The crisis in the Ukrainian electric power industry has reached the point when ignoring it has become dangerous for the life of both the state and each of its citizens. Statements by officials and comments by politicians only exacerbate a sense of hopelessness.
Is it possible to find a way out of the situation, is it renewables to blame, why there was a personnel shortage in the state sector of energy. Kosatka.Media discussed this issues with the managing partner of IMEPOWER group of companies Yurii Kubrushko.
- Ukrainian electricity market has been working under the new rules for almost a year. But instead of European stability, the industry is facing a deep crisis. Why did this happen?
- Problems and contradictions within the energy sector have accumulated for many years. The hasty and unprepared introduction of a new market model was only a trigger.
Firstly, we entered the market model of working with three unresolved issues that greatly complicated its implementation. These are subsidies and preferential tariffs for the population, the need for cross-subsidization of renewable energy and the unresolved issue of the enormous debts of Energorynok SE accumulated before the launch of a new market. In addition, PSO mechanism was improperly implemented when two PSO systems — PSO for population and PSO for renewables — were connected together on the basis of Guaranteed Buyer. All this laid a mine under the very idea of a new market.
Secondly, incorrect expectations were initially formed. For some reason, everyone believed that as soon as the market worked, electricity prices would immediately go down. But the situation in the markets is different. In addition, Ukraine has accumulated inertia. Our energy sector is chronically underfunded, for many years tariffs for Energoatom and Ukrhydroenergo were artificially restrained.
The very logic of the market was to lead to the fact that generating companies with cheaper electric power, entering the market and having freedom of action, would sell it not at cost or the old tariff, but under the conditions that were formed on the market. The price of nuclear energy should be pulled up to the level of the price of electricity produced by thermal power plants. Prices for consumers would rise, but state generation would receive more money. And then the decision would be for the state where it wants to direct these funds: either to subsidies to the population, or to the development of nuclear energy, or to raise funds for the future decommissioning of nuclear units. This would be a matter of state policy.
But in our country, the launch of a new market coincided with the elections, and the new government came with slogans to reduce or at least freeze tariff growth. The result is a strange situation. The market was launched, it seems to have to work independently, according to its own laws, but as soon as the price rises by several percent, manual control is turned on and they are urgently trying to reduce the price. We seem to have moved away from the planned centralized sector management system, but did not come to a real competitive market, being stuck somewhere in the middle. There is nothing market about this. And there is no easy quick fix either. The situation is too running.
- There is no easy and quick solution. But can the problem be solved?
- I think that Anti-Crisis Headquarters and the Ministry of Energy and Environmental Protection are on the right track. We need to look at the situation in the complex. The thesis that the market itself will regulate everything is theoretically correct, but in Ukraine there is no market. All the same, we need to take into account the interests of the most diverse subsidized groups: to provide PSO for the population, and, in one way or another, to pay FIT, and to support the coal mines for several years, since no one is ready to close them right now. Accordingly, there is a need for central planning. The technical forecast balance has already been updated, now we need to work with the financial one.
It is important to remember that there is no one magic decision – to raise or lower the tariff for someone, to prohibit or allow something, and everything will work out right there. At least 15-20 complex measures are needed. Well-coordinated work of at least the Ministry, NEURC, Ukrenergo and the Parliament is necessary. If they can ensure the plan is really supported by everyone, so that there is no sabotage in one form or another, then I believe that in six months it will be possible to solve most of the issues, return liquidity, and the system will work. And it will take another year to completely equip and adjust everything.
- The Anti-Crisis Headquarters plan provides for restrictions on nuclear generation. There are fierce debates in social networks and in the press about the impartiality and validity of this decision. In your opinion, how necessary is this step?
- This is an objective reaction to the current situation. The current Cabinet of Ministers and Acting Minister didn’t create it, but they now need to cope with an imbalanced system in which have accumulated many distortions. In addition, an unexpected simultaneous decrease in consumption due to quarantine hit hard.
And if, given the structure of the Ukrainian generation that we have, for the stable operation of the system, Energoatom needs to work in this way, then I do not see any tragedy.
The current PSO, when Energoatom gives 85% of its output to Guaranteed Buyer to ensure PSO, is the most inefficient working scheme. I believe that Energoatom should have the opportunity to sell its own electricity, plan its work, then the company will be able to build the right balance between how much energy to sell under direct agreements, how much to give to the DAM, etc. They will get predictability, they will control their sales and their cash flows. And the state will then be able to redistribute part of the profit for the necessary purposes, of the same PSO for the population, that is, in essence, it is necessary to switch to financial PSO. And everyone will work according to a single market system.
If this is done, then I do not see a problem in the fact that Energoatom will work on a new forecast balance. A company even with such production will be able to stabilize. The key question is not how much electricity it produces, but at what price it sells, whether it receives money for it and whether it can properly plan its activities.
It is still important to correctly separate the concepts. I often see the opposition in the press: tariffs for the population are rising due to excess green profits, or green generation is killing nuclear power. This is a wrong statement of the question.
Under the law, Guaranteed Buyer SE purchases electricity from renewables and sells it on the market, as well as receives compensation from Ukrenergo and pays it to renewables. Neither Energoatom, nor the population was in this scheme originally. To receive funds for the payment of compensation, it was planned only to increase transmission tariff of Ukrenergo. This of course affects commercial and industrial consumers, for whom the transmission tariff is included in the retail price of electricity.
But at the same time, PSO for the population is a separate mechanism. But they brought it to Guaranteed Buyer, mixed everything together, and it turned out to be a strange situation, when Guaranteed Buyer is in the center of everything: it owes now to both renewables and the nuclear scientists. And now, as one of the solutions, they discuss raising prices for the population. PSO for the population is a matter of Energoatom, as a state-owned company, which can receive enough funds to solve it in market conditions. And the issue of paying for renewables according to the law on the electricity market was always planned to be resolved by Guarranteed Buyer at the expense of the transmission tariff of Ukrenergo.
- The anti-crisis headquarters, proposing to reduce FIT and stop the construction of renewable energy facilities, hopes to build a dialogue with investors, which, in turn, have completely different hopes. How do you think the situation will develop?
- The acting Minister has a really difficult task to find a formula in a few weeks that will balance the interests of all market participants. Today we have over 700 renewable energy producers. These are small stations of 1 MW each and large stations of 100 MW each. They were built in different years, at different rates, with different capital costs. They have different returns on investments. There are stations that operate with a yield of 12-15% per annum, there are those who operate with a yield of 20-25% per annum. In addition, there is a big difference between SPPs and wind farms. SPPs can be built relatively quickly, according to wind farm, development, and financing, and construction last much longer. Some of the projects were financed by banks, some were built entirely by investors at their own expense. Accordingly, those who were built for credit funds, any actions, for example, the restructuring of the "green" tariff, must be coordinated with the creditors, otherwise they will face default.
The problem arises – to create a kind of universal formula that, on the one hand, would allow the state to reduce Guranteed Buyer’s deficit and pay less to renewables (through the restructuring mechanism), and on the other hand, distribute this delta between market participants with completely different stories. This can be done, but months of intensive work are needed to develop fair and balanced conditions for different groups of investors. Otherwise, someone will really suffer and default. Unfortunately, under the Cabinet of Ministers, such work was practically not carried out. Yes, there was mediation, negotiations were underway, but there was no in-depth analysis and attempt to develop a truly comprehensive solution.
In addition, in Ukrane there is a prevailing stereotype that renewables are mainly oligarchs in Ukraine. But, according to our calculations, at the end of the second quarter, the share of foreign investors in the total installed capacity of green plants will reach 30%. At the same time, the installed capacity of the stations of the same DTEK is about 18%. That is, we already have a large pool of real foreign investors who believe in Ukraine and come here with financing. A lot of money has been invested from the EBRD and a dozen other MFIs. These projects, as a rule, do not have any super-profits, because Western companies work here according to their own rules. They have high costs for research projects, obtaining international funding, monitoring compliance with all standards in the construction and maintenance of stations.
The difficulty is that we have skewed in favor of solar energy. The National Plan for the Development of Renewable Energy indicates that in 2020 there should have been approximately 2.3 GW of wind farms and 2.3 GW of solar power plants. Today, in fact, we have built two times less wind power plants, and more than two times more wind power plants. And there are a huge number of projects with pre-PPA signed - more than 5 GW of wind farms and more than 3 GW of wind farms. But the fact is that the demand for electricity is declining.
It turns out that more has already been built than planned. And nowhere to build more, especially, taking into account the influence of quarantine on the consumption. On the other hand, there are investors who have already invested heavily, and believe that the state should provide them with the opportunity to complete the stations. Moreover, while the development of SPPs is a relatively small investment, the development of large wind farm projects is much more expensive. Some of our clients have already built substations for their future wind farms, some paid turbines before quarantine, I know at least a few foreign investors who spent 5, 10, 15 million euros on their projects. And just to write off now such an amount, refuse to implement the project and wait for the auctions, which may someday be, is an unacceptable option for them. They also have their own shareholders, investors.
As you can see, the situation is much more complicated and multifaceted than the thesis "bad oligarchs earn billions from their greenback."
Yes, you need to reduce the burden on Guaranteed Buyer, and the tariff restructuring, which the Ministry of Energy and Environmental Protection is discussing with investors, is the right way. There is a certain potential for reducing the green tariff by a certain percentage, which is not critical for the payback of the project both in the sun and in the wind, provided that the PPA is extended for a certain number of years.
It is important that investors take this step voluntarily. One could still somehow put the pressure on Ukrainian investors, but foreign investors have much more opportunities to protect their rights. If it comes to arbitration courts, this will destroy the investment climate in Ukraine for many years to come, not only in the field of renewable energy.
In February, at the Ukrainian Energy Forum, Andriy Kobolyev was asked whether Naftogaz plans to take advantage of the low price period and build its gas generation. He replied that they are closely watching the solution to the green tariff problem. If there is a retrospective change in the legislation on green, then how can they build their gas stations, knowing that in a few years everything can radically change? It is impossible even to make rough calculations when the introductory changes constantly, when the state constantly changes the rules of the game.
And it’s not the green people who are to blame for this situation, not the current Cabinet of Ministers, but a whole galaxy of ministers, officials and deputies. For many years they could not create a mechanism for the natural limitation of the power of renewable energy construction. What was needed was a system by which green tariffs could be reviewed regularly, so that the level of investment profitability was sufficient for the stations to be built, but not enough for the boom that was in Ukraine last year. The state had long had to resolve all these issues, but the work was not done, and in the absence of any restraining signals, explosive growth occurred when several factors coincided.
- Can this situation affect the interests of Ukrainian prosumers? Many of them complain about the delay in payments for electricity sold.
- I sincerely hope that no one will get their hands on this segment in terms of changes, and they will remain working according to the same rules that exist. This is a separate segment. They are not tied to Guaranteed Buyer, they do not have the “superprofits” that the deputies like to consider there, and given that any reduction in their tariff is a drop in the ocean that will not solve anything in the energy market, I hope that they will not be touched.
- Our readers have two more favorite questions: why do they stop the units of nuclear power plants that generate cheap electricity and not thermal power plants, and why in Europe electricity is cheaper, and we don’t. Let's talk about each.
- As for the price of electricity, there are two factors.
Firstly, it is incorrect to compare prices by day. I see how many of our politicians flaunt statements such as “over the weekend, the price on the DAM has risen by 40%” or “over the past week the price has risen by 20%, until?!” In fact, the average April price on the DAM is at one of the lowest levels since last July. None of the industrial consumers who bought electricity on the DAM in April did not overpay. In January and March, for example, it was more expensive.
Secondly, the DAM markets of most European countries are closely interconnected, there is a lot of liquidity, you can easily “overtake” electricity across borders, and accordingly, the situation is maximally market.
Ukraine, with the exception of Burshtyn Island, operates asynchronously with the European power system. There is no opportunity to import electricity from anywhere; the Ukrainian market is closed on its own. And in this closed system there is no cheap generation. Old inefficient TPPs work on expensive coal and spend a lot of it. Energoatom cannot simultaneously subsidize the population, solve its problems regarding the modernization of plants and the purchase of fuel, and at the same time still give cheap electricity to the market. Ukrhydroenergo has the same situation: they need funds for investment programs to complete the PSPs, and due to the low water content in the rivers they have low generation, therefore they also cannot supply large amounts of cheap electricity to the market. There are still old and most inefficient CHP plants. And renewables, which are subsidized. Although it’s more correct to say not renewables, but that they are new. In Ukraine, any new generation, the same new nuclear power plants or thermal power plants, could not be built without a special tariff, which would help to recoup capital investments in a new project. It’s just that it would be called not “green,” but somehow differently.
We do not have cheap and efficient generation. So, there are no grounds for a price drop in the near future. They will definitely appear in 2030, when the green tariffs expire and all this volume is objectively cheap at cost, electricity will enter the open market. Then yes, the price in the market may drop significantly.
Another point. You need to look at retail prices for the consumer. The price on the DAM itself is not the best indicator. There are other market segments, the same direct contracts, there are additional price components, for example, transmission tariff for and distribution tariff. It is necessary to summarize all this and compare the totals. Here is a big field for manipulation - you can take any numbers out of context and interpret them as you like. It is basically difficult to compare prices in different countries: the fact that in Germany there is such a price, but in our country this does not mean anything. Each country has its own generation structure, its own market situation, and its own characteristics.
Regarding the question of what capacities to limit, one should be guided by the opinion of the Ukrenergo dispatch center. He is responsible for the stable operation of the power system: they see all the schedules for hourly and daily consumption, they know all the modes, the capabilities of all units in putting them into reserve, and starting up, and on this basis they make decisions to ensure the most stable and safe operation of the power system. And if the dispatchers believe that this spring, given the decrease in consumption, low water content and a host of other factors, such a mix of different types of generation will be correct, you need to rely on their opinion. They are the only professionals today who are able to analyze the situation in a complex.
Again, data taken out of context is often compared. The fact that in March it was so, and in April it is no longer so, does not mean anything. It is necessary to take data for 5, and ideally for 10 years, look at consumption levels for different periods, how this consumption was covered by different types of generation, and compare with today: how consumption fell, how much the production of nuclear power plants, thermal power plants, etc. decreased. And on the basis of this, it will be possible to draw the correct conclusions - how objective is this decision, is it caused by an increase in green generation or a drop in consumption, or a situation with low water availability, or (most likely) a combination of these factors.
- One of the main problems of the industry is personnel. We do not have permanent managers in all major energy companies: Ukrenergo, Energoatom, Centrenergo. At the same time, it is clear that any leader of the appropriate level today is associated with one or another center of influence, and any rearrangement will only lead to new distortions in the market. Can this dilemma be solved?
- The problem with the staff is a consequence of the fact that today all of our energy has been divided into fragments that are controlled by different bodies and are not coordinated among themselves. Ukrenergo is formally subordinate to the Ministry of Finance, Guaranteed Buyer - to the Cabinet of Ministers, Energoatom and Ukrhydroenergo – the Ministry of Energy. State mines and Centrenergo live their own separate lives. NEURC is formally independent, but in reality most of the members of the commission are directly appointed by the President without any competition. In addition, there are unresolved issues with the remuneration of civil servants, which is why it is difficult to massively attract knowledgeable people from the market. All together is a terrible mixture, which gave rise to today's crisis. It’s difficult to say honestly what to do with this.
There must be political will and some purpose. This is what I do not see today in the energy sector. What are we striving for, where are we going? When there is an understanding of the tasks, it’s already possible to form a team for them, call people and show them some vision of the issue. This is what happened in Naftogaz after the Maidan. There was a mission, which at the first stages was supported by the government, and people understood why and for what they were going to work there. This motivated, helped to find competent specialists and keep the team for a long time. In the energy sector, in the absence of a guiding, leading role of the Cabinet of Ministers and the Ministry of Energy, all companies scattered around their corners, and are fighting for the remaining funds on the market. I can’t even imagine how it is now possible to attract people from the private sector to the public sector: there is no story to interest them, to captivate.
The policy of “not raising tariffs” is not a policy, it is a short-term goal. This is not about development, not about principles, not about seeing the future.
Now there is a chance for normal work, because there is an objective crisis, there is personal attention to the sector from the Prime Minister, there is a loan of trust from the government from the acting Minister, there is a chance to do the right thing, stabilize the situation in a few months, if there will certainly be support from the Parliament and NEURC. But again, this is a short-term solution to current problems, not development.