie daily average tempemm One day iS 60

degrees F, then that day has 5 (65 minus 60) degree-days.
Chapter 4-Technologies for Energy Efficiency | 65

floorspace than buildings in the United

States, 43 controlling for outdoor temperature.

Furthermore, work by OTA and others has shown

that considerable improvements in the energy

efficiency of the U.S. building stock would be

cost-effective, 44 therefore the U.S. energy intensity indicators should be seen as an achievable

level and not an economic optimum. This suggests that a considerable potential exists to save

energy in FSU buildings through increased efficiency. Furthermore, buildings in the United

States are, in general, quite comfortable, and

saving energy in FSU buildings does not require

any loss of comfort-in fact, as discussed below,

improved control can both save energy and

increase comfort.

Electricity use in buildings tells a somewhat

different story. Residential electricity use per

capita in the FSU is about one-tenth that of the

United States.45 This is not an indication of

efficiency, however, but rather a reflection of the

low appliance saturation in the FSU. Although

households in the FSU often have refrigerators,

washing machines, and televisions (table 4-8);

they generally do not have air conditioners,

clothes dryers, electric ranges, and other electricityintensive home appliances common in the United

States. In addition, as shown in table 4-7,

households in the FSU are significantly smaller

and therefore have lower lighting requirements as

well.

Refrigerators are probably the single

electricity user in CEE residences. The

efficiency of new refrigerators currently

largest

energy

sold in

CEE lags significantly behind that of new refrigerators sold in the United States. As shown in

table 4-9 (page 69), refrigerators currently sold in

Poland exceed the maximurn energy use allowed

in the United States by 40 percent.

| Technologies for Improved Efficiency

Technologies for increasing the efficiency of

energy use in buildings include: improving the

operation and control of space heating systems,

fuel switching, improving the building shell,

improving the efficiency of electrical appliances,

and improving the district heating delivery system.

IMPROVED OPERATION AND CONTROL OF SPACE

HEATING SYSTEMS

Space heating systems in multistory apartment

buildings usually are operated very inefficiently.

The chief “technology” for temperature control

is usually an open window-a ‘‘fortichka," a

small window built within the frame of a surrounding larger window for the purpose of

regulating temperature (see app. 4-1). This technology leads to tremendous energy losses (opening windows rather than turning down the heat is

done in U.S. apartment buildings as well%).

There are a number of technologies, more

effective and efficient than opening windows,

that can reduce energy consumption while maintaining, or even improving, occupant comfort.

The first is an operating radiator valve, which can

be used to control the flow of steam or hot water

through a radiator. Many radiators lack valves

43 Deliver~ (useful) energy only. Source: L. Schipper ~d R. Cooper, SUpm note 35, p. 58.

44 see US, conges~, Offiw of Tec~ology Assessment, Bul/&g Energy ~ficie~cy, (3TA-~-518 (washhgto~ DC: U.S. Government

Printing Office, May 1992), chapter 1; also P. Komor and A, Moyad, ‘‘How Large is the Cost-Effective Savings Potential in U.S. Buildings?, ’

Proceedings of the ACEEE 1992 Summer Study on Energy Eflciency in Buildings (Washington DC: American Council for an Energy-Efficient

Economy, 1992), vol. 6, p. 6.125.

45 Re~iden~es ~ ~c FSU used about 400 kwh/Capita-y~ ~ 1990 (residen~ electricity use only, C)TA estimate based ill pti On M. Sagel_s

and A. Tretyakova, supra note 36, p. 12), while U.S. residences used about 3710 kl$%.kapita-year in 1990 (U.S. Department of Energy, Energy

Information Administration State Energy Dam Report (Washington DC: U.S. Government Printing Office, May 1992), p.32; U.S. Bureau

of the Census, Statisfi;al Absfracf ofrhe United States 1992 (Washington DC: U.S. Government Printing Office), p. 8).

46 J. DeCicco, ‘Modeling, diagnosis, and implications for improving the energy-efficiency of centrally heated apartment buildings,’ Report

No. 225 (Princeton, NJ: Center for Energy and Environmental Studies, April 1988), p. 228.
—

66 I Energy Efficiency Technologies for Central and Eastern Europe

altogether and those that are installed often

become j ammed due to corrosion. A case study of

an apartment in a high-rise in Krakow found that

all but one radiator had inoperative radiator

valves. 47 In a study of a centrally heated apartment building in New Jersey, 34 percent of the

radiator valves were stuck.48 Without an operable

valve there is no way, other than opening windows, to control the temperature.

Thermostats can reduce energy use and increase comfort by automatically regulating heat

to provide a constant indoor temperature. A

thermostat frees the occupants from the task of

continually adjusting the radiator, and also controls the temperature when no one is home.

Thermostatic radiator valves are available at a

cost of $30 to $35 each;49 these valves control

room temperature by modulating the flow of hot

water or steam through the radiator. These valves

can be retrofit relatively easily to many space

heating systems.50

One notable feature of multiunit apartment

buildings with central space heating systems is

that individual units are rarely metered; that is the

energy use of the individual apartment is not

actually measured. Energy costs are typically

based on a flat rate proportional to apartment size.

Therefore, there is no direct financial incentive

for efficient operation (such as using radiator

valves rather than windows to control temperature). The use of individual apartment meters

would provide data from which tenants could be

charged for their actual consumption, and could

be financially rewarded for efficient operation.5l

In a study of the effects of metering in apartment

buildings in the United States, energy consumption dropped 6 percent in one building and 13

percent in another after individual unit meters

were added.52

There are numerous technologies that can

improve the heat distribution system of a building. Examples include resets, which allow the hot

water temperature to vary in response to outdoor

temperature, cutouts, which shut off the hot water

when the outdoor temperature is such that no

space heating is necessary, and night setback,

which reduces hot water temperature in late night

hours. Installation of resets and cutouts yielded

space heating energy savings of 10 to 26 percent

in apartment buildings in Milwaukee.53 Modeling

of a centrally heated apartment building in New

Jersey suggested that heating energy use could be

reduced 63 percent by reducing steam pressure,

changing various control settings, instituting

night setback, and installing thermostats.54

In summary, improved operation and control of

space heating systems in multifamily buildings

are often cost-effective retrofits. A summary of 

47 A. Hoggatt, ‘Energy Efficiency in KrakovianApartment Buildings: An Engineering and Economic overview, ” dra.ftreport fOr U.S. EPA

May 26, 1992, Appendix A.11 by Steve Greenberg, p. 45.

48 J. DeCicco, SUpm nOte 46, p. 230.

49 These are approximate prices in the United States in 1993.

50 sy~tem ~i~ ~ s~=~t is, where the ouqmt of one radiator is the input to another-wiU require the titiation of a bypass Pip.

51 Metering m~t be combin~ with an enforceable billing system.

52 D. Palermini and D. Hewitt “Economic and Social Impacts of Converting to llmant Metering in Multi-Family Housing, ’ in Proceedings

o~the ACEEE ]990 Summer Study on Energy Eflciency in Build’ngs @%shingtou DC: American Council for an Energy-Ef13cient Economy,

1990), p. 9.238. Of course the meters themselves did not save energy, but the metered &ta was then used to charge occupants for actual

consumption.

53 M. Hewett and G. Petersom ‘‘Measured Energy Savings horn Outdoor Resets in Modem Hydropically Heakxl Apartment Buildings, in

Proceedings of theACEEE 1984 Sumtner Study on Energy Eficiency in Buildings (Washington DC: America nCouncil for an Energy-Ef6cient

Economy, 1984), p. C-135; as referenced in G. Ewing et al., “Effectiveness of Boiler Control Retrofits on Small Multifamily Buildings in

Wiscons@” in Proceedings of the ACEEE 1988 Summer Study on Energy Eficiency in BuiZdings (Washington DC: American Council for

an Energy-Efficient Economy, 1988), p. 2.51.

54 J. ~lcm, ‘‘fier~ consaation and Outdoor-Reset Control of Space Heating SYs@W ‘‘ in Proceedings of the ACEEE 1988 Sunvner

Study on Energy E~ciency in Buildings (Washington DC: American Council for an lhergy-~lcient Economy, 1988), p. 2.33.
Chapter 4-Technologies for Energy Efficiency | 67

multifamily building retrofits in the United States

and Europe found that heating system improvements offered significant energy savings and

reasonable paybacks—typically 3 to 7 years.55

FUEL SWITCHING

Many buildings in CEE are heated with coal. In

the case of multifamily buildings this heat is

provided either by a coal-freed district heating

plant or a small onsite boiler, while single-family

buildings are often heated by a small coal-fired

boiler.

Small onsite boilers in multifamily buildings

typically lack any pollution control equipment,

are fired with relatively low-quality (that is, high

ash and sulfur content) coal, and are poorly

maintained; the end result is very high air

emissions (including particulate, CO, and SOX

)

and low operating efficiency. One option is to

connect these buildings to the district heating

system, which although coal-fired often does

have pollution control equipment. Such an effort

is now being pursued in Krakow, Poland, funded

in part by the U.S. Department of Energy. A

second option is to convert these boilers to natural

gas, which could dramatically reduce air emissions.

Many buildings using district heat for space

heating also obtain their hot water from the

district heating system. This requires the district

heating system to operate year-round to provide

hot water. Converting to individual natural gasfired units for water heat would allow the district

heating system to shut down during the summer.

A second option is the use of a ‘ ‘front-end”

gas-freed boiler, a small onsite boiler sized to

meet hot water needs. Retrofits of front-end

boilers to multifamily buildings in the United

States have led to significant energy savings,

Coal stoves in residences are significant sources of

pollution.

although high frost costs resulted in long paybacks.56

Single-family buildings often are heated by

small coal-fired stoves. For those buildings located in areas served by natural gas, conversion of

coal-fried stoves to natural gas would have

significant air quality benefits. However many

single-family buildings are located in rural areas

without natural gas service, Similar air quality

benefits, however, could be gained through conversion to LPG (liquefied petroleum gas). Another option is to replace the traditional small coal

stove with a high efficiency, cleaner-burning

55 J. H~~ et ~,, ~~comp~ng Mea~wed sav@~ ~d Cost Eff~tiveness of Mu]tif~ly Retrofits in tie Unitd States md EurOpe,’ Energy

Systems and Poliq, vol. 13, 1989, p. 109.

56 M. Xmbenstein et al., “Measured Savings and Field Experience from the Installation of Front-End Modular Boilers,” in Proceedings of

the ACEEE 1990 Summer Study on Energy Eficiency in Buildings (Washington, DC: American Council for an Energy-Efficient Economy,

1990), p. 9.189.
modem coal stove. Energy savings and emissions

reductions from such a switch are thought to be

considerable .57

SHELL IMPROVEMENTS

Energy use for space heating can be reduced

significantly by reducing losses through the

building shell. Several researchers have noted

that buildings in CEE have relatively low insulation levels.58 One study found that walls in a

Polish apartment had an R-value59 of about 3.6,60

well below that of the R-value of 10 or higher

commonly found in walls of U.S. houses.6l

Similarly, improved windows can reduce heat

loss as well. Windows are typically double-pane

with a R-value of about 2, but are often poorly

fitted and sealed, which contributes to infiltration

losses. Improved windows making use of lowemissivity coatings, low-conductance frames, and

suspended reflective films are available with

R-values up to 8.62

The cost-effectiveness of shell retrofits in

multifamily buildings is sometimes questionable.

Although increased insulation and improved windows do reduce energy use, their relatively high

first costs often result in long paybacks. A review

of retrofits of multifamily buildings in the United

States and Europe found paybacks for shell

retrofits (such as increased insulation, caulking,

window replacements, and storm windows) to be

relatively long-over 10 years in many cases.63 In

new construction and renovation, however, the

use of high levels of insulation, high-R windows,

and careful sealing and weatherstripping is almost

always cost-effective.

IMPROVED APPLIANCES

Households typically have fewer and smaller

appliances than do households in the United

States or in Western Europe-however, there are

still significant opportunities for improvement.

For example, new refrigerators currently produced and sold in Poland exceed the current

(1993) U.S. energy standard by 40 percent (table

4-9). A number of engineering improvements

were used by U.S. manufacturers to allow for a 22

percent drop in refrigerator energy consumption

from 1990 to 1993 (table 4-9). These include

improved door insulation, improved compressors, redesign of heat transfer surfaces, and

improved evaporator fans. These technologies

could be used in CEE as well. The savings could

be significant-for example, if FSU refrigerator

manufacturers were to obtain equivalent savings,

the FSU could reduce electric power capacity

requirements by about 190 MW each year.64

Lights are a large consumer of electricity in

buildings. Substitution of compact fluorescent

lamps for incandescent lamps can reduce lighting

energy consumption 75 percent.65 The increased

57 us. Dep~ent Of ~ergy, ‘‘Krakow Clean Fossil Fuels and Energy Efficiency Project Statement of Work, ’ Attachment B, p. 4. Modem

residential coal stoves with automatic stoking (which reduces emissions caused by under- or over-fueling) and electronic temperature control

are currently produced in the United States (for example, units produced by Harman Stove and Welding, Inc., Halifax, PA).

58 L. sc~pper md R.C. Cooper, supra note 35, p. 22; M. Sagers and A. Tretyakova, supra note 36, P. 13.

59 “R” is a m=s~e of resis~ce to heat flow, with units of hour-square feet-degree F per Btu. The higher the R-value, the better tie

insulating value.

60A. Hoggat~ supra nOte 47, P. 44.

61 us. Congess, Offlce of ~c~olo~ Assessment, Building Energy Eficienqy, OTA-E-5 18 (was~gto~ DC: IJ.S. Government Pl_k@g

Office, May 1992), p. 18.

62 Wtidow R-values we meas~ed at center-of-glass, and do not include losses tiough tie frame.

63 J. MS et al.,supra note 55, p. 109.

64 Assupuom: ~~s~es of 6.5 ~fion refige~tors and freezers in the FSU (U.S. Bureau Of the CenSUS, supm note 40, P. 8-4)) sav~gs

of 200 kWh/year per uni~ capacity factor of 80%0 for electricity generation.

65 us. Congess, office of ~c~oloW Assessmen~ Building Ene~gy~ficie~qy, OTA-E-5 18 (wastigIo& DC: U.S. Government ~tiIlg

OffIce, May 1992), p. 52.
Chapter 4-Technologies for Energy Efficiency | 69

Table 4-9-Comparison of Energy Use of

Different Refrigerators

Energy use

Model/source (kWh/year)

New unit currently manufactured in Poland, 1992. . 694

U.S. maximum allowable by law, 1990. . . . . . . . . . 636

U.S. maximum allowable by law, 1993. . . . . . . . . . 497

NOTE: New unit is “partial automatic defrost” two-door 9.5 ft3(adjusted

volume) combination refrigerator-freezer manufactured and sold in

Poland in 1992. U.S. standards are the maximum allowable energy use

for a unit of that size with those features if offered for sale in the United

States.

SOURCES: Literature from Polar, uI. Adolfa Warskiego 6, Wroclaw,

Poland; Federal Register 47918 (Nov. 17, 1989).

frost cost of compact fluorescent lamps makes

them economically attractive only in areas where

lights are on for many hours per day—such as

corridors, entrance areas, and other public spaces.

There have been many improvements in commercial building lighting technologies as well. Electronic ballasts, improved reflectors, and reduced

wattage lamps can reduce lighting energy use by

over one-third.66

DISTRICT HEAT DELlVERY IMPROVEMENTS

The district heating systems that deliver hot

water for space heating to apartments are often

old, leaky, and inefficient. By one estimate, in

Poland 15 percent of the energy contained in the

original fuel is lost in the district heating delivery

system. 67 These losses are both in heat (via

conduction, convection, and radiation) and in

direct water leaks. Many of the technical frees to

reduce these losses are relatively straightforward,

such as replacing leaky pipes, repairing leaky

joints, and insulating pipes. By one estimate, pipe

insulation typically has a payback of less than 1

year.

68 Improved controls to better regulate temperature, pressure, and flow can reduce energy

use as well. An ongoing project to upgrade a

district heating system in Moscow projects energy savings of 30 percent from improved boiler

and distribution system controls (see app. 4-l).

Another source estimates savings of 10 to 30

percent from improved control of distribution

systems. 69

| Conclusions and Implementation

A number of factors will almost certainly lead

to increased energy use in buildings in CEE in the

long

●

●

●

●

●

The

term, including:

large increases in commercial building floor

space;

increases in the demand for energy-intensive

services in the commercial sector (notably

air conditioning, information technologies,

and lighting);

increases in the size (square meters of

floorspace per person) of residential housing;

growing population; and

growing demand for energy-intensive residential appliances, such as color televisions,

clothes dryers, and larger refrigerators.

challenge for improved technologies, therefore, is to moderate the increase in energy demand

below what it would otherwise be.

There are numerous examples of large opportunities for energy efficiency improvements in

buildings. As discussed above, walls in a Polish

apartment building were found to have less than

half the insulating value of walls in typical U.S.

houses. Space heating energy intensity in the FSU

is about 50 percent higher than in the United

States. New refrigerators in Poland use 40 percent

more energy than is allowed by the 1993 U.S.

standards. By one estimate, energy savings of 30

66 Ibid, p. 56.

67 L. Llp~ “DiStict Hinting Syst~s in Pol~d, ‘‘ in International Energy Agency, Seminar on Energy in East and West: The Poland Case,

Copenhagen April 1990.

68 Utited Nations, supra note 17, p. 94. If pipes are buried, paybacks will be longer.

@ Ibid, p. 95.
70 | Energy Efficiency Technologies for Central and Eastern Europe

to 45 percent are possible in the FSU buildings

sector. 70 The data are spotty but consistent: clearly

the savings potential is considerable.

The first priority for improving building energy

efficiency in CEE is to make those changes with

the highest returns and largest savings. Although

much of the building stock is in relatively poor

condition, the shortage of housing means that

very few residential buildings will be replaced in

the near term. Therefore low-cost investments can

be economically justified, even in older buildings, without concern that the building will be

torn down before the investment pays off.71 The

technologies providing these high returns include, for example, thermostatic radiator valves,

district heat distribution system controls, resets,

and cutouts. Although the financial attractiveness

of these technologies will vary depending on the

specific application, in most cases they offer rapid

paybacks.

As in the industrial sector, implementing these

low-cost measures requires several components:

. awareness of their availability and energy

savings potential;

● incentives to take the time and effort to

install them;

. hardware, and the capital to buy them; and

. knowledge of how and where to use them.

Much of the discussion above on implementing

low-cost measures in industry applies to the

buildings sector as well. To summarize, awareness of availability and energy savings potential

can be spread through professional journals,

training, word-of-mouth, demonstration programs,

exhibitions and trade fairs, and other informal

communication channels. Providing decision makers with the correct price signals, and allowing the

benefits (and costs) of efficiency to flow to those

making the decisions, will provide the needed

financial incentives. Building designers, builders,

and owners may recognize the energy-savings

potential and have a financial incentive to make

the investment, and yet not have the needed

capital. Several innovative financing schemes

could be used to supply capital to the buildings

sector for energy efficiency investments, including performnance contracting, utility financing,

and payment in energy rather than in currency.

Technical expertise can be provided through

audits, general educational materials such as

videotapes and books, technical courses, and

exchange programs.

The second priority is to improve the energy

efficiency of new buildings and appliances. At

present there is a shortage of residential housing

in much of CEE, and if the service sector grows

as rapidly as predicted there will soon be a

shortage of commercial buildings (for offices,

stores, restaurants, and so on) as well. The

financial attractiveness of retrofitting existing

buildings with insulation, high-quality windows,

and other energy efficient features is often questionable; however for new buildings the incremental frost cost is much lower and therefore these

investments are usually profitable.

There has been rapid growth in the building

energy efficiency business in recent years in the

United States, due largely to utility investments in

energy efficiency and to changes in State and

Federal regulations. Many smaller companies are

producing energy efficient devices, such as commercial lighting reflectors and high-R windows.

Larger appliance companies are investing considerable R&D resources into meeting Federal

energy efficiency standards. Numerous consulting and marketing companies are assisting utilities in their auditing and demand-side planning

efforts. And new building design and construction firms have paid increasing attention to energy

efficiency, due largely to the growing use of State

building energy codes.

Transferring these technologies and practices

could be aided by CEE adoption of some of the

TO L. Scfipper and R.C. Cooper, supra note 35, p. 60.

71 ‘l’’his is ~ ~on~at t. ~du~q, ~herc one fxes tie d~ision of whe~er or not to ~vmt iII a facfity tit my CIOW due to lack of demand.
Chapter 4-Technologies for Energy Efficiency | 71

same incentives used in the United States—

notably utility investment combined with regulatory change. In the United States, various market

issues such as high information and transaction

costs, separation between owners and tenants, and

high consumer discounting have led to a greater

reliance on regulation in the buildings sector than

in the industry or transport sectors.72 For example,

in the United States appliance standards and

building codes set minimum energy efficiency

levels, and recent legislation (the Energy Policy

Act of 1992) increases the coverage of both codes

and standards. If CEE countries were to adopt

similar provisions, the affected industries would

have to adopt the appropriate energy efficient

technologies and practices. Russia’s building

code, for example, is currently being revised.73

Communication with code revision bodies in the

United States, such as the Council of American

Building Officials (CABO) and the American

Society of Heating, Refrigerating, and AirConditioning Engineers (ASHRAE), could help

pinpoint useful and effective technologies and

practices.

TRANSPORTATION

Economic and social activities depend on

movement of goods, services, and individuals

from one location to another. The effectiveness of

this exchange depends on the availability and

efficiency of a nation’s transportation network.

As a nation’s economy develops, its demand for

raw materials, food, labor, goods and services,

and personal mobility develops as well; resulting

in an increased need for more extensive, reliable,

and affordable transportation. These trends have

been observed in Western industrialized nations

and in less developed nations with growing

economies. It is likely that the economies of

Figure 4-1—Income and Vehicle Ownership

●

●

●

Activity—measured in passenger-miles and

ton-miles;

Modal mix—the contribution each transportation mode (such as road, rail, air, and

pipeline) makes to the total transportation

sector; and

Modal energy intensities--a combination

of vehicle fuel intensity (energy per vehiclemile) and utilization of vehicle capacity

(number of passengers or tons of freight per

72 ~~ i~~ue is diy-~~~d ~ more de~] ~ us. Congess, Office of ~c~ology Assessment, Building Energy Eficiency, OTA-E-518

(Washington DC: U.S. Government Printing Office, May 1992), p. 131.

73 us, ~c., ‘‘Tkchnologicat Potential of Energy Conservation in Transport and Construction Sectors of Economy of the Russian

Federation” contmctor report prepared for the Office of Technology Assessmen4 December 1992, p. 29.
Table 4-10-Transport Systems and Energy Use, 1989/1990

t vehicle) which yields energy use per passengermile or per ton-mile.74

To decrease the amount of energy used by the

transportation sector one can work to alter each of

these elements. The primary methods for achieving this goal are:

1.

2.

3.

moderating demand by changing behavior

(e.g. by changing prices so as to reflect all

relevant social costs) or decreasing the need

for transportation via improved urban planning and communications;

influencing modal mix; and

improving the efficiency of each transportation mode.

Implementing options 1 and 2 relies heavily on

internal government policies and the establishment of appropriate market forces. Option 3,

although possibly requiring the government to

provide the impetus, is most dependent upon the

availability and application of technology, and is

therefore the major focus of this section.

The following discussion briefly examines

how energy is used in the transportation sectors of

the former CSFR, Hungary, Poland, and the

Former Soviet Union; what potential strategies

exist to improve the efficiency of transportation in

these nations, and the potential role of the United

States in improving the transportation energy

efficiency of these nations.

| Energy Use

In 1989, transportation comprised a large

portion of the total energy consumed in the

Western countries-nearly 27 percent in the

United States, and 25 percent in former West

Germany. In contrast, the FSU used only 16

percent of its energy for transportation; Hungary

and Poland 13 percent, and the former CSFR only

7 percent (table 4-10). These significantly lower

numbers correspond to the more limited economic development of these nations as compared

to Western countries, i.e. they have lower industrial output and lower GNPs per capita which are

74 L. Schipper and S. Meyers, “Trends in Transportation Energy Use, 1970-1988: An International Perspective,” LBL-32384 (Berkeley,

CA: Lwrence Berkeley Laboratory, May 1992), p. 1.
Chapter 4-Technologies for Energy Efficiency | 73

Table 4-1 1—Comparison of Auto Ownership Levels

(cars/1000 people)

Country 1950 1960 1970 1980 1987

FSU. . . . . . . . . . . . . 3 3 7 31 45

Poland. . . . . . . . . . . 1 4 12 66 104

Hungary. . . . . . . . . . 1 2 10 83 157

Czechoslovakia. . . . 8 14 46 152 174

France. . . . . . . . . . . 39 130 233 355 393

East Germany. . . . . NA 9 61 149 207

West Germany. . . . 13 82 208 375 470

U. S. A.. . . . . . . . . . . . 268 345 428 537 555

SOURCE: J. Pucher, “Capitalism, Socialism, and Urban Transportation: Policies and Travel Behavior in the East and West,” A PA Journal,

Summer 1990, p. 281.

directly linked to factors such as automobile

ownership (table 4-1 1).

From 1980 to 1989 the centrally planned

economies of Central and Eastern Europe exhibited modal shifts in transportation use. The most

prominent of these shifts was the increasing

reliance of each region on automobiles and trucks.

These changes occurred because of shifts in

industrial output and the types of goods being

produced, as well as the desire of individuals for

enhanced personal mobility as indicated by a

general increase in the amount of passenger

travel. The area of largest growth was in the use

of automobiles, although passenger travel on

planes generally increased as well. A shift to road

transport portends that the transportation sector,

if not managed effectively, will consume an

increasing amount of energy and a larger fraction

of each nation’s total energy use.

Automobiles often are one of the fastest

growing energy segments in a developing market

economy. Industry analysts project that demand

for automobiles in CEE will grow by 133 percent

during the 1990s. This compares to an OECD rate

over the same period of just 10 percent.75

Relatively few people own cars, but the number is

growing rapidly.

According to one estimate, it is predicted that

Eastern Europe will account for 60 percent of all

growth in the automobile industry over the next

20 years.76

An increase in automobile use increases demand for gasoline unless fuel economy increases

faster. For example, in Poland private gasoline

use rose by 17 percent from 1990 to 1991.77

Because private use for gasoline has been historically low, new demand will require additional

refining in those nations with such capability, or

the expenditure of more capital for the import of

gasoline. Thus, the average efficiency of automobiles in these nations, particularly newly acquired

vehicles, is critical. It is estimated that if the

FSU’s car fleet was used under Western conditions, the energy intensity would be approximately 9 liters/100 km (26 miles per gallon

[mpg]). The actual on-the-road energy intensity

of cars is estimated at 11-12 liters/100 km (20-22

mpg) due to poor fuel quality, vehicle maintenance, and road conditions.

78 A recent study

75 y. Kmoko~, “Automotive Industxy Trends and Prospects for Investment in Developing Countries, ” International Finance

Corporation, The World Banls 1990.

76 J, L~dq~st~d c, Ackerman, ‘ ‘Moving Into @erdIive, “ Director, November 1990, p. 125.

77 S. Meyers, “Economic Reform and Energy Efficiency in Eastern Europe, ” contractor report prepared for the OffIce of lkchnology

Assessment, December 1992, p. 4.

78 L. Sctipper and S. Meyers, supra note 74, p. 11.
Table 4-12-Comparison of Modal Splits in Urban Transportation

(percent of urban trips)

Public Pedestrian and Ratio of auto to

Country Auto transport bicyclist public transport

FSU. . . . . . . . . . . . . . . . . .

Poland. . . . . . . . . . . . . . .

Hungary. . . . . . . . . . . . . .

Czechoslovakia. . . . . . . .

France. . . . . . . . . . . . . . .

East Germany. . . . . . . . .

West Germany.. . . . . . . .

U. S. A.. . . . . . . . . . . . . . . .

12

15

11

13

47

24

48

82

88

85

58

52

11

27

11

3

NA

NA

31

35

35

48

40

10

0.14

0.18

0.19

0.25

4.30

0.89

4.40

27.30

NOTE: Public transport includes bus, street ear, subway, urban ferries, cable cars, inclined planes, and automated guideway

systems. Dates for the data are the most recent for each of the available countries.

SOURCE: J. Pucher, “Capitalism, Socialism, and Urban Transportation: Policies and Travel Behavior in the East and West,”

APA Journal, Summer 1990, p. 282.

indicates that new models such as the VAZ-2109

and the Moskvich-2141 are designed to get 5.9

L/100 km (40 mpg) and 6.6 L/100 km (36 mpg)

respectively .79 Automobiles produced in Western

nations that have attributes similar to the VAZ

obtain 4-4.5 L/100 km (52-59 mpg), with significantly lower pollution. Replacing the existing

fleet with new automobiles getting 20 per cent

better fuel economy would save about 50 million

barrels of oil per year.

Public transportation systems are extensively

developed by Western standards because they

have prospered under direct and indirect government policies. These include fare subsidization

and the existence of planned centralized housing

and industrial developments. The effects of these

policies are dramatic. In the United States, 82

percent of all urban trips are made with the

automobile, while only 3 percent use public

transportation (bus, subway, street car, commuter

rail). In the FSU 88 percent of urban travel is by

public transport and only 12 percent by automobile.80 Most European nations fall between these

extremes, with Central European nations being

most similar to the FSU (table 4-12). Automobile

travel, given as passenger kilometers per capita

per day, has universally increased (table 4-13). In

contrast to West Germany and the United States,

the use of public transportation in CEE increased

between 1980 and 1985.

In addition to the extensive availability of

public transportation networks in many Central

and Eastern Europe nations, the relatively low

cost of public transportation makes it attractive.

Table 4-14 indicates how expensive automobile

use is relative to public transport.

Even automobile owners in this region usually

take public transportation to work. The reasons

for this behavior are the high cost of fuel, high

automobile operating costs, parking problems,

and frequent inexpensive public transport service

during peak hours.81

Rail systems for freight are extensive as well,

although this system currently faces decreasing

utilization as industrial output declines. Coal use

for rail transport has been declining over the last

decade throughout the region as the use of diesel

locomotives and track electrification increases.

Air transportation, particularly in the FSU

where greater distances necessitate air travel, is

79 MS, Inc., supra note 73, p. 10.

80 J. ~Cher, ~ ~capi~SQ Soci&m ~d Urm T~po~on: policies ~d T~vel Behtior in the East ~d West, ’ APA JouT?fuf, fhUIMIIrX

1990, p. 280.

81 Ibid, p. 281.
Chapter 4-Technologies for Energy Efficiency | 75

Table 4-13--Trends in Public and Automobile Travel

(passenger kilometers per capita per day)

Public transport Automobile transport

Country 1970 1980 1985 1970 1980 1985

FSU. . . . . . . . . . . . . . . . 6.1 8.6 9.3 NA NA NA

Czechoslovakia. . . . . . . 7.5 9.3 9.6 6.2 15,2 15,8

France. . . . . . . . . . . . . . 3.6 4.7 4.9 16.8 23.2 24.6

East Germany. . . . . . . . 6.5 9.0 9.1 6.3 11.2 13.2

West Germany. . . . . . . 4.0 4.8 4.4 16.5 21.2 22.1

U. S. A.. . . . . . . . . . . . . . 1.0 0.9 0.8 30.7 34.9 36.1

NA - Not available.

SOURCE: J. Pucher, “Capitalism, Socialism, and Urban Transportation: Policies and Travel Behavior in the East and West,”

APA Journal, Summer 1960, p. 284.

well developed. The energy efficiency of the

system is below Western standards, primarily

because of the use of less technically advanced

equipment. The former Aeroflot appeared to be

energy-efficient, but only on a per passenger

basis. Unlike western airlines, most Aeroflot

flights were full. Generally speaking, energy

requirements per seat-kilometer of the former

Aeroflot fleet are 50 percent higher than those in

Western nations .82

| Potential Strategies for Improved

Efficiency

This section briefly examines possible methods to improve the efficiency with which energy

is consumed in the transportation sector, while

minimizing environmental pollution and improving transport services. These objectives can be

accomplished by:

1. using existing technologies to improve the

individual efficiencies of each transport

mode;

2. using government policies to: change modal

distribution or encourage the continuing use

of a more energy efficient mode—for example public buses or subways; set minimum

efficiency standards for individual transport

Table 4-14-Comparison of Gasoline Prices and

Public Transport Fares, 1988

Ratio of gasoline price per liter

Country to public transit fare per trip

FSU. . . . . . . . . . . . . . . . . . . . . . 8.2

Poland. . . . . . . . . . . . . . . . . . . 6.8

Hungary. . . . . . . . . . . . . . . . . . 11.7

Czechoslovakia. . . . . . . . . . . . 9.0

France. . . . . . . . . . . . . . . . . . . . 1.0

East Germany. . . . . . . . . . . . . 9.0

West Germany. . . . . . . . . . . . . 0.5

U. S. A.. . . . . . . . . . . . . . . . . . . . 0.3

NOTE: Fares are the regular one-way cash fare for a typical bus or

subway trip within the central city,

SOURCE: J. Pucher, “Capitalism, Socialism, and Urban Transport:

Policies and Travel Behavior in the East and West.” APA Journal,

Summer 1990, p. 287.

3.

4.

modes; and more realistically approach true

costing of fuel and land use;

improving infrastructure and communications; and

promoting overall system improvements,

e.g., educating individuals to provide proper

vehicle maintenance.

Each of these methods can yield significant

improvements in the energy efficiency of the

transportation sector.

The task of improving efficiency in Central and

Eastern Europe should be less daunting than

promoting energy efficiency in less developed

6Z L sc@Per and E.~“ OL “Energy Efficiency in Russia, Ulmine, and Belorus: Opportunities for the Westt” Lawrence Berkeley

Laboratory, drafl report prepared for the U.S. Department of Energy, January 1993, pp. 4-5.
nations. This region’s technologically well educated population, existing transportation infrastructure, and industrialized character are all

assets which augment the capacity of the region

to enhance its transportation energy efficiency.

SPECIFIC TECHNOLOGIES TO IMPROVE

INDIVIDUAL EFFICIENCIES

The efficiency of automobiles and trucks in

CEE is lower than that of OECD nations. Table

4-15 provides a summary of commercially available technologies which could improve transportation energy efficiency. Modem automobiles

usually incorporate these technologies. Technology transfer could involve integrated overall

design packages or specific elements.

Technologies to improve aircraft efficiency are

also available, e.g., improved airframe design,

lighter weight materials, and improved jet engine

design. Similarly, ships could benefit from known

technologies that improve hull and engine design.

Pipelines could be improved by optimization of

Table 4-15-Selected Technologies To Improve

Transportation Energy Efficiency

Automobile Specific

● Electronic control of spark timing

● Throttle body and multipoint fuel injection

● Improved vehicle drive trains and transmissions

● Accessory improvements

. Overhead cam engines as opposed to push-rod engines

Truck and Bus Specific

● Improved fuel injection pumps

● Electronic engine controls

● Cab mounted front air deflectors

. Turbochargers

For Autos, Trucks, and Buses

● Improved tire design

● Weight reduction

● Reduced aerodynamic drag

● Reduced engine friction

● Improved fuels

Rall Specific

● Diesel- electric locomotives

● Weight reduction

. Low friction bearing technology

● Computer directed operations

● Improved load factors

● Improved railway junctions

● Flange lubricators

● Mechanized/automated yards

SOURCE: Office of Technology Assessment, 1993.

pipe diameter and inner wall materials for the

specific substances being transported, improved

compressor technology, and automated leak detection.

Infrastructure, operations, and training also

have the potential to save energy. Specific options

include:

●

●

●

●

improved design of roads, rails, river locks,

airports, servicing facilities, filling stations,

etc;

computer controlled transport management

systems where appropriate (stop light timing/

traffic control systems, train scheduling and

operation, freight distribution);

improved mechanized freight loading; and

additional training of individuals responsible for the maintenance of various aspects of

the transportation sector, e.g. those responsible for individual vehicle maintenance or

traffic control.

Western companies have established several ventures that could result in rapid diffusion of

applicable technologies. Examples include Pratt

and Whitney commercial engine/airframe venture with Russia’s Ilyushin Design Bureau; Volkswagen’s investment in former Czechoslovakia’s

auto maker Skoda ($6 billion); Fiat’s manufacturing facilities in Russia and Poland, and its sales

networks in Hungary and the former CSFR; GM’s

efforts to initiate joint ventures in Eastern Europe;

and Citibank’s financing of Germany’s Hochtief

to renovate Poland’s Warsaw Okecie Airport

($200 million).

THE ROLE OF CEE GOVERNMENT POLICIES

The actual diffusion of technologies to improve

efficiency will most likely result from increased

international business. Thus it is the responsibility of the host nation to provide an environment

that is conducive to private international enterprise and yet synergistic with regard to its

domestic agenda. This includes providing a stable

government, lowering trade barriers, establishing

a reliable banking infrastructure, establishing a
legal system that can provide foreign companies

recourse and intellectual property protection,

examining its rules regarding the repatriation of

profits, and limiting restrictive technology import

policies such as tariffs, quantitative restrictions,

and licensing of imported technologies. It is

essential that a nation’s efforts be reflected in both

law and in implementation of that law.

A host nation can also improve the efficiency

of its transportation sector by implementing

policies that encourage and reward energy efficient technologies and behavior. This might

include policies that encourage:

● Land-use planning to better match residences with jobs, schools, shopping, and

transport corridors.

. Truer pricing of fuel.

. Fuel efficiency standards for automobiles

(similar to U.S. CAFE standards).

● Pricing of transport services to optimize

modal distribution (and reflect land costs,

road costs, parking, pollution, etc.).

. Retiring automobiles that are past their

designed service life, (By one estimate 30 to

40 percent of the motor vehicle fleet in

Russia qualifies as past its prime. Replacement of these vehicles with newer designed

automobiles could save 10 to 15 percent of

the fuel consumed by road transport.83)

. Targeted research and development to improve the efficiency of the transportation

sector.

. Assistance to domestic manufacturers to

improve the design and manufacture of more

energy efficient vehicles.

| The Role of the United States

Opportunities to improve energy efficiency

within the transportation sector include many that

can be accomplished with commercially available

technologies used widely in other industrialized

nations. The rapid diffusion of these technologies

could yield significant energy savings. It is quite

likely that the most cost effective and rapid

improvements in energy efficiency will result

from the transfer of commercially available

technologies.

The U.S. Government can assist in the transfer

of specific technologies in numerous ways, most

of which require expending capital either through

direct assistance or loans. These include:

1. Providing funds to foreign nations to purchase/

import specific equipment, such as automobiles, that will improve efficiency directly.

This will result in immediate efficiency

gains, but does not address the needs of a

host nation to improve its domestic skills/

manufacturing. It will however improve

U.S. exports.

2. Providing funds to domestic corporations

for overseas investment. These funds could

be used to target foreign companies that

would be appropriate recipients for energy

efficient technologies. Possibilities include

whole or partial ownership, joint ventures,

licensing agreements where a specific technology or service is leased, or franchise

agreements.

3. Providing funds for improvements in infrastructure that would contribute to more

energy efficient transport services. Capital

or specific technologies to improve roads,

airports, railroad tracks and crossings, river

locks etc. are all needed. Moneys targeted

for the procurement of traffic management

systems for road and air travel would also

improve efficiency.

4. Providing funds for improvements in communication networks, which can alleviate

the actual need for some transportation.

Additionally, a better communication network would allow for improved logistics

such as full loading, better routing, etc.

83 MS, he., supra nOte 73, P. 11 .
5.

6.

7.

Providing funds for education and training,

e.g., in the area of vehicle maintenance,

would also contribute to more efficient

transport services. Another area to target

might be airport and rail operations. Specific training facilities could be set-up in

host nations, within existing corporations in

host nations, or through worker/student

training in this country.

Scrutinizing domestic technology export

controls, originally implemented because of

strategic reasons, to allow for technology

transfer.

Assisting with the development of foreign

regulatory and government policies such as

taxes, duties, true costing, and land use in

urban areas to help promote those modes of

travel which are the most efficient. The U.S.

could provide direct government to government assistance in formulating legislation

and in drafting and implementing regulations. This might be accomplished via the

exchange of policy makers.

As with any effort to transfer technology, questions regarding applicability and sustainability

need to be addressed. Market based industrial

technology in the West has developed in a context

where consumer behavior/demand and pricing

schemes are unique. Higher wages and larger

disposable incomes, as well as ideas of property

ownership, have shaped technological development. Some high quality or high performance

technologies that make sense in the West might

not be appropriate for developing economies with

limited capital.

Once the market has identified and implemented applicable technologies, it is important

that the government continue to maintain an

environment where energy efficiency is desirable

via regulation and incentive based policies. An

understanding of human behavior is also essential. Identifying what motivates or inhibits consumers, e.g., financial benefits, access to previously unavailable services, or discount rates, is

needed as well. It also includes understanding

what motivates or inhibits a company manager to

use a specific technology made available as a

result of a government energy efficiency program

rather than to sell the technology on the market

and use the proceeds for another need.

SUMMARY AND CONCLUSIONS

In the short term, there are numerous highly

profitable opportunities for efficiency improvements through low-cost retrofits of existing facilities. Examples include thermostatic radiator

valves for buildings, insulation and steam traps

for industrial steam systems, and basic electronic

controls for district heat distribution systems. In

many cases these technologies offer paybacks of

1 year or less (that is, a return on investment in

excess of 100 percent). Implementing these technologies requires four components: 1) awareness

of their availability and energy savings potential,

2) incentives to take the time and effort to install

them, 3) hardware or the capital to buy them, and

4) knowledge of how and where to use them.

There are numerous policy options that can

encourage greater use of these technologies.

Trade fairs, audits, and exchange programs can

build awareness and technical knowledge, and

various innovative financing programs (such as

risk reduction and insurance programs) can encourage private sector provision of capital and

hardware. As the financial returns are relatively

high for these technologies, government support

and encouragement of private sector efforts,

rather than direct government assistance, may be

appropriate. This also has the advantage of

helping to build domestic capability for producing and utilizing these technologies, and avoids

longer term dependence on foreign assistance.

Consideration of capital-intensive retrofits, or

investment in new facilities, is more complex.

These new facilities-industrial plants, buildings, appliances, automobiles, and so on—will in

the long term determine energy efficiency. Most

energy-using devices (such as cars and refrigera-
Chapter 4-Technologies for Energy Efficiency | 79

tors) currently being produced in CEE are much

less efficient than those presently being produced

in the United States. The U.S. units, in turn, are

much less efficient than is technically feasible.

Clearly there are technical opportunities for

improved efficiency.

Implementing these new technologies requires

careful consideration of the long-term economic

health of the sector, especially in the industrial

sector. There are some likely trends, however,

that can guide future investment. There will

probably be growth in the service sector, which

will require more stores, restaurants, and offices.

Increasing consumer incomes will lead to increased demand for private automobiles, consumer appliances, and single-family housing.

Some argue that the present system has excess

capacity for heavy industry such as steel and

ship-building, 84 suggesting that these industries

will shrink.

Two key points should be considered when

contemplating policy options to promote longer

term investments in energy efficiency. First,

investments in new industrial facilities and buildings will depend on expectations of future demand, availability of capital, and the overall

economic climate; and not on energy considerations. Energy is typically a small fraction of total

operating costs in both industry and buildings,

and therefore is usually not a primary consideration when making investment decisions. Nevertheless, new equipment usually is more energy

efficient than old equipment, especially in industry. The policy relevance is that efficiency will be

well served by overall economic development.

The second and related point is that U.S. experiences show that energy efficiency often lags what

appears to be economically justified due to a

separation between buyers and operators, environmental externalities, information and transaction costs, and other reasons.85 That is, market

forces and economic development alone will not

lead to optimal levels of energy efficiency, and

policy intervention may be needed.

84 see for example J. Sachs, “Building a Market Economy in Poland,” Scienrzjic American, March 1992.

85 For a dism55ion of tiese issues in the buildings sector see U.S. Congress, Offia of ‘IkchnoIogy Assessmen4 Building hmgy Eficien9,

OTA-E-518 (WashingtoXL DC: U.S. Government Printing Office, May 1992).
Appendix 4-1

Case

Studies

OTA conducted several case studies of U.S. businesses that have tried to transfer energy efficient

technologies to CEE. These case studies illustrate the problems businesses face when working in CEE, and provide

some evidence of the effectiveness of Federal programs to assist U.S. businesses. The case studies are:

. A medium-size privately held U.S. company’s efforts to export steam traps, devices to improve the

efficiency of steam systems, to Bulgaria.

. A U.S. home-building firm’s efforts to build single-family housing in St. Petersburg—the first such

housing to be built in 70 years.

. A small U.S. company‘s efforts to set up a joint venture with a Slovakian firm to manufacture and market

energy efficient devices for industry.

● A large U.S.-based multinational’s efforts to retrofit district heating systems in Moscow.

81
Case Study 1

Export of

Steam Traps

to Bulgaria

INTRODUCTION

A steam trap removes condensate, air, and carbon

dioxide from steam systems, thereby helping to ensure

high efficiency. Although steam systems are typically

installed with steam traps, poorly designed traps often

fail prematurely, leading to expensive steam leaks.

Replacing a worn or defective trap with a high-quality

trap often results in significant energy savings with

rapid payback periods. Armstrong International, a

U.S.-based manufacturer of equipment for industrial

and commercial users of steam, manufactures and

markets a complete line of steam traps, including the

energy efficient inverted bucket steam trap. Armstrong

is currently marketing its steam traps in Bulgaria and

is working to expand its sales network throughout

Central and Eastern Europe (CEE).

HISTORY OF INVOLVEMENT

Armstrong first became exposed to business opportunities in CEE through an unplanned encounter with

the USAID Emergency Energy Program. An AID

consultant doing energy audits in CEE contacted

Armstrong for educational materials on steam energy

conservation to provide to Bulgarian industrialists.

AID ordered several educational videotapes from

Armstrong, and within a few months ordered 90

inverted bucket steam traps. This equipment order,

which specified shipment to addresses in Bulgaria and

Poland, piqued the interest of Armstrong sales representatives.

Douglas Bless, Armstrong’s Vice President for

Sales, then arranged a visit to Bulgaria to look for a

sales representative. Bless contracted with Christian

Spassov, a scientist at the University of Sofia who had

done energy audits for AID, to market Armstrong

steam traps in Bulgaria. Within a short time Spassov

sold $200,000 worth of steam traps, bought a truck and

hired installers, and enjoyed steadily increasing sales.

MARKETING ARRANGEMENTS

Armstrong uses the same approach with Spassov as

with their U.S. distributors. They sell him steam traps

at the wholesale price and he resells them at the retail

price, retaining the price difference as profit. Armstrong receives payment from Spassov in U.S. dollars

and has not had to compromise its margins. While

recognizing the importance of Spassov’s entrepreneurial and technical skills, Bless attributes the strong

sales performance of his company’s steam traps in

Bulgaria to their combination of low initial cost

(approx. $120) and high energy savings. He estimates

that, at prevailing world energy prices, the initial

investment in their steam traps can be recouped within

3 to 4 months.

NEXT STEPS

Bless is currently seeking representatives in other

countries in the region, hoping to find others like

Spassov, with the combination of technical compe82
Appendix 4-l-Case Studies | 83

tence and entrepreneurial abilities needed to market

and service Armstrong’s products. The company is

currently in the process of sifting through correspondence from numerous companies in CEE that have

been exposed to Armstrong’s products through the

USAID program and want to represent these products

in their countries. These potential distributors cite

strong demand for Armstrongs products. Bless explains: “If you get to the right people in management

at these companies, they understand the importance of

energy efficiency, and our product, a quality steam

trap, is just unavailable to them right now in their

region.

KEY ISSUES: FINANCING AND STANDARDS

While Armstrong has enjoyed encouraging sales of

its steam traps based on their rapid payback, it finds

that many potential customers want the product but

need help in financing the purchase. This situation

became apparent during meetings in Hungary and

Bulgaria, where local managers explained that they

understood the financial gains they could achieve by

investing in energy saving equipment, but simply did

not have enough up-front cash to buy the equipment.

Armstrong is currently exploring arrangements in

which a bank purchases the equipment and has it

installed, and then the plant pays the bank, over time,

from the cash made available through the energy

savings.

Another concern facing Armstrong is competition

from West European, particularly German, companies

that have been aggressively marketing similar products in the region. The situation is complicated by the

fact that German firms use a different system of

engineering measurements and standards than do

American companies. If American companies were

required to convert to the German standards system,

they would have to modify their designs, adding

significantly to the cost of their products and making

them less competitive. For this reason, Bless stresses

the importance of early market presence on the part of

U.S. companies to promote the adoption of U.S.

engineering standards and to create a preference for

American equipment. Aside from the standards issue,

Bless senses a preference in the region for doing

business with American firms, particularly those

associated with U.S. Government-sponsored programs,

based on admiration for the U.S. Government.

ROLE OF GOVERNMENT PROGRAMS

Bless stresses the role of the AID program in getting

Armstrong involved in the CEE market:

We had been thinking that someday this is going

to be a great market. USAID as a true catalyst

launch[ed] this program. . .we have sold $200,000

worth of equipment and are now fully engaged in

the whole region due to this success. . .we are on

our way now. I think that other U.S. manufacturers can benefit from this program.
Case Study 2

Export of

Prefabricated

Housing and

Related Technology

to Russia

INTRODUCTION

Ryland Building Systems, a U.S. manufacturer of

prefabricated housing units, is in the process of

transferring improved building technologies to Russia.

These technologies, such as insulation utilizing advanced materials; caulking and weatherstripping techniques to minimize heat losses; and the use of

multiple-pane, low emissivity windows; are being

transferred through modernization of a house fabrication facility in Siberia and through a joint venture with

a Russian contractor to build a housing development in

St. Petersburg.

INITIAL INVOLVEMENT: FACTORY

MODERNIZATION

Ryland first became exposed to the Russian housing

industry in 1990, when it was invited to look at a

housing factory in Western Siberia. After visiting the

factory, Ed Grachik of Ryland observed:

The [existing] equipment was of Swedish

origin, about 10 years old, and the problem was

that they had not maintained it. In most cases they

had bought maybe two pieces of a given type of

equipment, and only one was running because

they had taken parts off of one to keep the other

ruining. The equipment was rather sophisticated,

in our minds too sophisticated for what they were

trying to do.

Ryland has made plans to set up a new factory,

provide training, and then turn the factory over to the

Russians. They have, however, been unable to implement their plans due to the Siberian company’s

inability to obtain the needed hard currency, The

project has been put before the Russian government,

which has so far been unwilling to authorize the

expenditure of hard currency needed to finance the

project,

CURRENT PROJECT: BUILDING HOUSES IN ST.

PETERSBURG

While working on the Siberian project, Ryland came

in contact with a Russian group involved in fabricating

precast concrete building components and providing

civil engineering services to the construction industry

in St. Petersburg (formerly Leningrad). Ryland joined

with this group to form a joint venture, called Ryland

St. Petersburg, to build houses in St. Petersburg. The

venture has obtained a building site on which it plans

to build 23 townhouses of approximately 2,000 square

ft. each, with a basement and garage at ground level

and two floors of living space. Approximately 80 to 90

percent of the materials and prefabricated components

will be shipped from the United States. The windows

and some other components are being sourced from

Finland, and a small amount of local materials will be

used, such as stucco for the exteriors, The foundation

84
Appendix 4-l-Case Studies | 85

work has already begun, and Ryland hopes to have the

models open in the Spring of 1993.

MARKETING PLANS

Ryland plans to market the townhouses to Western

companies that have established offices in the area and

to the small number of Russians who have the hard

currency to buy them. Recognizing that the majority of

the local population will not be able to afford houses

made of materials exported from the United States,

Ryland views the current phase of the venture as a

training period and is working toward incorporating

local materials, identifying local contractors, and

establishing incountry manufacturing facilities.

DIFFERENCES IN TECHNOLOGY

Differences in construction materials and technology have led to concerns about the thermal performance of the houses. The Russians, accustomed to

masonry walls 12-16 inches in thickness, have reacted

with skepticism when confronted with a 5-inch thick

frame wall of equal insulation value. “The first

reaction is ‘that’s no good, ’ and we try to explain to

them that it is better, ” says Grachik, who has also

expended considerable effort educating Russians on

the importance of minimizing air leakage through

windows and doors. The houses exported by Ryland

will incorporate triple-pane windows from Finland and

other design features to improve the air-tightness of the

house. Ryland expects energy efficiency, along with

overall construction quality, to be a major selling point

for its houses.

COMPLICATIONS

Ryland has experienced difficulty in getting its

designs approved by local inspectors, due in part to

unfamiliar materials and construction techniques. The

process is further complicated by the fact that these

townhouses will be the frost private houses to be built

in St, Petersburg in 70 years. Ryland, with the help of

its venture partner, has managed to convince Russian

authorities of the soundness of its designs by demonstrating adherence to U.S. and international standards.

Ryland’s plans have also been complicated by land

ownership considerations. Most land is still government owned and clear mechanisms for private ownership have yet to be established. The venture has

negotiated a 99-year lease from the city for the current

project, and is doing the same for a second joint

venture in Moscow. Another problem is the absence of

mortgage financing, which will likely put house

purchases out of the reach of the general population.

ROLE OF GOVERNMENT PROGRAMS: TRADE

DEVELOPMENT PROGRAM

Ryland has received a grant from the Trade and

Development Program (TDP) to conduct a study on

issues relevant to the development of the Russian

housing market. The study includes development of a

survey to determine what design parameters Russian

people look for in a house. The TDP study will also

help Ryland identify local materials and evaluate the

feasibility of manufacturing in the country.

CONCLUSIONS

Grachik acknowledges the difficulties inherent in

doing business in Russia, but believes that Ryland’s

current efforts have potential to pay off:

Every day, it seems there is a different problem,

but as a company we feel there is an opportunity

there in the future. That’s why we are spending

our time, investing, doing things in anticipation

that things will be more stable, and once that

occurs there will be a large market for housing

there. But in order to participate in that, you are

going to need to have incountry manufacturing

and construction capabilities, and that is what we

are trying to develop right now.
Case Study 3

Joint Venture

to Manufacture

Industrial

Energy Devices

in Slovakia

INTRODUCTION

The phase liner reduces energy losses in electric

motors by aligning the phase angle of current and

voltage in the motor. The flue gas controller improves

furnace, boiler, and water heater efficiency by reducing

excess stack draft. Vertech International, a small U.S.

company, is transferring these patented technologies to

a manufacturing company in Bratislava, Slovakia and

plans to market the devices throughout Eastern Europe

and the former Soviet Union.

HISTORY OF INVOLVEMENT

In 1990 one of the principals in Vertech, Peg Kay,

hired an agent to look for business opportunities in

Central and Eastern Europe (CEE). The agent subsequently visited Elektroakustika, a manufacturer of

audio equipment in Bratislava, which expressed interest in bringing in new technologies from the West. He

relayed this information to Kay, and also reported that

energy consumption was a major concern in the region,

due to recent fuel price increases and environmental

problems.

Vertech determined that the phase liner would be an

appropriate device for Elektroakustika to manufacture.

Vertech began negotiations with the U.S. patent holder

for a licensing agreement covering manufacturing and

distribution rights in Central and Eastern Europe

(CEE). Vertech is now working out a joint venture

agreement with Elektroakustika for the manufacture

and distribution of energy saving products.

Vertech is also negotiating with the inventor of the

flue gas controller, and is planning to submit a funding

proposal to the Czech and Slovak American Enterprise

Fund.

MARKETING PLANS

Vertech is currently working through incountry

contacts to sell the products through their energy

savings, using a concept called performance contracting. This concept enables the customer to finance the

purchase of energy efficient products through future

energy savings. An outside company arranges the

financing, acquires and installs the equipment, and

guarantees that future savings will cover any debt

incurred by the customer. In effect, performance

contracting accesses money that would otherwise go to

the energy supplier, involves no up-front investment

by the customer, and gives the vendor a chance to

demonstrate the effectiveness of the product and

services.

The Slovakian venture partner has also marketed the

products to the Slovak Power Enterprise which has

indicated a willingness to assist in marketing and

possibly financial support.

86
Appendix 4-l--Case Studies 187

KEY ISSUES: FINANCIAL REGULATIONS,

BUSINESS SERVICES, AND ECONOMIC AND

POLITICAL STABILITY

Financial regulations regarding foreign ventures at

first appeared to be a problem, as there was a 55% tax

on gross profits and a requirement for 30% government ownership in any company with foreign involvement. The ownership requirements have since been

relaxed and foreign companies are now subject to the

same tax treatment as domestic ones. In addition, in an

effort to attract foreign investment, a tax holiday has

been declared for foreign companies. Vertech has been

assured by government authorities that currency conversion will not present a problem.

Vertech has been inconvenienced by the absence of

a developed business service infrastructure in the

region. Only one U.S. law firm has operations in

Slovakia, and it serves mainly large businesses.

Bookkeeping is complicated by the continued use of

communist accounting systems and unfamiliarity with

Western accounting practices. Banking services are

limited, with check cashing often requiring up to 6

weeks.

In view of the division of Czechoslovakia, there is

some concern over economic and political stability,

notably potential economic conflict between the Czech

and Slovak republics and potential ethnic unrest

involving Slovakia and Hungary. Vertech views economic growth in the region as the key to avoiding such

conflicts and believes that problems are likely to

materialize only if the economies stagnate.

ROLE OF GOVERNMENT PROGRAMS

The venture has received much assistance from

representatives of the Slovak embassy. A former

principal in Vertech, Shirley Hansen, also reports

having received valuable information and support

from the Czech and Slovak-American Council of the

U.S. Chamber of Commerce.

The group has also worked with SEVEn in Prague,

one of three Energy Efficiency Centers set up to

support energy efficiency related ventures in Eastern

Europe, for assistance in marketing its products to

utilities. SEVEn has been helpful in working with

utilities and in explaining the merits of performance

contracting to potential users.

Kay gives the Commerce Department’s International Trade Administration much credit for being

responsive and helpful in supplying information and

statistics. She also feels that AID ‘is doing shockingly

good, but thinks their programs should focus more on

small businesses and include Czechs and Slovaks in

their meetings, claiming that they “would love to sit

down with AID. ” Kay explains, “culture clash

problems exist when large companies try to establish

a presence in Eastern Europe. Small companies give

places like Slovakia a chance to grow their own

manufacturing. ’

The group’s outlook is summed up by Hansen: “I

think there is a lot of opportunity for U.S. companies

to do a lot of good over there. ”
Case Study 4

Improving

the District

Heating System

in Moscow

INTRODUCTION

A Fortichka is a little window built within the frame

of the surrounding larger window, and is used to

regulate room temperature in a Russian apartment-if

the apartment gets too hot, the fortichka is opened and

the excess heat escapes. Honeywell Inc., manufacturers of home, building, and industrial controls, in

cooperation with the Moscow City Council and a

Russian-Honeywell joint venture, is working to find

more cost-effective ways to regulate building temperature than by opening a window.

PROJECT DESCRIPTION

In the Tushino district of Moscow, Honeywell has

initiated a retrofit of the region’s district heating

system. (Throughout Central and Eastern Europe

(CEE), district heating is the predominate system in

most urban areas. Most of these systems lack modem

thermostat or boiler controls.) Honeywell estimates

that installing modem boiler controls in the Tushino

district alone, which consists of 350 buildings and over

20,000 apartments heated by four natural gas boiler

plants, will result in natural gas savings of about 20

percent (this number is approximate, since total gas

consumption in the Tushino District was not previously monitored). Installation of boiler controls represents the first stage in Honeywell’s initiative. In the

second stage, Honeywell will oversee the installation

of a heat exchanger control system to capture and

reclaim waste heat from combustion gases and other

sources. With both control systems in place, there

should be a 30 percent reduction in natural gas

consumption. The final step in the pilot program

outlined by Honeywell is to equip each individual flat

with thermostats and meters so that tenants can control

and be billed for their individual consumption. If all

three stages were implemented, the resulting energy

savings could be as high as 45 percent.

The combined cost for the first two stages in the

Honeywell plan is an estimated $3 million. The three

partners-Honeywell, the Moscow City Council, and

Agrochem-have each agreed to donate $1 million for

the project. In Honeywell’s view, a major retrofit of the

district heating systems in the former Soviet Union

would result in enormous energy savings, and the

potential revenues from the increased export of natural

gas and other energy resources resulting from more

efficient domestic use could go a long way toward

fueling the process of structural change currently

underway, In the Tushino District alone, one of 55

districts in Moscow, a 30 percent energy savings

translates into about $2 million/year of natural gas

saved (or available for export). There are about 1,000

such district heating systems in the FSU. The potential

market and energy savings from gains in energy

efficiency are enormous.

88
FINANCIAL ARRANGEMENTS

Honeywell is not a stranger to the Russian market.

In 1988, representatives of the Fertilizer Ministry came

to Honeywell with the idea of installing Honeywell’s

process controls in their fertilizer plants, which export

their product for hard currency. A joint venture, Sterch.

was formed and has completed retrofits on 22 fertilizer

factories.

In retrofitting the district heating systems in the

FSU, financial arrangements could be made in terms of

Appendix 4-l-Case Studies | 89

the product saved--energy. Natural gas, for example,

could be exported as payment for installation of

management and control devices. Such a barter

arrangement is difficult for an individual corporation

to arrange; however, with the mediation of international lending organizations and government agencies,

such large scale agreements can be an attractive option

for capital-constrained CEE industries.
T

he political and economic transition in Central and

Eastern Europe (CEE) has been accompanied by a

proliferation of international activity aimed at ameliorating the region’s energy and environmental problems.

One United Nation report cited 14 multilateral organizations and

initiatives supporting energy programs, and the United States,

the European Community (EC), and several other Western

countries have bilateral energy assistance programs. l T h e

objectives of these energy programs are diverse and vary by

recipient country. The emphasis overall has been on energy price

reform, restructuring the energy sectors, and the rehabilitation

and modernization of energy supply infrastructure. Much less

has been done on the demand side, on end-use energy efficiency

projects, or promotion of integrated resource planning and other

planning techniques that support energy efficiency.

However, the human resource and institutional capacity for

increasing the scope of energy efficiency programs is getting

more developed each year, supported at relatively low cost by

U.S. and European programs. Multilateral donors are indicating

that greater resources will be available for energy efficiency,

partly in support of initiatives to reduce emissions of greenhouse

gases, but also in recognition of the major gap between projected

needs for energy investment in Central and Eastern Europe and

the limited availability of financing over the mid term. As energy

prices continue to rise, regulatory frameworks become more

established, and economies grow, the demand for energy

efficiency technologies and services will increase, perhaps

dramatically. The United States has substantial resources,

Programs

To Assist

Energy

Efficiency

St. Andrews Church, Kiev,

Ukraine.

1 U.N. Economic and Social Council, Economic Commission for Europe, Multilateral

Assistance to Economies in Transition in the Field of Energy: A Preliminary Overview

and Evaluation, Aug. 28, 1992, p. 9.

91
92 I Energy Efficiency Technologies for Central and Eastern Europe

ranging from export promotion and financing to

research and development (R&D), that could be

mobilized more effectively and productively to

support the transfer of energy efficiency technologies and services on commercial and noncommercial terms.

This chapter describes the energy efficiency

aspects of U.S. and other energy assistance

programs in Central and Eastern Europe. But frst,

the chapter provides an overview of energy

assistance efforts and trade and investment opportunities.

THE ENERGY ASSISTANCE EFFORTS

There have been several transitions in the

Western energy assistance effort during the relatively brief period that it has been underway. In

the first year, circa late 1989-90, energy assistance was largely ad hoc while Western governments and multilateral organizations struggled to

research the East’s energy systems and prescribe

anew energy policy framework organized around

market principles. The first major step in this

process was energy price increases and plans for

energy sector restructuring and privatization in

Poland, and later Hungary and the Czech and

Slovak Republics, as conditions for World Bank

structural adjustment loans. Bilateral assistance at

this point was fragmentary. Indeed, energy was

initially subsumed under the environment, which

had captured world attention and was more of a

priority for the Western assistance effort. The first

U.S. energy project focused on installing scrubbers on a powerplant in Krakow, Poland, and the

EC did not begin developing a distinct energy

program until 1991.

In 1990-91, attention was galvanized by the

economic impact on Central Europe of rising oil

and gas prices and shortages as the Soviet Union

raised the prices of its energy exports and then

failed to make deliveries and as energy markets

responded to the Persian Gulf crisis. This prompted

some rapid emergency energy initiatives by the

United States and the EC, which included end-use

energy efficiency as one of the short-term means

for ameliorating the problem.

Since 1991, there has been an expansion in

energy assistance in Central Europe and the

Baltics by the World Bank, the European Bank for

Reconstruction and Development (EBRD), and

other bilateral donors. Energy assistance has

focused on the rehabilitation and modernization

of energy supply infrastructure, primarily in the

power sector and in district heating, natural gas,

and energy efficiency. In 1992, Russia and the

other newly independent states (MS) have also

begun to receive energy assistance focused on

reviving oil and gas production and nuclear power

safety. Also, there has been a sustained effort to

create a Europe-wide (West and East) binding

legal and regulatory framework for energy, the

European Energy Charter, that is likely to be

substantially completed in 1993.

Western donors have funded many types of

energy projects on varying scales. The World

Bank and other multilateral donors have financed

over $1 billion in large energy-sector projects.2

Bilateral donors with more limited resources,

including the United States and the EC, provide

technical assistance, training, and limited eqiip -

ment. While the scope of the bilateral programs is

difficult to ascertain, they probably total between

$150 and $200 million.3

2 Joerg-Uwe Richter, “Energy Issues in Central and Bastem Europe: Considerations for International Financial Institutions, ” Energy

Journal, vol. 13, No. 3, 1992; and Bernard Montfort and Harold E. Wachmaq “The World Bank Support for Energy Sector Transformation

in Central and Eastern Europe,” (World Bank, July 1992).

s As discussed below, U.S. energy assistance is about $100 million over 19! XL94; European Community energy assistance is estimated at

$41.5 million over 199092. With no verillcatiom up to another $50 million is assumed for bilateral European and Japanese energy assistance.

See U.N. Economic and Social Council Commission for Europe, Multilateral Assistance to Economies in Transition in the Field of Energy:

A Preliminary Overview and Evaluation, Aug. 28, 1992.
Chapter 5-Programs To Assist Energy Efficiency | 93

devoted around $15 to $20 million4 to support

demand-side energy efficiency, through energy

policy and pricing reform, management training,

and joint venture promotion.

TRADE AND INVESTMENT OPPORTUNITIES

As described in previous chapters, there are

immense opportunities for energy efficiency in

Central and Eastern Europe. One estimate of the

potential market for energy efficient industrial

products is $20 billion and estimates of the cost

of energy sector modernization, primarily in the

power sector, generally run into the hundreds of

billions of dollars over the coming years.5

Despite several programs that support trade

and investment in the region, the United States is

not currently well positioned to do business in the

energy efficiency area. The power sector has

attracted a number of U.S. firms, such as Westinghouse and Bechtel. General Electric and Honeywell also have investments and operations in

the region as do several energy and environmental

consulting firms, such as Booz-Allen Hamilton

and Coopers & Lybrand. Also, equipment purchases from U.S. firms under U.S. energy assistance projects have stimulated some follow-on

business activity. However, there are major barriers to increased exports of U.S. energy efficiency

technologies and services to Central and Eastern

Europe. The U.S. energy efficiency industry,

composed largely of small and medium-sized

fins, is only now mobilizing to export. Central

and Eastern Europe lacks capital, is a distant

market, and presents persistent economic and

political uncertainties--even to large fins. On

the positive side, Central and Eastern European

countries are very receptive to U.S. businesses

and desirous of U.S. technologies. Moreover,

there are strong cultural and ethnic linkages

between the United States and Central and

Eastern Europe.

The U.S. Government does have several programs for export and investment promotion,

financing, and insurance that support firms doing

business in the region. Some of these programs

are targeted at smaller firms, but the energy

efficiency industry has not heretofore been supported in this fashion. Also, U.S. export assistance programs have generally not been particularly accessible to, or perhaps well understood by,

smaller firms. There have also been concerns that

U.S. financing programs do not have adequate

resources, nor provide sufficient long-term financing and insurance to support effectively U.S.

firms exporting capital goods and energy services

to Central and Eastern Europe.6 There is a U.S.

Department of Energy (DOE) program under

consideration—the Committee for Energy Efficiency, Commerce and Trade (COEECT )-as

well as several nongovernmental organizations

that could assist in creating a more coherent

export strategy for the U.S. energy efficiency

industry.

By far the largest sources of public financing

for energy projects and investments are the

multilateral and regional development banks—

the World Bank Group and the EBRD. These

banks have coremitted about 10 times as much to

energy projects in the region as has the United

States, but primarily to energy supply infrastructure. The Global Environment Facility (GEF) is

another multilateral source of financing that will

5 The estimate for industrial energy efficiency is from Alliance to Save Energy, Business Opportunities in Eastern Europe for

Energy -Eficienr Industria/ Products, (Washington, DC: Alliance to Save Energy, January 19f72). Investment requirements for energy sector

rehabilitation could run as high m $120 to $150 billion over 1991 to 2000, according to Joerg-Uwe Richter, ‘ ‘Energy Issues in Centi and

Eastern Europe: Considerations for International Financial Institutions, ’ The Energy Journal, vol. 13, No. 3, p. 270.

6 1t should be noted that U.S. export assistance programs are less supportive of smaller firms and have less resources than do those of many

European countries and Japan. European fmns also have the advantage of proximity to Central and Eastern Europe.

7 An annual report to Congress under the SEED Act, compiled by the Department of State, provides an inventory of the U.S. and multilateral

programs. See Department of State, Report on FY 1990 Actions Mandated Under the SEED Act of 1989 (January 1991); Department of State,

SEED Act Implementation Report, Fiscal Year 1991 (Jan. 31, 1992).
Box 5-A-Legislation and Funding for U.S. Assistance to Central and Eastern Europe

U.S. assistance to Central and Eastern Europe is mandated under two major pieces of framework legislation,

the Support for East European Democracy (SEED) Act of 1969 (PL 101-179), and the Freedom for Russia and

Emerging Eurasian Democracies and Open Markets (FREEDOM) Support Act of 1992 (PL 102-51 1). Funds for

the assistance effort have also been appropriated under other foreign aid bills as well as reprogrammed by some

agencies.

The SEED Act was passed by the Congress and approved by the Administration in November 1969, and

authorized $930 million for fiscal years 1990-92. Foreign aid appropriations for fiscal year 1990 included $659

million for Poland and Hungary. Amid much debate over the appropriate scope of U.S. assistance, Congress

provided about $370 million in assistance for fiscal year 1991, along with $70 million for the newly forming

European Bank for Reconstruction and Development (EBRD) and $3 million for Romania. In September 1991,

Congress reprogrammed $11 million in aid to start SEED programs in the Baltic% Congress failed to authorize

fiscal year 1992 foreign aid, and funding was appropriated under a Continuing Resolution which made $370 million

available for the entire region. The Foreign Appropriations Act of 1993 (PL 102-391), signed on Oct. 6, 1992,

provides $400 million in assistance in fiscal year 1993 for Central Europe and the Baltics.

Assistance to the Newly Independent States (NIS), and in particular to Russia began in 1990 with the

extension of credits for imports of U.S. agricultural commodities followed by pledges of additional aid and the use

of Defense Department appropriations for destruction of weapons and other uses. About $460 million was

appropriated up to mid-1992 for humanitarian and technical assistance. An additional $417 million was

appropriated for the NIS in the Foreign Appropriations Act of 1993.

In April 1992, the Bush Administration proposed the FREEDOM Support Act, framework legislation that

defines the U.S. policy toward the NIS, provides authority for assistance programs, and proposes a number of trade

measures (other provisions of the FREEDOM Support Act, such as new financing for the International Monetary

Fund, have been approved under the foreign appropriations bill). The Senate cleared the FREEDOM Support Act

with modifications in June 1992 and the House in October 1992. The Act authorizes $410 million in assistance

to the NIS.

SOURCES: Congressional Research Service, selected briefs; Congressional Quarterly.

ture. The Global Environment Facility (GEF) is for East European Democracy (SEED) Act of

another multilateral source of financing that will

increasingly fund environmentally sound energy

projects, including energy efficiency.

U.S. PROGRAMS

| Legislative and Policy Framework and

Objectives

U.S. Government activities in Central and

Eastern Europe are authorized under the Support

1989 and the Freedom for Russia and Emerging

Eurasian Democracies and Open Markets (FREEDOM) Support Act of 1992. (See box 5-A.) A

number of government agencies have also undertaken activities in the region using appropriations

from their own budgets.7 Assistance has been

predicated on progress toward political pluralism,

economic reform, human rights, and improvement in relations with the United States.*

7 An annual report to Congress under the SEED Acg compiled by the Department of State, provides an inventory of the U.S. and multilateral

programs. See Department of State, Report on FY 1990 Actions Mandated Under the SEED Act of 1989 (January 1991); Department of State,

SEED Act Implementation Report, Fiscal Year 1991 (Jan. 31, 1992).

8 Under the SEED Act, Poland and Hungary were eligible for assistance in fiscal year 1990, and Albania, Bulgariaj CS~ Estoni% Latv@

Lithuani~ Romania, and Yugoslavia in fiscat year 1991.
Chapter 5-Programs To Assist Energy Efficiency! 95

Parallel to the assistance effort, the United

States has been negotiating agreements to enhance trade and investment. The countries in the

region are eligible for the General System of

Preferences (GSP) and Most Favored Nation

(MFN) status. There are also a number of bilateral

treaties that protect U.S. companies that export or

invest in the region, providing protection for

intellectual property rights, transfer of profits,

security of investments, legal rights, and in some

cases liability.

The SEED Act programs were initially organized as what the General Accounting Office

(GAO) has characterized as a “short-term experimental economic assistance approach’ based on

three primary assumptions: assistance would only

be required for a 5-year transition period; allocation of funding would take place on a regional,

rather than country-specific basis; and the programs would be managed centrally in Washington with limited authority granted to in-country

personnel.9 This reflected a U.S. decision that the

assistance programs were not the beginning of a

long-term traditional aid program. The regional

approach was adopted in theory to allow for

program flexibility and responsiveness as the

political situation changed in the region, and also

to limit the Agency for International Development (AID) contracting requirements given the

many actors and projects involved. 10 However,

the GAO, which conducted its evaluation in 1991

and early 1992, found that these characteristics

had hampered the assistance effort in some ways.

The regional approach made it difficult for

assistance recipients to plan and prioritize proposals, and recipients sometimes did not feel that aid

was tailored to each country appropriately. The

lack of country missions and in-country personnel

created coordination problems. Rather than sustained projects, U.S. assistance often funded

many short-term consulting missions that provided no sustained support to the recipient

country.

11 In the past year or SO, efforts have been

made to fund more long-term projects and to

address some of these concerns.

| Objectives and Coordination for U.S.

Energy Assistance

The U.S. energy assistance program in Central

and Eastern Europe has a range of objectives

encompassing most sectors of the region’s energy

systems----energy production, oil and gas distribution systems, electric power, and end-uses in

industry and buildings-and their environmental

impacts. Projects have included policy and technical assistance, a sectoral adjustment grant to

support energy price increases, human resource

and institution building, and business development. The approaches to energy issues are also

diverse, reflecting the different priorities and

objectives of the U.S. Government agencies

involved and somewhat different offices within

those agencies.

Within several large framework projects described below, many smaller projects have been

undertaken, ranging in size from several hundred

thousand to several million dollars. Some specific

energy activities have been mandated, notably

$30 million in the SEED Act for energy and

environmental projects in Krakow, Poland, but

the implementing agencies have generally had

flexibility in setting priorities for the additional

$70 million in energy assistance disbursed or

planned for Central European countries and the

Baltics, and $15.6 million currently reprogrammed out of AID’s Economic Support Funds in

fiscal year 1992 to begin non-nuclear energy

programs in Russia.

AID disburses energy assistance to Central and

Eastern Europe, in cooperation with DOE and the

Nuclear Regulatory Commission (NRC). DOE

9 General Accounting Office, Poland and Hungary: Economic Transition and U.S. Assistance, GAO/NSIAD-92-102, May 1992, p. 26.

10 Dep~ent of S@te, SEED Act Implementation Report, Fiscal year 1991, supra I101t3 7, p. 2.

11 GAO, Poland and Hungary, Supra note 9, pp. 28-36.
96 Energy Efficiency Technologies for Central and Eastern Europe

and EPA have also undertaken limited activities

with their own appropriations. A number of other

agencies are involved in support for trade and

investment in energy goods and services in the

region, including the Department of Commerce

(DOC), the Export-Import Bank of the United

States (Eximbank), the Overseas Private Investment Corp. (OPIC), and the Trade and Development Agency (TDA).12

Some initial coordination problems between

the agencies over the allocation of energy funding

were lessened through the formation of a State

Department-led interagency Energy and Environment Working Group. The interagency working

group no longer formally meets, but its members

convene to discuss specific projects.13

There is also coordination and some joint

projects with multilateral organizations and bilateral energy programs. Energy policy in Central

and Eastern Europe has been developed on a

consultative basis between Western multilateral

and bilateral assistance programs and recipient

governments. AID, DOE, the World Bank, the

International Energy Agency (IEA), and others

have collaborated on policy missions. For example, AID, the World Bank and the United

Kingdom are currently collaborating on a power

sector restructuring project in Poland.

Like the other SEED Act programs, the energy

assistance effort has been developed largely on a

regional basis. GAO reports that in at least one

instance this approach caused some confusion

among energy officials in the region, and made it

difficult for them to plan around U.S. assistance.14

However, GAO also notes that lack of organization and other problems within recipient countries

has made absorption of aid difficult. More recently, as the energy situation has become somewhat more defined, U.S. energy projects are

beginning to be developed on a country-specific

basis. AID is coordinating this effort, and a

number of country-specific projects are underway

(see table 5-1).15

| Federal Agencies Involved in Foreign

Assistance for Energy

The major implementing agencies for nonnuclear energy assistance to Central and Eastern

Europe-AID and DOE-have different institutional objectives that reflect their organizational

structure and changing perceptions of their mission. AID is the primary U.S. Government agency

involved in foreign assistance for energy. It is

responsible for developing and implementing the

energy assistance programs. AID’s East European energy programs are managed by the Bureau

for Europe in the Energy and Infrastructure

Division, in coordination with the AID representative in each country. This organizational structure is a departure from traditional AID project

management and reflects the U.S. Government’s

short-term approach to economic assistance in

Central and Eastern Europe.

AID has been criticized for not having a clear

energy policy, not supporting energy efficiency

and renewable energy more consistently, and not

devoting enough resources to energy in general.

AID has been directed by Congress in recent

years to increase its support for energy efficiency

and renewable energy.

16 Energy efficiency has

been a fairly major priority in Central and Eastern

Europe. The energy assistance program in this

region is designed to recognize the linkage

between broader economic and energy sector

12 me U.S. Tr~e ~d D~v~lopm~nt ~ogr~ (TDp) he he TDA on october 28, 1992.

13 Ge~e~~ ~comt~g OffIce, East European Energ~.S. Business Opportunities in and Assistance to poland’s Energy Sector, Report

to the Chairman, Commitkx on Energy and Natural Resources, U.S. Semte, GAO/NSIAD-91-206, May 1991, pp. 33-34.

14 GAO, Poland and Hungary, supra nOte g, P. 32.

15 per~o~ ~om~catio% Ro&rt Ichord, Chief, Ener~ ad ~r~~cture, Europe BUKXUI, Agency for International Development.

16 U.S. Covess, Office of T&tioIo~ Assessment (OTA). Fueling Development: Energy Technologies for Develqing Counm’es!

OTA-E-516 (Wa.shingto% DC: U.S. Government Printing Oftlce, April 1992), pp. 264-265.
Chapter 5-Programs To Assist Energy Efficiency | 97

Table 5-1—U.S. Energy Assistance to Central Europe:

Summary of Major Current Project Areas by Selected Country

Poland

Power Sector Restructuring, Privatization and Management

Multi-donor Energy Restructuring Program (with the World Bank, European Community, and United Kingdom)

Private Power Program and Electricity Tariff Reform

Utility Partnership Program

Energy Efficiency and Demand Side Management

Energy Efficiency Centers (Warsaw and Katowice)

Demand Side Management and integrated Resource Planning

Krakow Environmental Improvement

Skawina Power Plant Retrofit

Low Emissions Program

U.S. Energy Business Development

Regional Business Development Officer

Czech and Slovak Republics

Energy Efficiency and Environmental improvement

Development of Private Energy Services and Equipment Companies

Energy Efficiency Center (Prague) and Business Network Development

Energy/Environment Pilot Projects in Cesky Krumlov, Plzen, Ostrava, Bratislava

Oil Desulphurization and Natural Gas Substitution

Power Sector Restructuring and Privatization

Utility Partnership Program

Power System Regulatory and Organization Reform

Nuclear Safety

Nuclear Power Plant Operational Safety improvement

Regulatory Systems Improvement

U.S. Energy Business Development

Capital Development initiative (CDI) Energy Business Development

Hungary

Energy Efficiency

Training and Support to Private Hungarian Energy Service Companies

Energy Sector Restructuring and Management

Utility Partnership Program

Power Sector Reorganization, Privatization and Finance

Development of New Mining Office

Nuclear Safety

improve Plant Operation and Maintenance

improve Regulatory and inspection Systems

U.S. Energy Business Development

CD Energy Business Development

Baltics

Energy Pricing and Efficiency

Regional Electricity Price Reform

Demand Side Management and Energy Efficiency

Power Sector Restructuring/Management

Utility Partnership Program

Electricity Sector Restructuring

Nuclear Safety

Nuclear Safety in Lithuania

SOURCE: U.S. Agency for international Development
reforms and the achievement of energy efficiency

in both supply and demand sectors.

The program’s overall objectives include the

decontrol of energy prices, energy sector restructuring, export promotion, pollution control, and

nuclear safety. AID uses a number of mechanisms

to implement program objectives: competitively

selected contracts, a cooperative agreement with

the U.S. Energy Association (USEA), interagency agreements with DOE, NRC, and the

Department of Interior, and a grant to the International Energy Agency. Specific energy efficiency

projects funded by AID, such as the Emergency

Energy Project and Regional Energy Efficiency

Project, are described later.

DOE’s activities in Central and Eastern Europe

are also diverse and reflect the different objectives and capabilities of the offices within the

agency. DOE has developed a strategy toward the

region, with the overall program goals being to

assist in maintainingg a balanced and mixed supply

of energy at reasonable prices and with reliability

of supply; and to support the production, transport, and use of energy in ways that least damage

the environment. Program elements include political and economic analysis, development of

information systems, technical assistance, export

promotion, and financing. DOE’s activities are

coordinated through an internal working group.

Current projects focus on energy efficiency, fossil

energy, and nuclear safety .17

Through its Office of Conservation and Renewable Energy and the Office of Industrial

Technologies, DOE has supported several innovative projects, including three highly regarded

energy efficiency centers and an energy efficiency export promotion program. An important

element in DOE’s future energy efficiency activities in the region is its efforts to expand export

promotion of U.S. technologies and services,

Under the Energy Policy Act of 1992 (PL

102-486), DOE is authorized to administer, in

cooperation with AID, a program to promote

exports of energy technologies that can reduce

emissions of greenhouse gases, with funding of

$100 million annually.

EPA has also been seeking to expand its

international activities, heretofore primarily confined to policy consultations and joint research

programs, in the area of technology transfer and

export promotion. Under the SEED Act, EPA has

developed a number of environmental projects in

Central and Eastern Europe, managed through its

Office of International Activities. Its energy

activities in the region have focused on renewable

energy, particularly in the recovery and use of

coal-bed methane, sealing leaks in natural gas

pipelines, and supporting the energy efficiency

centers, reflecting its domestic experience in

these areas. EPA currently plans to increase its

renewable energy activities in Central and Eastern Europe; its successful voluntary energy efficiency programs in the United States—such as

“Green Lights” for lighting, “Energy Star” for

computers, “Golden Carrot” for refrigerators—

are planned for replication in Western Europe,

and could also be expanded elsewhere.18

| Assistance for Energy Efficiency

Energy efficiency has been a major component

of the U.S. energy assistance program in Central

and Eastern Europe. Policy and technical assistance and limited equipment purchases relating to

energy efficiency have been undertaken in the

context of three primary projects: Emergency

Energy, Regional Energy Efficiency, and the

Krakow Clean Fossil Fuel and Energy Efficiency

Project. These projects have a combined budget

of about $66 million, of which roughly one-third

is devoted directly to energy efficiency.

IT U.S. Department of Energy, ‘‘Strategy For Eastern Europe: Scope Paper” (intend draft).

]8 EPA, The C/imte i$ Right for ~rion: Voluntov ~rogra~ To Reduce Greenhouse Gas Emissions, EPA 44)()-K-92-(K)5, OCtOber 1992.
Chapter 5-Programs To Assist Energy Efficiency | 99

EMERGENCY ENERGY

The Emergency Energy Project is an AIDmanaged $11.75 million project largely undertaken in 1991 in response to the perceived threat

to Central European energy supplies and economies from increases in oil prices due to the

Persian Gulf crisis and the decline in Russian oil

deliveries. The project was developed by a joint

team of representatives from AID, DOE, the

Department of State, and U.S. industry in consultation with recipient governments in Poland,

Hungary, the Czech and Slovak Republics, Bulgaria, Romania, and Yugoslavia. Its objectives

were to improve industrial and oil refinery energy

efficiency, oil purchasing practices, and the

analytical basis for energy price reform.19

The industrial energy efficiency component of

the project undertook energy audits in 52 industrial facilities in 9 countries. AID reports that it

provided $1.5 million in energy efficiency equipment purchased from U.S. firms. As a result of the

equipment and management measures, AID estimates that energy savings are $16 million/year.

The project also stimulated local firms and

consultants that were subcontracted to assist in

the audits. Follow-on workshops, in the region

and in the United States, and studies based on the

audit findings also served to promote the project

results and business opportunities.20 Other measures to improve energy efficiency included audits

in more than 20 oil refineries, energy pricing

seminars for senior managers and policy makers,

and development of economic models to assist in

price reform.

REGIONAL ENERGY EFFICIENCY

The Regional Energy Efficiency Project is a

4-year, $34 million AID project initiated in 1991

and carried out through competitively awarded

contracts. The project is implemented by a

Measuring electrical effciency at a Yugoslav paper

plant using U.S. equipment.

number of agencies and covers a broad set of

activities, which include:

● rationalization and decontrol of energy prices;

. restructuring the energy sector and promotion of energy efficiency and the privatization of energy companies;

● promotion of U.S. investment, joint ventures, and technology transfer;

● reduction of environmental pollution;

● improving nuclear safety; and

● integration of energy systems with Western

Europe and international energy markets .21

The major project element devoted to energy

efficiency is the ‘‘Energy Pricing, Energy Efficiency, and Energy Sector Restructuring’ component ($6.4 million) begun in June 1992, that

provides technical assistance, training, and low

cost energy efficiency equipment to public and

private sector entities, through AID-managed

contracts. The project will assist in promoting

19 Usm, ‘‘Emergency Energy’ (Project S~and Progress Report, 1992).

20 me Alllmce t. Save Enera’s study, Bu~ine~~ oppo~unitie~ in Eastern Europe for Energy.EfiCient Indu.ftrid Products, Supra IIOk 5,

is based on this project.

z] us-, ‘‘Region~ Energy Efficiency’ (Project S~ary and Progress Report, 1992).
100 I Energy Efficiency Technologies for Central and Eastern Europe

competition in energy markets through further

price reforms and the establishment of regulatory

frameworks. It will also aim to stimulate energy

efficiency and the development of private energy

service and equipment supply companies linked

with U.S. firms.22

Other major project elements include the “Electric Power Systems and Related Fuel Supply”

component ($5.7 million), that will, among other

objectives, provide technical assistance and training in the management of electric generation,

transmission and distribution systems, and conduct feasibility studies for the efficiency improvement and rehabilitation of power plants. Some of

these activities will be carried out by AIDmanaged contracts in collaboration with the

World Bank, EC, and the United Kingdom.23

Under this project, AID has also entered into a

cooperative agreement with USEA to form the

U.S.-Eastern European Utility Partnership Program (UPP). Begun in October 1991, UPP brings

together electric utilities in the United States and

Central and Eastern Europe for activities focused

largely on management issues but including also

art annual regulatory systems seminar and dissemination of information and software resources.

The Program has received wide support from the

U.S. utility industry, including the Edison Electric Institute, Electric Power Research Institute,

and the North American Reliability Council. U.S.

utilities will share the costs of the program,

contributing $1 million, or one-fifth of the program’s budget.24

The first partnership was formed between New

England Electric Systems and a Hungarian power

company in April 1992, and others are being

developed between Commonwealth Edison and

the Polish Power Grid, Houston Lighting and

Power and the Czech Power Co. (CEZ), Southern

Co. and the Slovak Power Utility (SEP), and

Central Maine Power and the Bulgarian National

Electric Co. Further partnerships are planned with

the Baltics and Romania. AID also reports that

over 20 companies have expressed interest in

joining the partnership program.25

Another component of the Regional Energy

Efficiency Project provides funds to DOE for: 1)

promotion of cleaner and more efficient combustion of coal; and 2) end-use efficiency and

renewable energy, including support for and

establishment of energy efficiency centers. The

coal assistance is managed by DOE’s Fossil

Energy Office and the energy efficiency/

renewable work by Pacific Northwest Laboratories (PNL) under the DOE Renewable Energy

Office.

The $20 million “Krakow Clean Fossil Fuel

and Energy Efficiency Project’ assists in reducing Krakow’s air pollution problems by improving the efficiency of the city’s district heating

system and energy use in buildings. Phase I ($5.5

million) of this project has involved technology

assessments and feasibility studies; in phase II

($14.5 million), DOE will jointly fund commercial joint ventures to provide the fuels and

technologies prescribed. 26 Other technical

assistance projects include several focused on

improving energy efficiency in the Krakow

Polish-American Children’s Hospital and in the

buildings sector generally in Plzen and Cesky -

22 SYCC)~ a enerW ~rvice fii that is a joint venture of Bechtel Corporation and Paci.tlc Gas and Electric, is a member of the consortium

implementing this project. U.S. Agency for International Development, Bureau for Europe, “New Eastern and Central Europe Energy

Contract” Apr. 24, 1992.

23 us-, “Re@o~ Energy EfIlciency, ” Supra note 21.

24 us~~$s. fieW AssWlatioG U.S..Ea~tern European utili~ partnership program: sta~s Report, OCtober 1991-Muy 1992; USAID,

“Regional Energy Efllciency,” supra note 21.

25 us-, “R@o~ Enera Efficiency, ’ ‘supra nOtf3 21.

26 USAID, ‘XI-&Ow: Sh- Retrofit and Clean Fossil Fuel and Energy Efficiency” (project Summary and Progress Report, 1992).
Chapter 5–Programs To Assist Energy Efficiency I 101

Krumlow in the Czech Republic, and in Bulgaria. 27

One of the more innovative and cost-effective

energy efficiency assistance projects has been the

establishment of three private, nonprofit centers

for energy efficiency: the Polish Foundation for

Energy Efficiency (FEWE), with offices in Warsaw and Katowice, founded in 1991; the Czech

and Slovak Center for Energy Efficiency located

in Prague (SEVEn), founded in 1990; and the

Moscow Center for Energy Efficiency (CENEf),

founded in 1992. A center is also planned for

Bulgaria. The centers are staffed by local energy

efficiency experts (between 5 and 10 in each

center) with assistance from U.S. experts. They

receive rather limited U.S. seed funding (a total of

$400,000 in fiscal year 1991; $600,000 in fiscal

year 1992), and are intended to become self

sustaining within 3 years.28

The center’s activities are focused in four main

categories: policy research and development,

private business venture development, training

and demonstration projects, and public education

and information services. The centers have conducted seminars for local and national government policy makers on management, planning,

and standards for energy efficiency and have

acted as advocates for implementing such programs. The centers are also serving as clearinghouses for information on energy efficiency

technologies. As a follow-on to the center’s

promotion of integrated resource planning (IRP),

DOE is also planning to provide U.S. IRP experts

to Poland and the Czech and Slovak Republics in

1993.

DOE and the energy efficiency centers also

attempt to promote business development, which

will be discussed below in the section on trade

and investment.

U.S. equipment provided to measure boiler efficiency

at the LoZ, Poland district heating plant.

ACTIVITIES IN THE NEWLY INDEPENDENT

STATES

Energy assistance efforts for the NIS began in

mid- 1992, with a $15.6 million effort that included energy efficiency audits and followup

purchases of equipment in district heating plants

in Russia, Khazakstan, Belarus, Armenia, Ukraine,

and Kyrgyzstan.

29 The initial energy priorities, if

not emergencies, facing the NIS are nuclear

power safety and reviving oil and gas production.

It is not clear at this time what major funding for

energy efficiency is likely over the coming years.

BILATERAL ENERGY COOPERATION

AGREEMENTS

DOE has begun to establish formal institutional ties with countries in Central and Eastern

Europe relating to energy cooperation. Terms of

Reference have been concluded with the Ministry

of Trade and Industry in Hungary that provide for,

among other things, assistance in developing an

energy information system and evaluating approaches to energy regulation. Energy cooperation with Russia and the other newly independent

27 p~C~lC N~fiW~=t ~~~tOfi~~, A~~Uol R~~~~t>~O~~~rn for Energy Eficie~cy Assistance: Eastern Europe and Newly Independent

States, pp. 11-12.

28 Ibid, pp. 5-6.

29 Otier Progw ~ea~ me ~uclm ~~c~, oil ad ~a~ production, elec~c power pficlng ad pfivathatio% and COd mine SZifC~. USAID,

“Factshect: USAID Energy Program in the New Independent States (NM) of the Former Soviet Unio~” June 30, 1992.
102 I Energy Efficiency Technologies for Central and Eastern Europe

states has also been initiated. U.S.-U.S.S.R.

energy cooperation was focused on nuclear power,

although an agreement on exchanges in the power

sector was in effect from 1973 to the mid-1980s.

Under DOE auspices, the United States and the

Russian Federation signed a framework Agreement on Scientific and Technical Cooperation in

the Field of Fuel and Energy in June 1992. The

Agreement provides for data exchanges, joint

projects, and private sector contacts in a number

of energy areas, including energy efficiency and

renewable. The Agreement establishes a U. S.-

Russian Joint Commmittee, which will meet once

annually organized by DOE and the Ministry of

Fuels and Energy of the Russian Federation.

Research and Development

The U.S. energy assistance program currently

lacks a consistent R&D (and demonstration)

component that would allow emerging energy

efficiency technologies to be developed in accordance with opportunities in Central and Eastern

Europe.

Science and Technology (S&T) Agreements

have been signed with Poland (renewed in 1987),

Hungary (1989), Czechoslovakia (1991), and

Yugoslavia (suspended). The agreements are

administered by the Bureau of Oceans and

International Environmental and Scientific Affairs (OES) in the Department of State. Funding

for activities under the agreements are appropriated through the Department of State budget, and

augmented by participating government agencies. The S&T funds support add-on costs of

bilateral cooperation, and do not serve as primary

sources of funding for domestic research.30 Energy typically makes up about one-tenth of the

S&T budget. In 1990, seminars were held in

Poland on the U.S. experience with energy

conservation under

ment.

the U.S.-Poland S&T AgreeIn Russia and the other newly independent

states, previous science and technology agreements are being reassessed, and efforts have been

underway to support the existing science and

technology infrastructure and assist in conversion

from military applications. The United States has

been instrumental in establishing the International Science and Technology Center headquartered in Moscow. The United States, Canada,

Sweden, and Ukraine have also signed an agreement to establish a Science and Technology

center in Kiev. Energy and environment are

expected to be priorities for the center.31

| Trade and Investment Programs

U.S. programs in Central and Eastern Europe

have been strongly oriented toward private sector

development and U.S. trade and investment.

DOC, AID, and DOE have programs devoted to

facilitating U.S. business opportunities generally

as well as in the energy sector, including some of

the projects discussed above, such as energy

efficiency centers. The autonomous U.S. export

assistance and investment agencies—Eximbank,

OPIC, and TDA—are also active in most countries in Central and Eastern Europe, providing

pre-export assistance, such as for feasibility

studies, export financing, and insurance and

guarantees to cover political and economic risks.

The American Business Initiative (ABI), a

4-year, $46 million interagency initiative involving Commerce, AID, TDA, and OPIC, is the

framework for some of these activities and also

assists in coordination. ABI’s six programs,

including the Capital Development Initiative

(discussed later), targets five industry sectors that

are key to economic reform and growth. They are

energy, environment, telecommunications, hous30 Finding for ~c S&T agreements is minim~. To(21 f~~ing for all tie agreements in FY 1991 Was $4.5 million. SEED Act~mP/ementation

Report, Fiscal Year 1991, supra note 7, p. 17.

31 U.S. Dep~cnt of State, Office of the Assistant Secretary ‘‘ U.S., Canada, Sweden and Ukraine Initial Agreement Establishing Science

and ‘Ikchnology Center in Kiev” (Press Release, June 2, 1992).
Chapter 5–Programs To Assist Energy Efficiency I 103

ing, agriculture, and agribusiness. The United

States has also provided the capital for “Enterprise Funds’ in Poland, Hungary, and the Czech

and Slovak republics which can assist in business

development.

As discussed below, these programs have

provided a framework for trade and investment in

energy technologies and services that improve

efficiency, although heretofore primarily in the

power sector and for larger firms. Eximbank has

supported a number of energy sector exports to

Poland and Hungary. U.S. firms have also invested in companies that produce energy equipment with OPIC coverage—including General

Electric Co., which purchased the Hungarian

lighting manufacturer, Tungsram, and MagneTek, Inc.

However, the smaller firms that typify the

market for end-use energy efficiency products

and services-henceforth the energy efficiency

industry-have not done much business in the

region. This is in great part due to this industry’s

orientation toward the U.S. domestic market and

lack of systematic organization for exporting.32

Efforts to organize the industry for export are in

the nascent stages, through nongovernmental

organizations, such as the Alliance to Save

Energy and the International Institute for Energy

Conservation, a newly forming export council for

the energy efficiency industry, and forthcoming

efforts under proposed DOE-coordinated

COEECT.

It should be noted that there are factors that

could affect the ability of the energy efficiency

industry to mobilize for exporting. Recent studies

by OTA, GAO, and others have cited, among

other factors, poor coordination among U.S.

export assistance programs and no overarching

export strategy, limited access for small and

medium-sized businesses, and inadequate resources and excessive restrictions compared to

major U.S. competitors.33 Some of these issues

will be examined in more depth below.

PROMOTION OF TRADE AND INVESTMENT

There is an extensive framework of activities to

promote trade and investment in Central and

Eastern Europe, supported by DOC, AID, TDA,

and OPIC, and including market information

systems, business development centers, trade

missions, and fairs. DOC has promoted opportunities for power sector and other energy (e.g.,

buildings technologies) equipment exports, while

DOE and the energy efficiency centers have

attempted to target the energy efficiency industry.

DOC has a number of programs providing

information, promoting exports, and creating a

U.S. presence in the region. The Eastern European Business Information Center (EEBIC) acts

as a clearinghouse on trade and investment

opportunities for U.S. businesses. The EEBIC

publishes the Eastern Europe Business Bulletin,

on a monthly and sometimes bimonthly basis,

which includes general information on trade and

investment as well as specific business opportunities in the energy sector and in energy equipment.

It also produces the occasional publication, Eastern Europe Looks for Partners, which provides

information on joint ventures in specific sectors.

To speed access to these services and others, the

EEBIC has an automated fax delivery system,

EEBICFLASH.

Commerce established a similar program in

June 1992 for the newly independent states, the

~z Russell Sturm, Dcidre Lord, and Lynn Wagner, Seizing the Moment: Global Opportunities for the U.S. Energy Efficiency Industry, A

Report of the Ofice of Encrg-y Conser~ation and Renetiqables, U.S. Department of Energy, October 1992.

~~ Ex~plcs from ~s growing literature include: Office of Technology Assessment, Competing Economies: America, Europe, and the

Pacific Rim, OTA-ITE-498 (Washington, DC: U.S. Government Printing Office, October 1991); William E. Nothdurft, Going Global: HOW1

Europe Helps SmaII Firms Export (Washington, DC: The Brookings Institution, 1992); and James Altschul, The Eqort Finance Crisis

(Washington, DC: Economic Strategy Institute, July 1992). The General Accounting Office has published several reports on export assistance

programs, including Export Promotion: A Comparison of Programs in Fi~le Industnalized Countries, GAO/GGD-92-97, June 1992, and Export

Promotion Federal Programs Lack Organizational and Funding Cohesit’eness, GAO/NSIAD-9249, January 1992.
104 I Energy Efficiency Technologies for Central and Eastern Europe

U.S. machinery and tools are used to insulate

apartment building in Krakow, Poland. (AID Project)

Business Information Service for the Newly

Independent States (BISNIS). Like the EEBIC,

BISNIS provides a monthly newsletter, marketing plans, and other information of use to

potential exporters.

The U.S. and Foreign Commercial Service

undertakes export promotion activities in the

region. Electric power technologies are promoted

as a ‘‘best prospect’for U.S. trade. Commerce

has sponsored several trade missions promoting

energy and environmental goods and services,

including energy efficiency technologies.

More focused activities on the energy efficiency industry are currently being undertaken

under the DOE/PNL project, Energy Efficiency

Assistance program for Eastern Europe and

Newly Independent States. This effort is focused

on utilizing the capabilities of the energy efficiency centers, and includes creating U.S. liaison

support between the centers and U.S. companies,

developing an Automated Eastern Europe and

Newly Independent States Information System,

and other business development activities. For

example, the Czech and Slovak center, SEVEn, is

initiating a series of Energy Efficiency Business

Weeks. The frost was held November 30 to

December 4, 1992. The project estimates that 50

U.S. firms have been provided assistance.34 (See

table 5-2.)

PRE-EXPORT FINANCING

A number of U.S. Government agencies provide financial assistance for prefeasibility and

feasibility studies, training and other services that

can assist in the export of U.S. energy efficiency

goods and services, including TDA, Eximbank,

OPIC, AID and the small International Fund for

Renewable Energy and Energy Efficiency

(IFREEE). By assisting U.S. firms in the early

stages of project development, these programs

can help position the firms for follow-on exports.

The TDA is the major source of financing for

feasibility studies in Central and Eastern Europe,

and also provides consulting services, training

programs, and other project planning services,

and identifies development projects that offer

large export potential. The TDA is a relatively

small program, funded at $35 million in fiscal

years 1991 and 1992, but it has a strong record in

stimulating follow-on U.S. exports.35 Energy and

natural resource projects have made up the largest

share of TDA’s projects and obligations in recent

years. TDA activities in Central Europe include

~ pac~lc NOfiWeSt Laboratories, Annual Report4%ogram for Energy Eficiency Assistance, supm note 27, PP. 7-9.

35 Udtcd Smtes Tr~& ~d Development ~o~~P), Congressional/ ~rese~ta~o~, Fiscal year 1993; TDP, “The Trade ad

Development program in Central and Eastern Europe” (October 1992).
Chapter 5-Programs To Assist Energy Efficiency I 105

Table 5-2—Support for U.S. Firms by Energy Efficiency Centers

Type of Energy Efficiency Product CENEfa SEVEnb FEWec

Energy Efficiency Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 26 8

Insulation & Energy Efficient Construction Materials. . . . . . . . . . . 2 8 1

Cogeneration Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 11 5

Renewable Energy Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . 3 13 5

Energy Conservation Services (DSM,e IRP,f and others). . . . . . . 2 18 15

Coalbed Methane Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 NA 20

Cement Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 NA 2

a) Center for Energy Efficiency (Moscow)

b) Center for Energy Efficiency (Prague)

c) The Polish Foundation for Energy Efficiency

e) Demand-side management

f) Integrated resource planning

NA - Not applicable.

SOURCE: Battelle Pacific Northwest Labs, Annual Report-Program for Energy Efficiency Assistance.

several feasibility studies for rehabilitating thermal power plants and modernizing electric power

transmission systems, and support for a conference on U.S. electric power technologies.

Eximbank and OPIC also provide financing for

feasibility studies. Under the American Business

Initiative, OPIC can offer project development

assistance for up to 50 percent, or 75 percent for

small businesses, of the cost of feasibility studies

and business development plans,36

The AID-managed Capital Development Initiative (CDI) ($10-15 million) is another effort to

assist U.S. firms in trade and investment under the

American Business Initiative. The CDI is focused

on Poland, Hungary, the Czech Republic, and the

Slovak Republic, but includes also the Baltics and

other Eastern European countries outside the NIS.

U.S. consulting firms paired with Eastern European counterparts have been retained by AID to

manage the CDI, and assist U.S. companies in

identifying and pursuing investment opportunities. Energy is one of the initial components of the

CDI, with management by ICF Resources, a

Virginia-based firm. The CDI also provides a

Development Cost Support Fund that can grant up

to 50 percent or $500,000 toward the preparation

of a project for investment financing.37

There are a number of other small energy

preproject assistance programs that could provide

support for energy efficiency projects in Central

and Eastern Europe. AID supports an Energy

Project Development Fund, which can provide up

to 50 percent of funding for prefeasibility and

feasibility studies. The fund is devoted to financing energy projects that can demonstrate environmental benefits, and to assisting U.S. companies

in trade and investment. The IFREEE, a nonprofit

Washington-based corporation funded by AID,

DOE, EPA and the Rockefeller Foundation,

attempts to facilitate access to private and public

financing for industries in the renewable energy,

energy efficiency, and natural gas sectors. The

first year’s programs have focused on renewable

energy projects, but some energy efficiency

projects are in the pipeline.

EXPORT FINANCING AND INSURANCE

U.S. export financing and insurance programs

play an important role in facilitating trade and

investment in Central and Eastern Europe, given

the current constraints on commercial financing

36 Usm, “~eri~ Business and Private. Sector Development Initiative” @OJect SUmrnarY and Progress Repom 1992).

37 Ibid.
106 I Energy Efficiency Technologies for Central and Eastern Europe

and the risks of doing business in the region.

Eximbank’s programs are designed to support

exports that would not otherwise attract private

sector financing, by offering loans with longer

term maturities, providing export credit insurance, and countering export credit subsidies of

foreign governments. The Foreign Credit Insurance Association (FCIA), a private sector consortium affiliated with Eximbank, provides insurance for Eximbank loans. OPIC offers political

risk insurance, financing through direct loans

and/or loan guarantees, and loan services to U.S.

private investors. Both Eximbank and OPIC

support energy firms extensively, including smaller

renewable energy companies.

Eximbank exposure in Poland, Hungary, and

Czechoslovakia as of fiscal year 1991 was about

$377.6 million, most of which is in Poland.38 This

includes loans and guarantees to support power

sector exports to Poland and Hungary .39 Companies doing business with Hungary and the Czech

and Slovak republics now have access to mediumterm insurance and long-term loans and guarantees; loans and guarantees to Poland are limited to

5 year-s amortization and 7-year total term.40

Loans, guarantees, and insurance to other countries in the region are on a more restricted basis.

Table 5-3 summarizes the limitations of Eximbank programs in Central and Eastern Europe as

of November 1991.

There has been some concern that Eximbank is

too cautious in supporting exports to the region.

Exports of capital goods, such as energy technologies, that require a large up-front investment for

long-term payback, require longer term financing

and insurance. The Advisory Committee of Eximbank has recommended that the situation in

Central and Eastern Europe requires “new and

imaginative initiatives enabling Eximbank to

identify the underlying strengths of these economies, and therefore making it possible for exporters to position themselves in these markets during

their early development stage. ”41

U.S. direct investment in Central and Eastern

Europe can help stimulate the local economies,

facilitate private sector development, and provide

avenues for transfer of technologies and management skills, In 1990 and 1991, OPIC provided

insurance and loan guarantees to almost 50

fins-ranging from small to large but with an

emphasis on larger firms-to support investments

in Central and Eastern Europe. These included

firms producing renewable energy (methane recovery), refrigeration insulation, electric motors,

and lighting products (General Electric Corp.).

Total exposure in the region was $550 million by

the end of fiscal year 1991.42

OPIC has also authorized a Central and Eastern

Europe Growth Fund with a $50 million investment guarantee, which is in the process of being

capitalized. The Fund will invest in equity and

debt securities of firms that have a sound financial

condition, potential for growth, and can demonstrate positive developmental benefits.43 OPIC

has also authorized a $100 million Environmental

Investment Fund (also in the process of being

capitalized), which will invest in projects in five

38 TOM exposwe as of mat year WaS ahnost $27 billion. Export-Import Bank of the United States, AnnuaZ Repon, 1991, PP. 16-19.

39 Exirnbanlc provides a significant amount of insurance, loan and guarantee support for energy exports and investment, pMy in Power

generation and oil and gas sectors-almost $2.9 billion in fiscal year 1991 and $2.4 billion in fxa.1 year 1992, according to Export-Import 13X

Office of Public Affairs, “Exirnbank’s ban and Guaran tes Support For Energy Exports” (Oct. 22, 1992).

40 Expofi.hWfi Bti oft.he United s~test “CountryLimitation Schedule: Special Conditions Pertainin g to Eximba.nk Iman and Guarantee

Programs and Export Credit Insurance” (Effective Nov. 15, 1992).

41 Expofi-~pofi B~of~e Unitti Swtes, RepO~ zo the U.S. Congress on Export Credit Competition ati the E~o~-Impo~Bati of the

United States for the Period January 1,1991 through December 31, 1991, July 1992.

42 Ovas= ~vate ~ves~ent Coqoratioq 1990 An~l Report and 1991 Annual Report.

43 o~c, $ •~omtio~ s~; Central and Eastern European Growth Fund” (no date).
Chapter 5-Programs To Assist Energy Efficiency! | 107

Table 5-3—Central and Eastern Europe-Eximbank Programs

Short-term Medium-term Medium-term Long-term

insurance insurance Loans/guarantees

Albania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bosnia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bulgaria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Croatia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Czechoslovakia. . . . . . . . . . . . . . . . . . . . . . . . .

Estonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hungary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Latvia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lithuania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Poland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Slovenia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Yugoslavia. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Armenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Azerbaijan. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Belarus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kazakhstan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kyrgyzstan. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Moldova . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tajikstan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Turkenistan. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Uzbekistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No

No

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

No

No

Yes

No

Yes

No

No

Yes

No

No

Yes

Yes

No

No

No

No

Yes

No

Yes

No

No

Yes

No

No

No

No

No

No

No

No

No

No

Yes

No

No

No

No

No

No

No

No

Yes

No

Yes

No

No

Yes

No

No

No

No

No

No

No

No

No

No

Yes

No

No

No

No

No

No

No

No

Yes

No

Yes

No

No

No

No

No

No

No

No

No

No

No

No

No

No

No

No

No

No

SOURCE: Eximbank, July 27, 1992,

environmental sectors, including renewable and

alternative energy.44

Many of the firms in the U.S. energy efficiency

industry are small and could have difficulty

approaching Eximbank and OPIC, which tend to

finance larger firms. Since 1986, Eximbank has

been required to set aside IO percent of its total

budget authority to finance small business exports. In recent years, this target appears to have

been met and sometimes exceeded.45 Eximbank

has taken a number of other steps recently to

improve access to small businesses, including

increasing locations that can represent its prograrms at the State and local level, and forming a

Small Business Group to assist in streamlining

and improving its programs. The Small Business

Administration (SBA) also provides export financing for small businesses through its Export

Revolving Line of Credit, although this program

has apparently not been widely used.%

ENTERPRISE FUNDS

The Polish-American Enterprise Fund (1990),

the Hungarian-American Enterprise Fund (1990J

4`$TheotherprogramaseasfortheEnvironmentalInvestmentRmd aresustainableagrieulture,forestmanagemen4ecotouri.sq ~dpo~ution

prevention and abatement technologies. OPIC, “InformationatS ummary: The Environmental Investment Fund’’ (notate).

45 mere ~s ken some ~biwl~ bout Eximb~’s rep@ of its suppofl for -l bus~ess expofi k that dkat SUppOfi WiiS IIOt

distinguished from indirect support to small businesses that contracted to larger fm. The rezent legislation for Eximbank reauthorization

requires the bank to calcutate only direct support for small business. General Accounting OffIce, The U.S. Export-Import Bank: The Bank

Provides Direct and Indirect Assistance to Small Businesses, GGD-92-105, August 1992.

46 Gener~ ~oun~g OfflW, Export promtion: prob[e~ in the Small Business Administration’s programs, ~D-92-77, SePtem~r

1992.
108 I Energy Efficiency Technologies for Central and Eastern Europe

and the Czech and Slovak-American Enterprise

Fund (1991) were established under the SEED

Act to undertake a number of activities in support

of private sector development, including making

loans, grants, and equity investments, and sponsoring technical assistance and training. The

funds emphasize the financing of firms in the

recipient countries and joint ventures with U.S.

fins, but will also finance U.S. companies doing

business in the recipient countries. The funds are

oriented to small and medium-sized fins. Anecdotal accounts suggest that the enterprise funds

have not responded favorably to environmental

and energy service companies.

The Polish and Hungarian funds were authorized at $240 million and $60 million, respectively, over fiscal years 1990-92. By fiscal year

1991, the Polish Fund was capitalized at $104

million and the Hungarian Fund at $26 million.

The Czech and Slovak Fund was seeded with $10

million in fiscal year 1991 and authorized for $65

million. The funds may raise additional capital

from the private sector and foundations.47

U.S. Energy Efficiency Industry Export Potential

U.S. Government programs for trade and investment offer a wide array of resources for firms

in the energy efficiency industry, including small

fins, that could export to Central and Eastern

Europe. However, the industry is not well organized to export, nor is there a government-wide

strategy for mobilizing the industry. U.S. Government energy efficiency export activities have

begun in limited fashion under the DOE coordinated Committee on Renewable Energy, Commerce and Trade (CORECT), established by

Congress in 1984 to promote the use abroad of

U.S. renewable energy goods and services, but

will be developed more extensively under the

DOE Committee for Energy Efficiency, Commerce, and Trade (COEECT) program. COEECT,

like CORECT, will be an interagency initiative

with private sector participation, that mobilizes

resources to assist in export of energy efficiency

technologies and build a government-industry

partnership. % Central and Eastern Europe is

targeted as the initial priority market for

COEECT, given the framework

development already in place.

| State and Nongovernmental

While the Federal Government

U.S. funder of energy activities,

for business

Activities

is the largest

a number of

public utilities and private organizations have

provided policy guidance and attempted to facilitate private sector involvement in energy efficiency. 49 participants in the Utility partnership

program noted earlier include the New England

Electric Systems, Commonwealth Edison, Houston Light and Power, Southern Co., and Central

Maine Power.

A number of nongovernmental organizations

have programs focused on researching and implementing energy efficiency in Central and Eastern

Europe, and also in mobilizing U.S. firms to

export. The Alliance To Save Energy has been

informally organizing energy efficiency industries to export under its World Export Program,

including to Central and Eastern Europe, and has

assessed business opportunities in industrial energy efficiency in the region.50 The International

Institute for Energy Conservation (IIEC) has

recently opened an office in Brussels from which

41 SEED Act Irnp[mwmation Report, Fiscal year ]99], SUWi note T.

48 ~~duS~ ~y5i5 ~re~~ed t. suppofi COEECT is Russe]l s~et al, Seizing the Moment: GIo~l Opportunitiesfor the U.S. Energy

Efi”ciency Industry, supra note 32.

49 me Citimm Dem~m~y Coqs publishes a compen~~ of U.S. nonprofit ~sis~ce tit includes selated ener~ activities. ChtXM

Democracy Corps (CDC) Clearinghouse, Compendium: U.S. Nonprojit Assistance to Central and Eastern Europe and the Commonwealth of

Independent States (3 vols.), (Washington DC: CDC, 1992).

SO A~~~e t. Save Energy~t~atio~ ~ti~te for Energy Comematioq A Reso~ce Guide for Expom”ng Energy -Eflcient Products

(Washington DC, 1991); and Business Opportunities in Eastern Europe for Energy-E ficient Industrial Products, supra note 5.
to assess projects in Central and Eastern Europe.

The American Council for an Energy Efficient

Economy (ACEEE) has supported the work of the

energy efficiency centers in Central and Eastern

Europe. The Natural Resources Defense Council

NRDC) is undertaking energy efficiency projects in Belarus and other republics. The Center

for Clean Air Policy has established a State

Energy and Environment Exchange Program in

the Czech and Slovak Republics, from which

projects in energy conservation and energy regulatory policy are planned. The Sister Cities

program is exploring energy partnerships between a U.S. and Polish city.

Other recent initiatives include a newly forming export council for energy efficiency technologies and services, and a proposal by the Atlantic

Council to organize a World Council for Energy

Efficiency that would assist the countries of

Central and Eastern Europe, and the developing

world, in accessing information on energy efficiency programs, technologies, and measures.51

MULTILATERAL PROGRAMS

A review of multilateral assistance in energy to

Central and Eastern Europe found at least 14

multilateral organizations, institutions, lending

agencies, and initiatives.52 Multilateral development banks, particularly the World Bank Group

and the EBRD have provided the bulk of financing for energy projects in Central and Eastern

Europe. The Global Environment Facility, now

the interim financing mechanism for the FrameChapter 5-Programs To Assist Energy Efficiency! 109

work Convention on Climate Change, will also

become more active in financing energy projects

with environmental benefits, including energy

efficiency. 53 Other multiateral organizations, such

as the IEA and the U.N. Economic Commission

for Europe (UN ECE), have policy research and

information systems programs that have been

extended to Central and Eastern Europe. The

activities of these organizations will be reviewed

in this section.

Also reviewed below is the European Energy

Charter, a European Community initiative, that

has been developed on a multilateral basis, to

create a legal and policy framework for energy

trade and investment and international energy

cooperation. The charter was conceived as a

means to integrate Central and Eastern Europe in

world energy markets.

A tentative UN ECE evaluation of the multilateral energy assistance programs (that included

also the European Community programs) found

that they had succeeded in avoiding duplication

of effort, but also characterized the coordination

as not very consistent. Energy programs are often

announced to other donors after the fact. Multilateral lending was found to be ‘‘limited, slow,

supply-oriented, and uneven. ’ Alternative approaches to financing, such as shared savings

agreements, energy service agreements, joint

ventures, and third-party financing, were ‘‘not

sufficiently propagated. ’ The evaluation also

recommended ‘multiplying small-scale develop51 ~c Council ~aS ~ropos~ h The Atlatic CoWICiI, Energy Technology Cooperation for Sustainable Economic Dfl’elopment, po~cY

Paper Series, September 1992, p. 27.

52 U.N. Economic and Social Council, Economic Co remission for Europe, Multilateral Assistance to Econom’es in Transition in the Field

of Energy, supra note 1, p. 9.

53 ~c Fr~ework Convention on climate Change was signed by the United States and over a hundred other Comties in Ro de J~euO

in June 1992, and ratified by the U.S. Congress in October 1992. It could take several years to go into force internationally, which requires

50 countries to ratify. The convention is designed to begin a process of reducing emissions of greenhouse gases, of which the Centrat and Eastern

European countries are major sources-particularly of cartxm dioxide (COZ) released by combustion of fossiI fuels and methane or natural gas

(CHd) released from coat mines and leaks from natural gas systems. “United Nations Framework Convention on Climate Change, ” U.N.

General Assembly, A/AC.237/18 (Part 11)/Add.1, 15 May 1992. For a review of the scientitlc and technical issues involved in climate change

policy, see OTA, Changing By Degrees (Washington, DC: U.S. Government Printing Office, 1991).

54 UN. fionofic ad Socld Council, Multilateral Assistance to Economies in Transition in the Field of Energy, supra note 1.
110 I Energy Efficiency Technologies for Central and Eastern Europe

ment assistance. . rather than financing a few

large-scale projects. "54

 The World Bank Group55

The World Bank (IBRD) is the largest single

funder of energy projects in Central and Eastern

Europe, lending about $2 billion from 1980 to

1991.56 The Bank has had a major influence on

energy sector reform in the region through

conditions in its structural adjustment loans,

including pricing reforms and restructuring and

privatization of energy-sector enterprises. The

Bank’s major current energy projects in the

region, totaling almost $1 billion, focus on

modernizing energy supply and conversion infrastructure, in district heating, natural gas, and in

the power sector (box 5-B). There are no end-use

efficiency projects currently being financed, although three smaller loans, totaling almost $100

million, were provided to Hungary over the 1980s

for industrial energy efficiency. The Bank also

operates the Central and Eastern Europe Network

for Regional Energy (CEENERGY), in coordination with the EC, United States, and the IEA, a

program that seeks to facilitate technical assistance and preinvestment activities in high-priority

areas. CEENERGY currently supports preliminary studies of energy efficiency in the context

of analysis of energy-related environmental

impacts .57

The Russian Federation became a member of

the World Bank in June 1992, but the Bank has

not yet begun project lending to Russia or the

other countries of the NIS. A Bank review of

Russian economic reform has identified the

priority elements of an initial energy policy

package, consisting of energy price reform and

the development of a regulatory framework to

stimulate investment in the oil and gas sectors.58

While recognizing the potential for end-use

efficiency in Central and Eastern Europe, the

Bank has stressed energy pricing and regulatory

reform as the primary means to encouraging

greater efficiency. Overall, end-use efficiency has

not been a significant element in Bank energy

lending-as low as 1 percent according to one

estimate. 59 In a previous study, OTA found that

three primary factors militate against the finding

of energy efficiency projects at the World Bank:

first, they are more diverse and complex than

conventional energy supply projects and harder to

put into a project format for lending; second,

results of energy efficiency initiatives are hard to

forecast and incorporate into supply plans; and

third, the past emphasis on traditional supply

projects is difficult to change.60

The Bank has taken some steps recently to

increase its incorporation of energy efficiency in

energy project development and lending. A strategy for energy conservation lending is under

discussion, and supports better integration of

~ U.N. Economic and Social Comcil, Multilateral Assistance to Economies in Transition in the Field of Energy, supra note 1.

55 The world BardK Group co~ists Of the International Bank for Reconstmction and Development (lBRD), the kttemational Development

Association (IDA), the International Finance Corporation (IX), and the Multilateral Investment Guamn tee Agency (MIGA).

56 k Ig91, Bti ene~ lending to the region equaled 23 percent of its total energy lending. Lending commitments to Centd md ~tem

Europe (excluding the NIS) equaled 18 percent of overall Bank lending in fiscal year 1991. See Joerg-Uwe Richter, “Energy Issues in Central

and Eastern Europe: Considerations for International Financial Institutions, ” Energy Journal, vol. 13, No. 3, 1992, pp. 274-277.

57 Otier priori~ artxM for CEENERGY include: Soviet energy exports and their impact on Central and Eastern Europe; petroleum Refutig

and TmnspoN Electrical Power Interconnection and Trade; and Natural Gas Trade. Montfort and Wackmaq ‘‘The World Bank Suppori for

Energy Sector Transformation in Central and Eastern Europe,” pp. 15-16.

58 The World B* Russian Economic Reform: Crossing the Threshold of Structural Change (Washington, DC: World B@September

1992), pp. 18081.

59 Mictiel ~ips, TAe f,easr cm Energy Path for Developing Counm”es: Energy Eficient Investments for the Multilateral Banks

(Washington DC: International Institute for Energy Conservation@ September 1991)

60 om, Fueling Development, supra note 16, p. 268.
Box 5-B-Recent World Bank Energy Projects in Central and Eastern Europe

Poland

Structural Adjustment Loan ($300 million/July 1991).

Energy sector conditionality included decontrol of coal prices and phased removal of energy related subsidies

and cross subsidization.

Energy Resource Development Project ($250 million, World Bank; $60 million, European Investment Bank;

$338 million, Polish governrment/June 1990).

Focused on increasing production and use of natural gas, this project also supported increases in gas prices

and studies of restructuring and demonopolization in the gas, power, district heat, and coal subsectors.

Heat Supply Restructuring and Conservation Project ($340 million, World Bank; $50 million, EBRD/June

1991).

This project supports energy pricing reform and improves energy conservation in the district heating sector

by rehabilitating existing infrastructure and introducing energy efficient equipment.

Cogeneration Privatization Project (Tentative loan amounts: $85 million, World Bank; $30 million,

commercial banks/spring 1993).

Combined heat and power production will be introduced in Krakow.

Czech Republic and Slovak Republic

SAL Structural Adjustment Loan I ($450 million/June 1991).

Energy related conditionality included energy price reform, energy sector regulation, and introduction of an

environmental plan.

Power and Environmental Improvement Project ($246 million, World Bank; $311.5 million, Czech

Republic and Slovak Republic/May 1992).

Focused on reducing air pollution in Northern Bohemia, this project includes some efficiency improvements

in the electric power sector, particularly in the transmission system.

Slovak Power Loan (in planning).

This project will improve thermal efficiency at a power plant.

Hungary

SAL Structural Adjustment Loan II ($250 million/June 1991).

Energy related conditionality included energy price reform.

Energy/Environment Project (approximately $125 million/spring 1993).

Focused on increasing natural gas supply, energy conservation, and environmental protection.

SOURCE: Bernard Montfort and Harold E. Wackman, “The World Bank Support for Energy Sector Transformation in Central and Eastern

Europe” World Bank, July 1992).

energy efficiency issues at the early stages of the undertakes energy assessments of member counBank’s country policy dialogue, greater use of tries and provides follow-up technical assistance,

demand side management planning, and in- has been integrated more closely into Bank

creased transfer of energy saving technology operations, and can provide support for instituwithin sector and project work. The Energy tional design, pricing policy, and regulatory

Sector Management Assistance Program issues in establishing an energy conservation

(ESMAP), a joint program of the World Bank and strategy.

61 Other programs that could have a

the U.N. Development Programme (UNDP) that greater influence on Bank energy efficiency

61 Energy Sector Management Assistance ~ogramrne (ESMAP), ‘‘ESMAP: A Briefing Note, ’ September 1992, and “Energy and the

Environment: ESMAP Beyond UNCED, ” October 1992.
112 I Energy Efficiency Technologies for Central and Eastern Europe

lending include the Financing Energy Services

for Small-Scale Energy Users (FINESSE) program, begun in 1989 to provide financing for

small energy loans, and IFREEE, which can

support energy efficiency experts to assist in the

design and financing of Bank projects.

The International Finance Corp. (IFC), the

private sector lending arm of the World Bank

Group, raises its share capital from member

countries but provides loans and equity on strictly

commercial rates. The IFC is also an implementing agency for the Global Environment Facility

(GEF), discussed below, and is assisting in

developing a GEF private sector program.

The IFC’s activities in Central and Eastern

Europe have focused on providing technical

support and financing for the privatization, restructuring, and modernization of state enterprises. A number of these enterprises are in

energy-intensive industries-cement, glass, rail

transport-or in energy products—lighting, insulation. In Poland, the IFC cofinanced the purchase

of a manufacturer of lighting products by Philips,

which will now produce energy-efficient lamps.62

It has been proposed that the IFC integrate

energy efficiency into its operations by providing

technical assistance to firms and by conditioning

financial assistance on energy audits.63 These

functions could be provided by the IFC’s Technical and Environment Department, which currently conducts environmental impact assessments and promotes private sector involvement in

environmental industries.

The World Bank Group also provides insurance for foreign investment through the Multilateral Investment Guarantee Agency (MIGA), which

was established in 1988. MIGA also provides

technical and advisory assistance to create appropriate settings and programs for investment. Most

countries in Central and Eastern Europe have

become members of MIGA or are in the process

of doing so. Through its Foreign Investment

Advisory Service, MIGA has assessed investment

incentives in several Central European countries. 64

| The Global Environmental Facility

The GEF was established in 1990 to finance

energy and environmental projects that could

show global environmental benefits but would

not otherwise be commercially viable. Investment projects are implemented by the World

Bank, technical assistance and research by the

UNDP, and scientific research by UNEP. In its

pilot phase, from 1990-93, the GEF has provided

funding for investment and technical assistance in

four areas: global warming, biodiversity, international waters, and ozone depletion. For the pilot

phase, the GEF has pledges of about $1.2 billion,

which includes $200 million of cofinancing and

$150 million from the United States of parallel

financing. 65 A number of energy projects have

been approved, primarily in the area of renewable

energy. Energy efficiency projects are under

consideration in the second and third phases of the

GEF work program.

At the U.N. Conference on Environment and

Development (UNCED) in June 1992, it was

agreed that the GEF would move beyond the pilot

phase and act as the interim financial mechanism

for the Framework Convention on Climate

Change. This will make the GEF a major potential

source of financing for energy efficiency projects.

In collaboration with the IFC, the GEF has also

62 EC, Annul R~pofl 1991; WC, [FC ~~ the E~vi~~nme~t: An~~l Review 1992 (’washin~o~ DC, 1992).

63 p~llips, The ~ast Cost Energy Path for Developing COUfWk?S, Supra note S99 P. 85.

64 AS of oCt, 30, 1992, polmd, Hugq, ~~ Czwh ~d Slovti Republics, Estofia ad Azerbaij~ were. members of MIGA; the Russian

Federation and most other Newly Independent States are in the process of fulfilling membership requirements. Multilateral Investment

Guarantee Agency, Annual Report 1992.

65 G1ob~ Environment Facility, “Report by the Chairman to the April 1992 Participant’s Meeting: Part One, Main Repofi” March 1992,

p. 13.
been working on increasing private sector access

to its funds.

| The European Bank for Reconstruction

and Development

The EBRD was formed by the United States

and the EC to assist in the development of market

economies and democratic systems in Central

Eastern Europe. The Bank began operations in

April 1991 and is both a development bank and a

merchant bank: 60 percent of its funding must be

to the private sector, with not more than 40

percent to public infrastructure or other projects.

Its lending was $353 million in 1991 and is

estimated to be $930 million in 1992. The United

States has been the largest single donor to the

Bank, contributing 10 percent of its capital stock

(the U.S. contribution in 1991 was $70 million).

The EBRD currently plans to earmark 60 percent

of its loans for Central Europe and the Baltics and

40 percent for the NIS.66

The EBRD has cofinanced an energy sector

loan in Poland with the World Bank and has

several other energy projects in its “pipeline,”

including emergency energy loans to the Baltic

states 67 and developing, with AID assistance,

energy service company joint ventures. The

EBRD’s ‘‘Energy Operations Policy, ’ completed

in May 1992, states that the Bank’s “overall

objective will be to assist countries to reorient

sector development away from a narrow focus on

supply expansion to a broader ‘least-cost’ focus. . .in

which projects to expand supplies are compared

with alternatives to improve supply and end-use

efficiencies. But the stated near-term priorities

are heavily in conventional energy supply projects: repairing and rehabilitating existing supply

Chapter 5--Programs To Assist Energy Efficiency 113

facilities, completing existing power sector projects, assisting counties in diversifying energy

supply, and promoting private sector projects

which ‘‘promote liberalization of supply. ’ The

Bank concludes that ‘‘the majority of operations

are expected to provide finance to fuel industries

and energy utilities. " 68

| The European Energy Charter

The European Energy Charter is a political

declaration of principles, objectives, and actions

that aims to create a new framework for cooperation, investment, and trade in energy across

Europe and possibly across the world. The

Charter was initiated by the EC with the major

objective of integrating Central and Eastern

Europe into world energy markets. Following

several months of preparation, it was signed by 43

countries, including the United States, in December 1991, and several others since then. A legally

binding “Basic Agreement” to the charter and

additional protocols are currently under negotiation. 69

The Charter’s objectives are organized around

three functional areas: energy trade, international

cooperation in the energy field, and energy

efficiency and environmental protection. The first

two of these include provisions to promote

sounder legal frameworks for energy activities,

access to energy resources, lower barriers to trade

in energy goods and services, efficient management and use of energy resources, modernization

of infrastructure, information exchanges, research

and development, and policy consultation.70

The objectives for energy efficiency and environmental protection include:

66 E~~Pe~ B~ for Reconstruction and Development, organization, ~ch 192.

67 )7 Wopcm B~ for R~ons~ction and Development, prOCUWTk?fU Opportunities, No. 5! AUtPt 192.

68 D ocument of the European Bank for Reconstruction and Development, ‘ ‘Energy Operations Policy, ’ March 1992, pp. 2-6.

69 Ricbd Greenwo~, ~ ~~e EWope~ ~ern Ctier: A new fimework for pan. EWopean energy cooperatio~’ Energy in Europe, No.

19, hdy 1992, pp. 69-72.

TO 1‘Concluding Document of the Hague Conference on The European Energy Charter, ’ Dec. 16-17, 1991, The Hague, Netherlands.
114 I Energy Efficiency Technologies for Central and Eastern Europe

●

●

●

●

●

ensuring, in a cost-effective manner, consistency between relevant energy policies and

environmental agreements and conventions;

ensuring market-oriented price formation,

including a fuller reflection of environmental costs and benefits;

the use of transparent and equitable marketbased instruments designed to achieve energy objectives and reduce environmental

problems;

the creation of framework conditions for the

exchange of know-how regarding environmentally sound energy technologies and

efficiency use of energy; and

the creation of framework conditions for

profitable investment in energy efficiency

projects.

Negotiations over the “Basic Agreement,”

that would provide a legal framework for energy

trade and investment, and more detailed sector

protocols—initially energy efficiency, nuclear

power, and hydrocarbons-began in February

1992. The negotiations over the Basic Agreement, planned for completion by December 1992,

have proven more difficult than expected and are

anticipated to last into 1993.

| Other Multilateral Programs

A number of other multilateral organizations

are supporting energy efficiency research and

measures. The IEA, which normally confines its

research to OECD member countries, has carried

out energy assessments of Poland (1991) and

Hungary (1992) and recommended a series of

energy efficiency steps.71 The IEA also has

programs of energy technology research and

development and demonstration and information

sharing that are being slowly opened to participation by Central and Eastern European countries.

For example, the IEA Center for the Analysis and

Dissemination of Demonstrated Energy Technologies (CADDET) provides information about

new energy technologies.

The UN ECE energy efficiency program for

Europe, Energy Efficiency 2000, was launched in

mid-1991, and included a particular emphasis on

assistance to Central and Eastern Europe.72 The

objectives of the program include promotion of

trade, dissemination of information, technology

assessments, and development of “demonstration zones” and pilot projects. Major undertakings have included a number of international

meetings and trade fairs .73 The UN ECE and the

UNDP have also recently established the Eastern

European Center for Energy Efficiency in Buildings in Sofia, Bulgaria. The center will assist in

information exchange, training and promotion of

building energy efficiency projects.

EUROPEAN AND JAPANESE PROGRAMS

European countries are very active in reforming the energy system in Central and Eastern

Europe, both through the EC and on a bilateral

basis. The EC is attempting to lay the foundation

for a common European energy system with

programs of policy and technical assistance,

capacity building through a series of energy

centers, and the European Energy Charter. Often

supported by bilateral energy cooperation agreements, European firms, particularly from Germany and Scandinavia, have also been developing business opportunities in the energy sector

71 me IEA w~ es~bli~ed ~~ me @-gtintion for Economic Cooperation and Development (OECD) iU 1974 (follo~ the f~t oil

crisis) to coordinate an international energy program focused on the stability of oil markets and steps that countries can take to reduce oil

dependence, including energy conservation. IEA/OECD, Poland: Energy Policies, 1990 Survey (Paris, 1991); IEA/OECD, Hunga~: Energy

Policies, 1991 Survey (Paris, 1992).

72 me U.N. &onofic Cotission for Emopew~ created by the U.N. Economic and Social Council in 1947 to prOmOte economic relations

in the region. The United States is represented on the Commission.

73 U.N. ~onomic commission for Europe, Easr-JVesr Energy Eficiency, ECE Emergu Series No. 10 (United Nations: New York 199Z),

p. 48.
Chapter 5–Programs To Assist Energy Efficiency I 115

and in energy efficiency. European firms obvi- ing in greater quantities and on better terms than

ously have a geographic advantage over U.S. the United States.74

fins, and more consistent governmental and A discussion of specific EC and Japanese

commercial relations. Several European countries projects and funding will be provided in the final

and Japan also offer export promotion and financ- report of this study.

74 Office of Technology A.sSeSSrnen~ Competing Economies: Ametica, Europe, and the Pacific Rim. A fofi~ming OTA s~dy on U.S.

environmental technologies and competitiveness will compare U.S. with Japanese and European trade promotion activities in the environmental

and renewable energy sectors.
T

Policy

Considerations

he countries of Central and Eastern Europe all have

energy problems, some extremely serious, as has been

described in the previous chapters. The problem is not a

lack of regional resources, but economic and political

disruption. Even in energy producing countries such as Russia,

energy shortages have become a constraint on economic

activities. Some problems can be corrected by these countries

themselves or could be alleviated by overall economic reform

(e.g., ending subsidies of energy prices that encourage waste). As

market prices and incentives improve decision making, and

obsolete manufacturing facilities are replaced, energy efficiency

will rise. However, that presumes they will successfully navigate

the transition.

The process of raising energy efficiency can be greatly

accelerated by technology transfer from the West, thereby

contributing substantially to the transition. The notable gains in

efficiency in the United States since 1973 came from myriad

technological improvements, many of which can be transferred

to these countries. In a few years, energy savings could far exceed

direct financial assistance from the West and help finance overall

economic revitalization.

Assistance in increasing energy efficiency could return several

benefits to the United States. First, improving energy efficiency

appears to be one of the most cost-effective contributions to

economic revitalization. There is a clear U.S. national interest in

promoting revitalization because the present economic chaos

could lead to security concerns if hostile, authoritarian regimes

emerge. It is likely that savings in the U.S. defense budget from

the end of the cold war will be small if economic reforms fail in

the former Soviet Union (FSU). Second, some of the energy

saved will be available on the world oil market (and some very

6

The Kremlin Wall by Lenin’s tomb.

117
118 I Energy Efficiency Technologies for Central and Eastern Europe

Box 8-A-Example of U.S. Benefit From Energy Efficiency Assistance

If the petroleum consumption of the former East Bloc (about 10.5 million barrels/day (MMB/D) in 1989) is

reduced sufficiently to expand exports by 1 MMD/D, world oil supplies (out side the former Bloc) effectively would

increase by about 4 percent Such an increase might decrease world prices about 3 percent (the actual number

would vary with time and the outcome of many variables including the behavior of other exporters and importers;

this is an estimated composite). Since the United States imports about 7 MMB/D which now cost $20/barrel,

savings would be $1.5 billion/year. These savings would continue until the facilities or equipment to which the

improvements are made are replaced, probably at least a decade on the average.

Estimates of what it would cost to achieve these savings are very uncertain, but the total would be about $7

billion total if, as appears likely, sufficient opportunities to save this much energy are available with one year

payback For example, the United States could supply a combustion control system and other equipment costing

$200,000 to a factory in Eastern Europe that saves 10,000 barrels of oil per year, worth $200,000. If a total of $7

billion was supplied to save energy, the nations of Central and Eastern Europe would save $7 billion/year. The

United States would save $1.5 billion/year, recouping its investment within 5 years and continuing to enjoy the

dividends for many more. However, not all oil saved will be exported. Some of the savings will allow very expensive

or high-sulfur oil to be Ieft in the ground. Therefore, additional efficiency gains must be attained to achieve 1 MMB/D

additional exports. Countering this factor are the contributions of other countries, particularity in Western Europe.

The United States need supply only its share, not the entire remedy. All importers benefit from lower prices not

matter what the source.

Price decreases normally lead to consumption increases, which could negate the advantage. That need not

happen if an energy tax such as on gasoline, imported oil, carbon, or general energy was imposed to raise the

price to consumers. This combination of tax plus increased assistance would capture economic advantages for

the nation without encouraging increased imports of oil. It would, however, come at the expense of oil exporting

countries, including U.S. allies such as Mexico and Venezuela.

This simplistic calculation is only indicative, not predictive, but it shows that the benefits to the United States

of energy efficiency assistance to Eastern Europe could be very large even without counting indirect benefits such

as increased stability and trade, and an improved environment.

SOURCE: U.S. Congress, Office of Technology Assessment, 1993.

expensive or dirty fuel will simply not be economic crises facing these countries, caution

produced), keeping prices lower than they otherwise would be. As a major oil importer, U.S.

economic savings could be substantial (see box

6-A).

Third, energy is one of the major sources of

pollution in Central and Eastern Europe and there

will be major environmental benefits from reducing consumption. In particular, improved energy

efficiency in this region may well be the most

cost-effective way to reduce emissions of carbon

dioxide, the main concern for global climate

change.

Efforts to assist Central and Eastern Europe

must be shaped by the urgency of the political and

because of the complexity of the situation, and

recognition that the United States can supply only

a small fraction of the help that is needed. The

outcome of reform efforts for many of these

nations is very uncertain. The reforms may

succeed, resulting in friendly, productive trading

partners. They may fail catastrophically, resulting

in total chaos and great human suffering. Or they

may be terminated violently by new, authoritarian

leaders. The latter two prospects are likely to be

far more expensive for the United States than

even a massive aid program. Western involvement may well be crucial in averting disaster in

this region.
Chapter 6-Policy Considerations ! 119

Table 6-l—Policy Options To Promote

Technology Transfer

Increase Funding for Energy Assistance

Information programs-policy assistance and technical assistance.

Material support-purchase equipment and support private investment.

Reorganize Assistance Programs

Rationalize procurement policies

Review “Buy-Ameria” policy

Re-organize for efficient cooperation

Investment and Export Assistance

Expand TDP and AID feasibility studies

Institute insurance for economic risks

Support CORECT

Export-Import Bank assistance for small companies

Expand FCS and other assistance programs

Training and Education Programs

Ensure all assistance programs include training when feasible.

Establish programs to bring trainees to the U.S.

Encourage university programs

Train energy analysts directly.

Create a legislative energy policy course for parliamentarians.

Federal Agency Cooperation

Increase DOE and EIA roles in advising governments.

Support Federal and State regulatory agency advice programs.

Collaborate in R&D efforts.

International Assistance Programs

Encourage multinational agencies to give higher priority to

efficiency.

SOURCE: U.S. Congress, Office of Technology Assessment, 1993.

However, it is clear that the impact of U.S. aid

will be small unless the nations of Eastern Europe

provide the conditions to make assistance useful.

Most technology transfer and foreign investment

will be from private enterprise. Much is now

deterred by political and institutional instability,

uncertain legal requirements, punitive taxation,

and other problems. Some nations are actively

addressing these problems, others have barely

started. U.S. Government technical assistance

must be targeted to where it can be used most

effectively. There is little point in trying to

improve the energy efficiency of enterprises that

have no market incentives to improve themselves.

Greater energy assistance can have major benefits, but only if carefully directed.

The previous chapter discussed the programs

that have already been initiated. Most of these

programs involve technology transfer, usually in

the form of information (e.g., policy advice,

access to databases), specific technical assistance

(training, energy audits), and material (financial

assistance to procure equipment). This chapter

suggests how these programs might be strengthened and the potential results if they are. A recent

OTA reportl on energy in developing countries

has further information on the agencies and

institutions involved. The nations of Central and

Eastern Europe are technologically, economically, and socially quite different from developing countries. Nevertheless, the mechanisms for

expediting technology transfer and supplying

foreign assistance are largely the same, and much

of the policy discussion in that report is relevant

here.

The major areas to consider are shown in table

6-1 and discussed below.

U.S. POLICY OPTIONS TO INCREASE

TECHNOLOGY TRANSFER

I Increase Funding for Energy Assistance

The current level of foreign assistance funding

for Central and Eastern Europe is substantial, as

discussed in the previous chapter. Nevertheless,

far more assistance could be used effectively and

may be essential in avoiding disintegration of

some states. It is not the intent of this section to

analyze where the additional funds would come

from. However, the budget deficit is inescapable,

so it is worth noting that there are only three

options:

1.

2.

The overall foreign aid budget could be

increased, putting further pressure on the

deficit;

Funds could be redirected from other regions

of the world, further reducing already diminished programs in developing countries that

may need assistance even more desperately;

1 U.S. Congress, OffIce of Wchnology Assessment Fueling Development: Energy Technologies for Developing Counm’es, OTA-E-516

(Washington DC: U.S. Government Printing Office, April 1992).
120 I Energy Efficiency Technologies for Central and Eastern Europe

3. Energy efficiency projects could be given a

higher priority for the funds already earmarked to Central and Eastern Europe. However, the needs are so great across the region

and across these economies that it is difficult

to argue that energy efficiency is necessarily

such a high priority.

All three of these options involve major

liabilities, yet the need for the funds is also very

great. Congress will have to balance some very

important national goals in considering this issue.

Several of the following sections discuss specific areas where funding increases may be

warranted. This section is an overview of what

might be done for energy efficiency if an overall

increase is seen as in the national interest. Two

general areas should be considered to accelerate

energy-efficiency technology transfer: increases

in programs involving the transfer of information,

and increased support for investment and the

purchase of equipment.

INFORMATION

Unlike developing countries, Eastern Europe

has substantial technical capabilities. The main

reason that efficiency is so low is because the

system provided no incentive to minimize costs,

not because decisionmakers couldn’t have figured out how to do it had that been their goal.

Now, even though elements of the market are

being introduced, it will take a long time before

the incentives are completely in place. Decisionmakers must learn how to react to them and

become acquainted with opportunities to do so.

Energy-efficiency information programs are intended to accelerate the latter two shifts. Policy

assistance improves the understanding of decisionmakers, while technical assistance provides

the necessary skills and data at the local level.

Policy assistance is rendered primarily by the

Agency for International Development (AID) and

the Department of Energy (DOE) through the

Regional Energy Efficiency Project, in particular

the Energy Pricing, Energy Efficiency, and Energy Restructuring component ($6.4 million,

which includes technical assistance). Increases in

energy-policy assistance would logically come

from the same agencies, plus perhaps the Environmental Protection Agency, through information exchanges, visits, and other contacts. Enhanced contacts are discussed below in the

section on Federal Agency Cooperation. Generally, this need not be a very costly nor long-term

program. However, increased funding would

accelerate the growth of expertise needed for

energy system market reforms.

Technical assistance encompasses a variety of

activities including the promising centers for

energy efficiency. These appear to be well received in the areas they are starting to serve, and

expanding the concept could be considered. The

United States has sponsored centers in Prague,

Warsaw (with an office in Katowice), and

Moscow, and another is being created in Sofia,

Bulgaria. Others could be initiated in Ukraine,

Belarus, Hungary, and elsewhere. Since these

centers employ primarily local people, care has to

be taken to ensure that the proper expertise and

support are available. These centers could lose

credibility if they are expanded too rapidly.

However, they also appear to be among the most

effective forms of U.S. assistance, and if additional finds can be supplied, centers should be a

high priority. The centers are funded by AID

through DOE.

Another activity that could be effectively

expanded is for demonstrations of technologies

unfamiliar in eastern Europe. Techniques such as

combustion control, waste heat recovery, energy

management systems, and power systems monitoring are well know in the West but not in

Eastern Europe. Before plant managers commit to

making changes, they will want to be sure that

changes are worthwhile. Demonstrations have

been important in this country to accelerate

penetration of new technologies. They will be

even more important in eastern Europe where the

whole concept of innovation to reduce costs is

new. For example, several combustion control

systems have been installed on boilers in factories
Chapter 6-Policy Considerations I 121

and district heating plants. The results have

surprised the operators who had no idea how

cheap and easy it is to save energy.2

AID’s industrial audit program already includes some demonstrations. It could be expanded to include a greater emphasis on the

installation of energy-saving equipment, with

follow-up monitoring and information programs

for other facilities with similar needs. The audit

program itself could also be expanded to Russia

and other FSU nations.

The third area of technical assistance that

appears to be particularly appropriate for expansion is training, such as for energy managers and

auditors. This is discussed below under training

and education programs.

Adding several million dollars to the Energy

Pricing, Energy Efficiency and Energy Restructuring component would significantly increase

the value of these programs. More might be

required if many demonstration projects are

desired. Such a strong program would help build

relationships among U.S. companies and new

customers, leading to longterm commercial benefits.

MATERIAL ASSISTANCE

The second general area for increased assistance, support for investment and purchases,

would be more expensive, though results could be

commensurate and there would be considerable

benefit to U.S. companies. Lack of money is one

of the greatest barriers to improved efficiency as

these nations introduce market economies. In

many cases, managers know what should be done,

but they simply can’t afford to do it. Making

additional funds available for enterprises to purchase new equipment, revamp energy intensive

production lines, upgrade buildings and heating

systems, and increase production of energyefficient equipment would be the most effective

thing the U.S. Government could do. Clearly,

there are far more opportunities for funds to be

productively spent than are likely to be funds

available. Nevertheless, any increase, if targeted

appropriately (see below), would be useful.

The major approach to assisting directly in

improving energy efficiency is through AID. AID

could expand its assistance with the purchase and

installation of the equipment recommended in its

energy audits of industrial facilities and district

heating plants. Such a program would be similar

but much larger than the demonstration program

discussed above. Results should be significant

because in many cases, without assistance, the

improvements will not be made. In addition, AID

could supply the expensive instrumentation needed

for sophisticated energy audits. Trainingin audits

does little good if the auditing team cannot afford

the means to perform the work.

Naturally, there will be considerable pressure

to buy American equipment under such a program. However, OTA has heard reports that this

approach sometimes has failed because the American supplier has not had adequate service representation in eastern Europe, or because American

equipment was not appropriate for the task. This

problem is discussed in the following section.

Another cautionary note is that it is necessary

to be careful about who receives the funds.

Supporting bankrupt facilities will accomplish

little. In countries where implementation of

market incentives is lagging, central ministries

may not make good use of assistance. Funding for

energy efficiency must be targeted directly to

where it can be used effectively.

Other programs to support exports and investment overseas are discussed in the section below

on export assistance. These are not primarily

foreign assistance programs.

Z Michael Ellis, “Energy Efficient ‘Ikchnologies and Methods in Industries: USAID Industrial Energy Efficiency Program in Lithuania,”

paper delivered by Mark Hanson at a conference ‘‘Lmproved Energy Eftlciency in Former Centrally-Planned Economies, ’ Kaunas, Lithuania,

Oct. 19-21, 1992.
122 I Energy Efficiency Technologies for Central and Eastern Europe

| Reorganize Assistance Programs

Much of the U.S. program for assistance to

Central and Eastern Europe has been wellplanned and has produced encouraging results.

However, there also is some evidence that operations could be more effective. The strategic

planning for assistance to Central and Eastern

Europe appears to be inadequate. Aside from the

G-7 agreements, no one has determined how

much aid is required and the most effective way

to deliver it. Even within AID, responsibility is

divided among several divisions, and intergroup

communications appear to be less than complete.

There appears to be ample opportunity to streamline the programs, although that is beyond the

scope of this assessment.

A common operational complaint is that procurements are too cumbersome, in large part

because they seem burdened with excessive

safeguards to ensure fairness and honesty. While

these are certainly laudable goals, rigid application of tight controls, especially where the controls are not appropriate, can result in virtual

paralysis. For example, staffing for the energy

efficiency centers was delayed because of a

requirement for proof that the salaries to be paid

were comparable to those for similar jobs. It is

almost impossible to determine comparability

during the economic turmoil that exists now, but

getting the requirement waived was very difficult.

No one seems to have the authority or the

incentive to restrict the review to those regulations that make sense for a particular procurement. 3

The procurement process also deters potential

contractors who may have the expertise or products needed but who lack the resources to learn

the system. The net effect, at least for AID

procurement, is a concentration on familiar contractors who know how to navigate the process.

For example, the specialized energy auditors who

analyze U.S. industrial facilities feel shut out of

U.S. advisors training Polish technicians in

weatherization techniques.

the AID process. Contracts are often large and

cover many separate tasks. Small contractors are

unable to respond even if they find out about the

opportunity, and don’t have the resources to

persevere through the contracting process. If the

audits are to be expanded past the current basic

stage, it will become increasingly important to tap

this specialized expertise.

Nonprofit institutions also find the process

formidable. For example, a consortium of environmental organizations led by the Natural Resources Defense Council has proposed an energy

efficiency program, involving training and assistance in developing integrated resource planning

(IRP) concepts in the North Caucasus region of

Russia. The idea appears worth considering, but

the group has had difficulty applying for funding

s This was a recurrent theme of tbe OTA workshop on Sept. 18, 1992 and in the ‘‘Report of the Task Force on Foreign Assistance’ to the

Committee on Foreign Affairs, U.S. House of Representatives, Document 101-32, Government Printing Office, February 1989.
Chapter 6-Policy Considerations I 123

because it does not fit neatly into any existing

activity.

Some of the problems encountered are generic

to the U.S. Government, rather than specific to

AID. Congress might consider whether all the

accountability and other requirements imposed

on government agencies are taking an excessive

toll in governmental efficiency and creativity. An

evaluation of procurement practices and reform is

well beyond the scope of this study. However,

three modest steps to expedite the process would

be particularly relevant to Central and Eastern

Europe. First, quite frequently only one or two

local contractors are qualified (especially since

command of English is one of the necessary

qualifications). Simply easing the standards for

sole source procurement would facilitate contracting with little or no loss of competition.

Second, a small portion of the funding could be

exempted from some of the controls to encourage

agencies to experiment with unorthodox approaches and creative ideas. The energy efficiency centers were not initiated through an AID

plan, but because outsiders, working through

DOE, were able to make the case they were

needed and persevere through the process of

securing funding.

Third, finds now transferred from AID to

another agency could be appropriated directly. In

particular, the energy efficiency centers are paid

for by AID through DOE, because of the latter’s

expertise on the subject. The Environmental

Protection Agency also receives funds from AID

for various programs. Centralizing the appropriations helps to coordinate activities, especially

when the activities are in a state of flux. However,

if a specific item is likely to receive funds for a

period of years (such as expanding the number of

energy efficiency centers), appropriating the money

directly to the disbursing agency would save a

step that requires time and effort.

Another issue has been pressure to spend funds

in this country rather than transferring them to the

recipient country. Up to a point, such a practice is

both necessary and reasonable, and all donor

countries engage in it to some extent. It would be

hard to justify spending our funds for equipment

supplied by our trade competitors. However, as

noted in the previous section, American equipment can also be useless equipment if it fails and

cannot be serviced. In the long run, this damages

American interests and wastes assistance.

Overemphasis on ‘‘Buy American” can also

conflict with the SEED Act, which seeks to build

up the capabilities of Central and Eastern Europe.

If, as assumed in this report, the object of aid is

economic revitalization, then the latter must have

priority. Aid that does not promote development

will have very limited results. The old adage that

you can feed a man for a day if you give him a fish,

but he can feed himself for life if you give him a

fishing rod has a modern counterpart. Sending an

American team to install a combustion control

system on a boiler in Moscow will save energy for

that facility. Helping a local enterprise design and

build control systems, and training energy engineers in how to use them, will create a flourishing

business and help many facilities save energy.

The impact of aid that conveys new capabilities,

i.e., technology transfer, will continue to grow far

beyond the ability of the West to give goods and

services.

Naturally, there must be a balance. Giving

business to American companies is very often

appropriate. Training and demonstrations accompanying American equipment and services can be

very effective technology transfer. However, the

desire to help American companies should not

conflict with the basic mission of the aid program,

which is to help other countries develop. In the

long run, development will contribute far more to

the U.S. national interest. The difficulty appears

4 to arise not in the legislation but in policies

carrying out the law.

4< ‘Buy ~e~cm kt of 1988, ’ Title VII of Public IAW 100-418.
124 I Energy Efficiency Technologies for Central and Eastern Europe

| Investment and Export Assistance

The greatest strides toward development and

energy efficiency will come with new industrial

and commercial facilities. However, none of the

nations of Central and Eastern Europe have the

capital to build many new facilities. Western

companies are likely to be the key to overcoming

this barrier to development, through investments

in productive facilities. Manufacturing facilities

there generally are in great need of upgrading to

produce appropriate, modem products while reducing pollution. Not only do such investments

directly provide needed facilities, but they also

facilitate technology transfer for further development. Large companies are accustomed to investing in many countries in expectation of earning a

profit, at least eventually.

Relatively little investment by American companies has taken place yet, in part because of the

economic turmoil surrounding the transitions

underway, compounded by soft markets at home.

Many American companies also seem to lack the

staying power of European and Japanese competitors in building a base for the long term. Small

companies are particularly deterred by lengthy

A computer in the central control room of a

pharmaceutical plant in Prague.

negotiations, legal and institutional uncertainties,

and the high cost of visits. If building economic

health in eastern Europe is seen to be in the U.S.

national interest, then additional efforts to promote investment are likely to be required. Promotion is likely to be important in ensuring that U.S.

companies develop a strong presence and maintain competitiveness relative to European companies which are much closer geographically. Such

efforts might involve financial incentives from

the U.S. Government to build in the region.

However, great care must be taken to ensure that

the program will help create new demand, not

transplant American jobs abroad.

Another cause of the reticence of American

companies to invest is the risk involved. The

Overseas Private Investment Corp. (OPIC) insures against political risk, such as expropriation.

Commercial insurance also is available for some

economic risks. However, small enterprises, such

as some in this country that invest in energy

efficiency projects with industry and share the

savings, may feel too exposed in eastern Europe.

Many enterprises there will go bankrupt, leaving

investments stranded, and it can be difficult to

determine which ones are vulnerable. Partnerships to share energy savings could be effective

ways to promote energy efficiency if ways can be

found to reduce this risk. One suggested way is

through an additional insurance plan that would

be based on extensive analysis of the prospects of

the industrial facilities and on the U.S. national

interest in promoting energy efficiency. Such a

plan might be initiated by OPIC. An alternative

approach would be additional financing by the

U.S. Government, which would share the risk.

The programs discussed in the previous chapter

appear to be effective, and could be usefully

expanded. Feasibility studies, such as supported

by AID and the Trade and Development Agency

(TDA) frequently lead to the purchase of American equipment and supplies. These studies are not

very expensive and may return many times their

cost in business. However, most of the energy
Chapter 6–Policy Considerations | 125

studies to date have been supply, not efficiency

oriented.

The Committee on Energy Efficiency Commerce and Trade (COEECT), an interagency

coordination body modeled on CORECT (Committee on Renewable Energy Commerce and

Trade) relies on industry input to identify U.S.

Government assistance necessary to increase U.S.

exports and technology transfer in various world

markets. CORECT currently is being formed with

fiscal year 1993 appropriations.

Two factors suggest that attention to the

Export-Import Bank (Eximbank) may help to

increase sales of energy-efficiency products. First,

most support for exports at present is for energy

supply projects because they usually are large

transactions that are compatible with conventional procedures. Greater efforts may be required

to convince the efficiency industry to look for

exports and Eximbank to emphasize those exports. Second, energy-efficiency products often

are produced by small companies unfamiliar with

Eximbank services, which are geared to larger

companies. Exim’s new Small Business Set

Aside Program should alleviate that problem, but

Congress may want to monitor its activities to

ensure it. In addition, agreements must still be

reached with the remaining countries in the region

to make them eligible for Eximbank loans.

As has been noted several times, the lack of

funds, especially hard currency, has prevented

badly needed investment and purchase of equipment. Financing can be the key to increased U.S.

exports. The enterprise funds discussed in the

previous chapter have the potential to be major

contributors, but as yet have little experience with

energy efficiency. Total financing may have to be

in the range of many billions of dollars to both

support the competitiveness of U.S. companies

and provide the needed investment for Central

and Eastern Europe. Energy should receive a

reasonable share of the total, but it may be

necessary to stipulate that energy-efficiency projects get special handling.

Commercial sales of equipment services could

benefit from a more aggressive government

policy. Sales of energy-efficient equipment and

techniques could become large. However, many

of the leading American companies in the field

are small and need assistance to realize their

potential. Expansion of the Small Business Administration’s Export Revolving Line of Credit

could be the key for many small companies,

especially if combined with information on how

to do business in the region. Small businesses are

frequently unaware of information and other

services provided by the Department of Commerce (DOC), the Foreign Commercial Service

(FCS) and sometimes AID, Greater outreach,

including notification of opportunities, trade missions, data collection, and other promotional

activities can make it possible for American

companies to market where otherwise they would

find logistics too difficult. AID contacts have

already led to significant sales as noted in chapter

4, even though that is not the main function of the

assistance programs.

| Training and Education Programs

All the nations considered in this analysis have

well-educated work forces. In fact, the fraction of

the population with a technical education is

higher than in many western countries, including

the United States. What they are missing is

expertise important in a market economy, e.g.,

energy and financial analysis; management, including an understanding of the importance of

minimizing costs; and specific information on

opportunities to do so. At the factory level, many

engineers, managers and other personnel can

quickly absorb this information. Thus training

programs can be very cost-effective ways to

accelerate efficiency.

For example, OTA has heard from both Americans and Eastern Europeans that some industrial

facility auditors performed their analysis by

themselves, wrote up their recommendations, and

left. Such limited contact may leave the facility
126 I Energy Efficiency Technologies for Central and Eastern Europe

personnel with a general idea of what an audit is,

but at best it provides a one-time improvement.

The exercises that included training in the detailed techniques of energy auditing and the

necessary instruments allowed plant personnel to

follow-up with continuing improvements and

ensure that new equipment was working as

predicted. There is a need for expanded training

for the emerging private consultants as well as for

the industry plant personnel directly involved in

managing energy to assure that the skills are

developed and energy-efficiency work continues

in these countries.

Another possibility would be to augment

programs bringing East Europeans to this country

to study modem energy management. AID and

various private institutions already have related

activities. Cooperative work/study programs in

industry and academia could be arranged with a

focus on energy. This approach would provide

total immersion in modem industrial practices,

including technology, quality control, innovation,

marketing, and management methods. This approach can be a very effective form of technology

transfer, conveying critically needed skills.

The nations of Central and Eastern Europe are

also deficient in broadly trained energy analysts,

including data collection and policy analysis.

Many people have a relevant technical background and can be easily retrained to understand

how energy markets work and the national

implications of various decisions. Ensuring that

energy ministries have access to this expertise

should help put demand options on an equal

footing with supply. AID activities under the

Regional Energy Efficiency Project could be

expanded to include the transfer of this expertise,

perhaps with the cooperation of DOE and the

Energy Information Administration

The energy efficiency centers provide training

(including training of trainers) and policy consultation to governments. Expanding their activities

would be one way to contribute to the growth of

this expertise. One form of training is with retired

Americans who visit the centers for a period to

share their expertise.

Various non-Federal Government initiatives

also could be supported to increase training. For

example, many large cities in Central and Eastern

Europe have sister city connections in the United

States. Many American cities have implemented

energy saving programs, especially in low income housing. DOE has been involved in these

programs and could be funded to help local

governments transfer this experience. DOE and

AID also have sponsored a sister utility project

which is transferring expertise on electric power

operations. Many American utilities have extensive programs to help their customers conserve

energy in order to avoid having to build new

powerplants. Transferring this type of information could be accorded a higher priority, which

would expedite energy efficiency and allow the

shutdown of particularly polluting or dangerous

powerplants.

It is worthwhile to note that very few students

from the FSU are enrolled in American universities. In contrast, China has had tens of thousands

of students here, most of them in science and

engineering. Government/private programs to

bring Eastern European science and engineering

students here would be one of the most effective

Polish technicians with insulation blowing machine

supplied by U.S. AID.
Chapter 6–Policy Considerations I 127

forms of technology transfer, though the effect

would not be noticeable for a decade or more.

Similarly, there is no Russian equivalent to the

Dalien Management Institute in China, a school

that teaches modem management using visiting

American professors. It is sponsored in part by

DOC and has been playing an increasingly

important role in China’s surging economy. DOC

could fund such schools in Eastern Europe.

Congress plays a direct role by sharing expertise on legislative activities and support services

with the parliaments of Eastern Europe. This

program could be expanded to include detailed

information on energy. That would be particularly

pertinent because of the major legislations that

was enacted in 1992. The negotiation process that

achieved balance among the various perspectives,

interests, and options would be of great interest to

many parliamentarians involved in energy policy.

Operations in a parliamentarian form of government are quite different from the American

model, but many of the considerations that go into

legislation are common. Congress could invite

members of the various parliaments, senior staff,

university professors and others to spend several

months here, working with committee staffs and

support agencies. This program might have to

include travel and per diem expenses because of

the severe economic problems in Eastern Europe,

so the total cost might be on the order of $5,000

to $15,000 per visitor, depending on the length of

stay, plus the staff time that would be involved.

Existing private programs such as in universities

and other institutions might cooperate with this

activity.

| Federal Agency Cooperation

The sophistication of our understanding of key

energy issues (e.g., the role energy plays in the

U.S. economy; how to maximize its benefits to

the country and minimize its problems) has grown

considerably over the past 20 years. Making

DOE’s expertise on energy issues and technology

more available (e.g., attending conferences, assisting ministries) could convey substantial advantages. Many governments appear not to understand how much energy their economies waste,

how much that costs them, or what to do about it.

DOE plays a role in Eastern Europe, but it is

largely secondary to AID. As noted above,

DOE/EIA training programs for counterparts in

Eastern Europe should strengthen energy policy

decisionmaking. A direct role by DOE advising

and training government officials could go even

further.

For example, poor energy data is an obvious

deficiency that makes analysis and policy making

quite uncertain. It is impossible to determine the

best allocation of limited funds for investment

when you have very limited understanding of the

costs and benefits you are trying to adjust. EIA

collects and analyzes vast quantities of information. They could transfer their expertise in knowing what data are critical, how to collect it with

minimum disruption, and how to prepare it for use

by policymakers. This could be done by extended

visits in both directions,

Another potential area for cooperation is regulation. The Federal Energy Regulatory Commission and various State regulatory agencies should

have much to offer in determining equitable rate

making for electricity and natural gas. In addition,

State agencies are pioneering energy planning,

including IRP. At present, electric power companies in Central and Eastern Europe have little

need for IRP because they have excess capacity,

but the planning concepts should become more

useful as their economies stabilize. State agencies

could assist in determining what would work and

how to initiate it.

A third possibility is for shared R&D projects

in energy efficiency. Funding projects there

would help direct attention to efficiency opportunities as well as expand those opportunities. Such

5 me J2nerg pollcy ,&-t of 1992, pL 1~-486, made gr~t c~ges ~ m~~ as~c~ in ~ attempt to rn&c fhe enf-?rgy System, both Supply

and demand, work more effectively.
128 I Energy Efficiency Technologies for Central and Eastern Europe

a program would capitalize on the low labor costs

due to the collapse of the ruble and other

currencies, and might yield substantial benefits

here if the R&D is successful. Some collaborative

efforts already have been initiated, such as with

fusion R&D. DOE’s proposed ADEPT program

(Assisting Development of Energy Practices and

Technology) could be an appropriate mechanism.

| Raise Priority of Energy Efficiency Among

Multilateral Agencies

The multilateral development banks (MDB)

such as the World Bank and the more recent

European Bank for Reconstruction and Development (EBRD) tend to focus mainly on large

energy supply projects.6 Projects to improve

energy efficiency usually are small and dispersed

(an exception is entirely new manufacturing

facilities where high efficiency is designed in as

only one of the benefits), and are harder to

organize, administer, and monitor. However,

efficiency is so low in the emerging market

economies that a great many opportunities exist

for investments with returns far greater than are

available for most supply projects. Improving the

use of energy will greatly ease requirements for

new supply facilities, which should benefit both

economies and environments.

As discussed in the previous chapter, the World

Bank’s record in supporting end use projects is

quite weak, though there are some signs of

improvement. Giving equal weight to energyefficiency improvement would almost certainly

improve the economical balance of the Bank’s

projects, but it would also demand changes in the

Bank’s policies and practices. Some shift in

emphasis may be instigated if Congress makes it

clear that funding should be based insofar as

possible on a least-cost analysis. Full equality

might require a major renegotiation of principles.

CONCLUSIONS

Ideally, one would like to be able to identify the

probable results of any given U.S. policy in

Eastern Europe. That is not possible because of

the great uncertainties and complexities of the

situation. We don ‘t know which countries are

going to succeed with economic reform and

democratization, or the paths that the others will

take. Nor can we quantify the impact that U.S.

energy-efficiency initiatives would have, largely

because the economic situation is so confused.

Some countries appear likely to succeed economically: Hungary, Poland, and the Czech

republic. The Slovak republic and the Baltics also

have a good chance after current difficulties are

overcome. All of these countries will encounter

many major problems and setbacks, but the

questions seem more related to how fast, rather

than if, they will recover.

Russia, Ukraine, and other republics of the

FSU are less predictable. Replacing 70 years of

entrenched central planning and one-party rule

will be excruciatingly difficult. Current leaders

seem committed to economic reform of some sort,

but it is not at all clear how political struggles will

evolve and whether future leaders will be as

cooperative.

| The Case for Major Assistance

If U.S. policy makers see such constructive

cooperation as being in the U.S. interest, then

major increases in foreign assistance should be

considered, particularly for Russia and other FSU

republics. Most of the economic infrastructure

needs to be rebuilt over the next several decades,

which is likely to cost hundreds of billions of

dollars, most of which will have to be generated

internally. U.S. assistance over the next few years

can help stabilize economies and point them in

the right direction. Even though the impact of

U.S. assistance cannot be accurately quantified, it

certainly can be substantial if targeted appropri6 U.S. Congress, OffIce of ‘lkchnology Assessment, Fueling Development: Energy Technologies for Developing Counm”es, OTA-F? 516

(Washington DC: U.S. Government Printing Office, April 1992) p.278.
ately. Major increases in aid, perhaps to several

billion dollars per year, will greatly increase the

chances for Russia and the other countries in the

region to avert economic chaos and political

authoritarianism, and move onto a path of economic recovery. It would also help control

potential proliferation of both nuclear weapons

and conventional arms. If these countries are to be

our friends, now is when they need help.

The energy efficiency assistance considered in

this report will directly improve the economic

situation and encourage economic reform. The

leverage on both goals should be quite high

because energy is used so wastefully. In addition,

the United States will gain some benefits because

the conserved petroleum will be available for the

world oil market. Energy-efficiency improvements are likely to be beneficial no matter what

happens politically and economically, and the

gains should greatly outweigh the costs.

I The Case Against Increased Assistance

Chapter 6-Policy Considerations

democratization. However, there are other priorities also. This country has its own great needs,

including reducing the budget deficit. It is difficult to ask the U.S. taxpayer to support former

adversaries when the same funds could produce

direct benefits here. Furthermore, foreign assistance may be largely wasted if it does not ‘‘work’

in promoting economic reform and democratization. If it does work, these countries could turn

into future competitors or even adversaries, and

we would have contributed to their strength.

Neither of these perspectives can be explicitly

refuted. Economic assistance in general, and

energy efficiency in particular, will almost certainly be beneficial for people who badly need

help, and will serve U.S. national interests.

However, it cannot be shown that increases in

assistance definitely will avert economic disaster

or political instability. Generous assistance just

makes these possibilities less likely. Whether that

improvement is worthwhile is a matter of judgment of national priorities.

Few people are against economic progress in

Eastern Europe, and probably none are against