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What's wrong with Ukraine's electricity market?

Author : Oleksiy Kushch

Source : 112 Ukraine

Everything is heading towards the emergence of a new quasi-state monster
20:43, 10 August 2021

112 Agency

Who rocks the electricity market?

Two FIGs, which are under the control of two "main citizens of our city", are literally tearing the torso of the country's energy system into two parts. This manifests itself in constant price swings when the market literally throws itself out of the fire and into the fire. This makes the so-called targeting of electricity prices for industry practically impossible, which is one of the key elements of the factorial competitiveness of the national economy.

Electricity is the basic energy resource of any industry, and if the price of a given factor of production is poorly predictable, this leads to the inability to carry out high-quality business planning and narrows the price forecast horizon from several years to months or even days. As a result, we get a unique situation - having the largest power generation in the post-Soviet space and a potential high industrial and household power supply, we have practically lost the competitiveness factor in the form of affordable electricity in comparison with other countries – regional competitors.

Related: Electricity price for households to remain the same, - Ukraine's PM

In Ukraine, a unique situation can be observed when a record drop in electricity prices is recorded on the intraday market and it becomes one of the cheapest in Europe, and before that, one of the most expensive energy resources is recorded on the day-ahead market. And such price swings can occur in a fairly narrow time range.

According to the quotes on the market and the choice made, "whom to jam", it is possible to determine which oligarch's "head" has now gained the upper hand in the construct of our energy "pull-pushing".

If the nuclear power plant is shut down and the reactors are put into a “temporary downtime”, it means that the winter was warm, there was a lot of coal in the warehouses, and good people should be helped to burn it by increasing the share of generation of private thermal power plants. This leads to an increase in electricity prices and the shutdown of industrial enterprises. That is, the “head” that controls heat generation and the coal market wins. If thermal power plants are stopped, it means that another "head", "ferroalloy", has taken the upper hand, which needs a cheap electrician for nuclear power plants. And they will stop heating, at the same time reducing coal reserves in warehouses, and even on the eve of the heating season, when they need, on the contrary, to increase.

There is also a "window" for fixed-term contracts with a dynamic volume of electricity supply in the form of a "Guaranteed Buyer", which trades mainly in "green", that is, electricity from renewable sources. Here you can buy the necessary volumes of the resource, especially for those companies that rely on a "green audit" and a low carbon footprint in their products (in the EU market this is appreciated, and in the future, it will also be profitable because the Europeans plan to tax imported goods with a carbon footprint)...

Related: Ukraine renews import of electrical energy from Belarus, - MP

This whole structure functions within the framework of the so-called market, which is one of the biggest myths and illusions of our reformers in recent years. Several hundred million dollars were spent on the activation of the electricity market in Ukraine in the form of loans and grants from Western partners, and it is somehow “inconvenient” to admit that they have built a "pulling line".

The population in this tug-of-war story for a long time found itself on the sidelines, which explained the phenomenon when an average Ukrainian salary could buy the largest amount of electricity in Europe. But this was the case until the last moment, when several tens of billions of hryvnias, which were allocated to compensate the tariff for individuals (PSO regime), urgently needed "pulling" in a 50/50 proportion: one "head" needs cheap nuclear power, and the population gets confused by feet, the other - an expensive electrician - that is, "physicists" have to pay "according to the market." In general, "this is not your tooth, this is not even my tooth, this is their tooth"...

A classic electricity market is impossible in Ukraine

The classic electricity market is not about Ukraine. In any case, until the completion of the first stage of industrial policy in the form of reindustrialization. And that's why.

Philosophical aspect - whatever one may say, the factor of available electricity for the population in Ukraine is almost a constitutional norm about a welfare state. We do not have a private generation in the classical sense of the word. Apart from wind turbines and solar panels, private business has not built a single power unit or a single trunk line in Ukraine.

Related: Zelensky signs law requiring to ban electricity imports from Russia

In simple words:

Oligopoly control over the market by the state in terms of basic generation.

Low paying capacity of the population, when any "market reforms" will either lead to social tension or to budget subsidies for subsidies. Or to "splinters". Or all three results at the same time.

High energy intensity of industry: "we have no other writers," and it will be possible to criticize excess consumption at enterprises only after the completion of the first stage of reindustrialization within the framework of the new industrial policy, unless, of course, there is a desire to turn the country into one "big vegetable garden and a field of corn" ... Without the factor of cheap electricity for industry and targeting electricity prices for the next 2-3 years, we will not be able to attract systemic investments to the real sector.

Tariff imbalance of renewable energy sources with other types of generation.

How could this problem be solved?

The first contour is the sale of a part of the cheap electricity from hydroelectric and nuclear power plants to industrial enterprises by issuing "energy options", the cost of which would also include subsidies for the tariff for the population. Exchange trading in such options could be limited by the price corridor (minimum/maximum) formed for the next three years by the government regulator (price target).

As a separate element of such a strategy - the creation of industrial parks near the NPP with a night shift in order to use the excess generation of the nuclear power plant at a reduced tariff with its fixation for the next five years (direct agreements between industrial parks and NPPs). The tariff for the population in this model may be lower than the cost price.

Related: Ukraine refuses to buy electricity from the Belarusian NPP

The second contour is the classic market for the non-production sphere of the economy (except for the population), that is, the model that is approximately used today (dealer - buyer).

Payment of compensations for renewable energy sources at a guaranteed tariff from a special state fund formed with the help of energy excise taxes (for thermal generation) with a simultaneous strict purpose of such payments - the use of money for the creation of new accumulating and balancing capacities for renewable energy sources at the rate of one generation unit to 0.9 units accumulation and balancing. With the subsequent payment for the services of such capacities from the energy market.

Yes, and this scheme has a number of disadvantages. She will be reproached for industrial lobbying. But in this version, the preferential price for the industrial energy option will apply to all enterprises, and not only to "ferroalloy" and "green metallurgy". In addition, buying electricity at a price higher than the cost of atomic generation, but cheaper than the "market", industrial enterprises will subsidize the tariff for the population and ensure it is "frozen".

Naturally, renewable energy sources will not want subsidies to go for their intended purpose - they need cash "at home", but the art of persuasion is important here. And, of course, there will be criticism from the "non-production sphere", but here you will have to decide which is more important - an expensive electrician, for example, for billboards, or the chaos that is observed now.

On the eve of the end of the industry

In the meantime, coal reserves at Ukrainian thermal power plants have decreased by another 25%. More than a dozen thermal power units have been brought to a standstill, many thermal power plants have declared a pre-bankruptcy state - they have nothing to pay for coal. Good surroundings for autumn-winter rolling blackouts and massive imports of electricity from Belarus.

All of these are excellent scenery for the nationalization of private thermal generation or the introduction of temporary administrations there. Moreover, the owner of the thermal power plant has long been not averse to selling these assets or simply "drowning out" if there are no buyers. In this case, nationalization is about the same sale, because it involves the payment of monetary compensation to the owner. This is about the case when almost all the participants in the process are interested in nationalization: the authorities will show their "cores" and their ability to fight the oligarchs, and the oligarch will get rid of an unnecessary asset by paying from the state budget.

Related: Chinese could build electric vehicle plant in Ukraine

Everything is heading towards the emergence of a new quasi-state monster, into which Centrenergo and nationalized private thermal power plants, as well as "temporary administration" will merge. It would be advantageous to bring the state program to "revive mines" under this. In general, several tens of billions can be fully "mastered" before the end of the current political cycle.

Related: Current model of specific duty in electricity market proposed to be extended until August 1

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