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Ukraine's disconnection from power grids of Russia and Belarus: Prices and consequences

Author : Olena Holubeva

Source : 112 Ukraine

Ukraine is going through the final stage in the process of uniting power grids with Europe and disconnecting from the energy space shared with Russia and Belarus. Synchronized with the energy grid of continental Europe ENTSO-e, our country will not be able to use the existing sections for the import of cheap electricity from Russia and Belarus. Also, technical flows from Russia will stop. At the final stage of integration, Ukraine will receive not only European rules, but also European electricity prices. 112ua.tv figured out what would change and how much Ukrainians would pay as a result of the upcoming changes.
12:02, 28 April 2021

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Why does Ukraine switch power grids to Europe

Since the collapse of the USSR, Ukraine has remained a part of the energy system common with Russia and Belarus. Our country has already twice tried to leave the common energy zone with its historical neighbors, synchronizing with the electric power system of continental Europe ENTSO-e - in 1999 and after the Orange Revolution. Both attempts were unsuccessful.

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Authorities returned to the issue of synchronization with the European energy system a year after the Maidan. As a result of negotiations and consultations, on June 28, 2017, in Brussels at the General Assembly of ENTSO-e, a historic agreement was signed - on the unification of the energy systems of Ukraine with the energy system of continental Europe. The document was not coordinated with Russia.

According to the document, Ukraine took five years to prepare for synchronization. According to the plan, the connection to the European energy system is scheduled for 2023.

The idea of ​​joining ENTSO-e is actively lobbied by politicians and officials who came to power after the Euromaidan. They are convinced that this will eliminate the possibility of resuming economic cooperation with Russia, including at the level of electricity exchange, which, in their opinion, poses a threat to the growth of Russian influence on economic and political processes in Ukraine. As part of this strategy, Ukraine has already refused to import Russian gas and is re-exporting it from Europe. As a result, even gas extracted from our own subsoil is not cheaper in our country than on the stock exchange in the Netherlands.

As a result of the physical disconnection of power lines connecting the Ukrainian energy system with the combined energy zone of the Russian Federation and Belarus (the wires are not cut, but will be disconnected), Ukraine will lose the ability to import electricity from these countries. After synchronization with the European energy zone, it will be possible to import electricity only from the European direction.

As the main advantages of the reunification of Ukraine with ENTSO-e in the current configuration, the Ukrainian government cites European rules and procedures that will apply to the country's electricity sector, as well as transparent pricing. Many Ukrainian officials are convinced that the price of electricity in Russia and Belarus can be influenced by authorities and politics, while prices in Europe are regulated exclusively by market mechanisms and can be seen in the public domain on exchanges.

"Commercial contracts, under which electricity is supplied from Russia and Belarus, are non-public and closed. Nobody understands and does not know the prices for these contracts ... Thermal generation at such prices works below the cost price and has no money for the purchase of coal, repairs and reconstruction of thermal power plants", ex-Minister of Energy Ivan Plachkov expressed the main concerns to 112ua.tv.

It is worth noting, however, that there is a different opinion: thermal generation, which is now represented by private business in Ukraine, is often accused of inflated prices. The head of the energy committee in the Verkhovna Rada and one of the president's chief advisers on energy issues, Andriy Gerus, has repeatedly stated that only imports from Russia are holding back heat workers from raising the price of electricity to sky-high heights. And they may well do this, as they are one of the largest producers of electricity in Ukraine.

If Ukraine manages to connect to ENTSO-e, special inserts will be needed to resume electricity imports from Russia and Belarus. These are very expensive projects. “I believe that we cannot discuss any trade issues with Russia at all. As for Belarus ... Ukraine is interested in such an insert. They will not demolish their nuclear power plant. This electricity can come in without the slightest damage to Energoatom, which will be able to export its electricity to The European Union. This will mix the price situation on the Ukrainian market downward. Speaking about ideological issue: I do not understand why there might be objections to electricity from Belarus if we transit Gazprom's gas in Ukrainian pipes and talk openly about the advantages that this gives the Ukrainian economy," Vsevolod Kovalchuk, ex-head of the operator of backbone networks, told 112ua.tv.

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The construction of the inserts is not a matter of one day; the projects will take years to complete. In any case, the question of who will pay for the implementation of projects will be especially acute.

“I support if the inserts are built for the money of Belarus. They are very expensive and with long payback periods. The cost of such projects amounts to tens of millions of euros. Under such a project, you need to conclude a contract for ten years. If we go this way, we will take on obligations that we will not be able to bear, "Ivan Plachkov told 112ua.tv.

European electricity prices for Ukrainians

It is naive to believe that only industrial consumers will feel the effect of integration into ENTSO-e. Ordinary Ukrainians will feel it both through the price of goods and services with a high specific weight of electricity in the cost price, and through payments from universal service providers.

Now the population continues to pay two times lower than the current market price. The decision to abolish this privilege and equalize the electricity prices of the population and industrial enterprises has long been ripe in the offices of Zelensky power, but officials do not dare to take the last step, fearing a social explosion. It was expected that prices for the population would be equalized with the market already from April 1, but the issue was postponed until May 1: until this date, a special decree was extended, which regulates the PSO price.

It is difficult to predict how the authorities will act on the issue of electricity prices for the population in the end. Alternatively, a plan for a phased increase in electricity prices for the population to market levels may be approved, 112ua.tv sources say. In any case, by 2023, by the time of Ukraine's integration into ENTSO-e, with almost one hundred percent probability, PSO prices for the population will sink into history: accordingly, the cost of electricity in payments will be determined by the market and free competition between service providers to the population. This means that changes in the price of electricity that will occur after joining ENTSO-e will be felt by every Ukrainian.

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It is too early to predict how much the prices will rise or fall after the connection to the European power grids. At the first stage of integration, the export-import exchange of electricity with Europe will influence the price situation, experts say. According to them, the issue of pricing after synchronization with ENTSO-e should be considered in the context of two stages. "The technical synchronization of networks is not at all equivalent to the unification of markets. In fact, we are building a road, but a lot of work will have to be done in order for movement along it to begin," says Kovalchuk.

At this stage, the technical possibility of export-import operations will appear. At the moment, the range of exchange of capacity with the Russian Federation and Belarus is 3 thousand MW. After disconnection as a result of synchronization with Europe, we will have 2.2-2.3 thousand MW. This is equivalent to the capacity of two nuclear and one thermal power units and is equal to about 10% of the volume of electricity consumption in our country. Accordingly, the impact of European prices on Ukrainian prices will be significant.

The lack of physical ability to import from Russia and Belarus can play precisely in the direction of increasing electricity prices. It is worth noting that it was already somewhat banned, but then the ban was lifted again. Recently adopted by the Verkhovna Rada, bill 3364-1 (required for certification of the Ukrenergo transmission system operator) has again banned the import of electricity from Russia and Belarus. Every time the authorities prohibit the import of Russian electricity, its price in Ukraine rises sharply. In winter, when frosts hit, when most of the Ukrainian thermal power plants had coal reserves for several days and were forced to announce emergency repairs in order not to switch to expensive gas, thanks to imports from the Russian Federation, it was possible to avoid a shortage of electricity in the system and bring down rush prices.

Another factor in the rise in prices will be the export of electricity produced by Ukrainian nuclear power plants - its cost is one of the lowest. As you know, it is the atom that traditionally mixes the prices of electricity in Ukraine downward. The configuration may look as follows - cheap nuclear power from Ukraine will go to Europe, and we will receive electricity from European countries with a premium to the price of thermal generation, which will make the price weather in the country. This is how the free market works.

"After the opening of the option for export-import operations with the EU, domestic nuclear energy producers will have the best competitive opportunities in European markets. Such advantages will appear due to the low cost of electricity produced at Ukrainian nuclear power plants. Thermal electricity produced in Ukraine is much less likely to be exported to Europe due to its high production costs due to production at unmodernized TPP units. In addition, this type of electricity will be additionally taxed due to carbon quotas, which will lead to an additional price increase of approximately 10%. This tax (Carbon Border Adjustment) in Europe is proposed to be introduced until 2023," Ye Energy director Artem Kompan confirmed to 112.ua.

Even if prices in Europe are significantly lower than in Ukraine, traders will not be interested in dumping and losing margins. They will sell electricity from Europe slightly below the prices in Ukraine.

Note that now the wholesale price of electricity in Ukraine is 42% lower than in Hungary, Slovakia and Romania, and 36% lower than in Poland. The impact of European prices on Ukraine will be even more pronounced if there is not only a technological unification, which is planned in 2023, but also unification at the level of common markets, with uniform rules. ENTSO-e currently unites 43 operators in 36 countries of the European continent.

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The PSO mechanism, if maintained until 2023, could become an obstacle to unifying markets as part of an opaque pricing formation. Excessive regulation of prices in the form of a price cap may also be an obstacle, said the former head of Ukrenergo.

Stay isolated and survive the blackout

The greatest danger for Ukraine on the way to ENTSO-e is the condition of passing the isolated regime. In simple words, the country twice (in the warm and cold seasons) will have to demonstrate stability and readiness to work in the ENTSO-e zone, without creating problems for Europeans in the form of accidents and drops that affect the stability of the entire European energy giant. To do this, Ukraine will need to physically disconnect from the energy zone in which it stays together with Russia and Belarus, without connecting to Europe, for some time (they say periods from several days to a week). The country's energy system will only have power flows with Moldova, which also goes to ENTSO-e. Note that for Moldova, Ukraine is a kind of lifeboat.

In an isolated regime with Moldova, Ukraine may be stuck indefinitely. The risk that Russia may refuse to join our country back to the common energy zone, and the Europeans are not yet ready to make a decision to join ENTSO-e, is extremely high, say the interlocutors of 112ua.tv in the market.

The implementation of such a scenario will have catastrophic consequences: Ukraine will be able to completely cover the needs for electricity on its own, without imports, only under favorable weather conditions. In the event of severe frosts or, conversely, high temperatures in summer, when an acute shortage of electricity occurs in the system, it will be necessary to introduce planned restrictions for industrial consumers. The threat of blackout in this case is quite real. An additional load in this situation will be the need to pull the Moldovan energy system, which, in the absence of another alternative, will be balanced by Ukrainian electricity.

If Ukraine does not manage to get out of isolation and it hangs for a long time in the same energy center with Moldova, electricity prices in the country will skyrocket.

To avoid a catastrophe, Ukraine must prepare well for an isolated regime: provide for all the nuances - make sufficient fuel supplies for thermal power plants, nuclear power units, accumulate sufficient water resources in the cascades of hydroelectric power plants. It is necessary to prepare gas-oil blocks and have a sufficient volume of gas for them, says Kovalchuk.

He advised not to carry out the test if there is no 100% certainty that Ukraine will pass it, as well as that after it the country will be able to return to the energy system from the Russian Federation or connect to ENTSO-e.

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