A risky scenario:
Why the current scheme of electricity exports does more harm than good to Ukraine’s energy security and is more costly for domestic consumers
The challenge of monopoly on the electricity market and solutions to it
Ukraine has been increasing exports of electricity for three years now. It sold 3.4bn kWh abroad in 2015, over 4bn in 2016 and 5.1bn in 2017. In 2018, Ukraine plans to export at least 5.9bn kWh. According to the latest estimates of the State Fiscal Service, electricity exports yielded US $235.2mn in 2017. All this is presented as great success by Rinat Akhmetov’s DTEK which holds a monopolist position both in electricity generation and in politics.
A closer look shows that the current scheme of electricity exports hurts the country. It yields financial benefits to Akhmetov’s company alone, while domestic consumers in Ukraine are losing billions, the country’s energy security is weakened and dependence on the import of anthracite coal from the territory Kyiv does not control grows.
Ukraine sold 3.4bn kWh abroad in 2015, over 4bn in 2016 and 5.1bn in 2017. In 2018, Ukraine plans to export at least 5.9bn kWh
A lion’s share of exported electricity is now produced at two ZakhigEnergo DTEK-owned thermal power plants: Burshtyn TPP in Ivano-Frankivsk Oblast and Dobrotvir TPP in Lviv Oblast. In 2017, they generated 4.1bn kWh, i.e. over 80% of the electricity exported that year.
The electricity went directly into the grid to later be exported. On paper, however, DTEK ZakhidEnergo sold it to the Wholesale Electricity Market of Ukraine (WEM). Then, DTEK Trading, another unit of Akhmetov’s monopoly, bought from it from that grid. The price at which electricity was sold into the grid was higher than the price at which it was bought for further exports. In December 2017, the gap was UAH 0.4 per kWh (see A simple scheme). This was almost the price of a kWh of electricity from EnergoAtom (UAH 0.47 in December).
Since DTEK was buying every kWh of its own electricity from WEM at UAH 0.4 below the price at which it nominally sold electricity into the grid, somebody had to cover that difference. Domestic consumers did: their suppliers were forced to buy the amount of electricity left at WEM at the price high enough to compensate for the difference earned by DTEK. This no longer looks like something that benefits Ukraine, especially its domestic consumers.
The two DTEK TPPs in Western Ukraine are the only that can export electricity to the EU right now. As that export grows, so does the supply of more expensive electricity from them at Ukraine’s wholesale grid. Meanwhile, the share of cheaper electricity generated by nuclear and hydro power plants shrinks. In December 2017, TPPs sold electricity into WEM at UAH 1.78 per kWh, while the rate from nuclear power plants was UAH 0.47.
This increases the median price at which electricity is sold to consumers from WEM. The National Commission for Regulation of Energy and Utility Services admits that the “negative impact of change in the structure of generation in the given year caused by expected decline in the generation by nuclear power plants and increase of generation by thermal and steam-electric power plants” is one of the key factors behind the increase of wholesale price of electricity in 2018. Virtually all of the increase in the production of electricity in 2018 (by 3.8bn kWh) is planned through TPPs (3.7bn kWh). By contrast, nuclear power plants are expected to cut generation by 1.2bn kWh compared to 2017.
Apparently, the Ministry of Energy realizes that impact. Increasing the share of thermal-generated electricity and its exports serves the interest of DTEK and hurts other consumers in Ukraine. It is hard to come up with explanations for this, other than corruption.
In addition, the abolition of “subsidy” certificates for electricity exports has been actively lobbied lately. They provide for a compensation for subsidized household electricity prices through higher prices for commercial consumers. Lately, that extra charge has been at 25% of the price commercial consumers would pay without subsidy certificates. If the certificates are abolished, DTEK Trading will buy its own electricity at half the price at which its subsidiary, DTEK ZakhidEnergo, sells it to the wholesale grid. As a result, domestic consumers will have to pay double for every kWh exported. For now, this does not reach the households directly: the regulator sets the rates for this segment at a level far below the market one. The impact is indirect, reaching household consumers through the growing prices of what’s produced in the country. When the subsidizing of households stops, they will buy electricity from the market at the same price as other consumers do. As a result, the burden of paying extra for every kWh of electricity exported by DTEK will end up on the shoulders of millions of Ukrainian families.
Higher electricity prices for domestic consumers is just one consequence of the current scheme. An equally detrimental one is the import of much anthracite coal which is disguised as an effort to keep fuel prices down. This import comes primarily from Russia.
The deficit of gas coal in Ukraine is linked to the fact that it is burned at DTEK’s TPPs in Western Ukraine to produce the subsidized export-oriented electricity. The need to import both anthracite and gas coal is used as an argument in favor of a steep increase of rates for coal-driven TPPs. These are largely owned by Akhmetov’s DTEL and DonbasEnergo whose current real owners or co-owners are unknown.
In 2017, DTEK and the Ministry of Energy complained that switching all anthracite-driven thermal power plant blocks to domestic coal is difficult because Ukraine does not produce enough coal. Yet, it will take nearly 2mn t of gas coal to produce the intended 4.8bn kWh of export-oriented electricity at Burshtyn and Dobrotvir TPPs in 2018. The deficit of anthracite coal at Ukrainian TPPs will hit 4.2mn t in 2018. This will have to be imported.
If anthracite blocks of TPPs switch to gas coal and plants in Western Ukraine stop exporting electricity, the import of anthracite coal could be cut in half. This would minimize or abolish imports of that coal from Russia. In 2017, DTEK had to import gas coal from the US and Poland as a result of the deficit. This was used to justify the increase of electricity prices under the infamous Rotterdam+ formula. If DTEK ZakhidEnergo’s TPPs stopped exporting electricity, this would make the imports of coal unnecessary, eliminating the role of Rotterdam+.
Lately, the rhetoric of the Energy Minister and DTEK leadership has changed. Since early 2018, they have been talking about the excess of gas coal which they seemed to have lacked badly some months ago. Also, they have been switching anthracite blocks at TPPs to gas coal, a necessary component of Ukraine’s energy security. This led to a conflict: after the state-owned TsentrEnergo mines refused to buy gas coal from DTEK, Akhmetov’s companies stopped buying coal from state-owned mines in Lviv and Volyn Oblasts. Mykhailo Volynets, head of the Independent Trade Union of Miners in Ukraine known for a synchronized position with DTEK in the past years, laments that “TsentrEnergo demanded that DTEK increases the extraction of coal to 250,000 t per month, or 3mn t over 2016.” According to DTEK, it has set up new mining sections for that and now has nowhere to sell the surplus coal. So, it will supply more of it to Burshtyn and Dobrotvir TPPs while quitting coal from Lviv and Volyn mines.
It is important to note that the subsidizing of electricity from Burshtyn and Dobrotvir TPPs by domestic consumers is often presented as a way to support Western Ukrainian mines. This has little to do with reality. Instead, it’s yet another myth that benefits DTEK. According to the Ministry of Energy’s forecast on the consumption of fuel at thermal and steam-electric power plants in 2018, Burshtyn TPP is expected to burn 4.6mn t of gas coal, and Dobrotvir TPP – another 1.14mn t. This is almost four times higher than the amount of coal to be extracted at all mines in Lviv and Volyn oblasts in 2018 – they produced 1.65mn t in 2017. Even if all export-oriented electricity production stops, mines in Western Ukraine will be unable to supply enough coal for the two DTEK TPPs. They will need to buy more fuel from Dnipro Oblast.
The surplus of gas coal that Ukraine seems to have is in fact a result of manual pumping of Russian anthracite coal into the country. Part of it may be coming from the occupied parts of Donetsk and Luhansk oblasts. Ukraine has failed to ban the import of energy coal from Russia in 2017. This has led to a dependence on that fuel that’s dangerous for national security. Plus, the coal has been imported at dumping prices, encouraging TPPs to use anthracite coal.
Even the state-owned TsentrEnergo has postponed the launch of a reconstructed block of Trypillia TPP scheduled for December 2017. Allegedly, it will now open in the spring of 2018. It will work on gas coal, while now the plant is burning imported anthracite. The opportunity to bring in unlimited amounts of anthracite coal from Russia (or ORDiLO) has discouraged Sloviansk TPP of DonbasEnergy and Kryvyi Rih TPP of DTEK to switch to gas coal. As soon as this dangerous approach is abolished and all TPP operating blocks switch from anthracite to gas coal, the deficit of the former fuel will be visible again while electricity export from ZakhidEnergo TPPs will hurt electricity supply for domestic use.
Eventually, the more electricity TPPs in Western Ukraine export, the more DTEK is encouraged to sabotage their turn towards the domestic grid. This hampers the growth of generation at nuclear power plants. On August 5, 2015, Arseniy Yatseniuk’s Cabinet instructed the Ministry of Energy and the state-owned UkrEnergo to “take measures to switch three additional blocks of Burshtyn TPP to the unified grid of Ukraine” by October 15, 2015. DTEK as the owner has been sabotaging that.
LOOKING FOR WAYS OUT
It will take profound changes to go from the current electricity export model that benefits Akhmetov’s DTEK to the one that will benefit Ukraine. The country should stop the exports of electricity subsidized by Ukrainian consumers in favor of DTEK. Or it should stop subsidizing it through WEM: DTEK ZakhidEnergo can start selling its electricity directly abroad if anyone in Europe will buy it at the rate at which it’s sold to Ukraine’s wholesale grid. The best way out, however, is the following one. Electricity supply from DTEK’s TPPs in Western Ukraine should first of all be redirected to balance out the deficit of electricity in Ukraine’s grid at peak hours. This will enable a rational use of nuclear power plants and increase their production by 10-15bn kWh. Regular repairs should take place when regulatory restrictions halve EnergoAtom’s generation capacity. Until recently, the potential of nuclear power plants was not used to its full extent because scheduled repairs were done at one part of the year, and regulatory restrictions were in effect in another.
As nuclear power plants start producing more electricity, it could be exported in larger amounts compared to the current ones. In order to do this, Ukraine would have to complete the constructions of transmission lines to wire electricity from Khmelmytsky and Rivne NPPs to EU countries. If exported, that electricity could actually benefit Ukraine through higher price and better energy security. With more nuclear-generated electricity Ukraine will need little to none imported coal from Russia or any other country.