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Key challenges for Ukraine's new energy and ecology minister Orzhel

Author : Olena Holubeva

We’ve tried to find out who Oleksiy Orzhel, Ukraine’s new Minister of Ecology and Energy, is, what to expect from him and what challenges he would have to deal with
11:05, 3 September 2019

Radio Liberty

We’ve tried to find out who Oleksiy Orzhel, Ukraine’s new Minister of Ecology and Energy, is, what to expect from him and what challenges he would have to deal with.

Unexpected appointment

During a week before the first meeting of the parliament of 9th convocation, media called Vsevolod Kovalchuk, head of the NEC Ukrenergo, power company responsible for operational and technological control of the Integrated Power System (IPS) of Ukraine and electricity transmission via trunk power grids from generating plants to the distribution networks of the regional electricity suppliers, the most likely candidate for the post of Minister of Energy and Coal. Given the fact that he was at the origins of one of the most criticized reforms of the transition to a market model in the wholesale electricity market, and also signed an agreement with ENTSO-e (European Network of Transmission System Operators for Electricity, ed.) on the integration of Ukraine into the European energy system, his appointment did not raise the slightest doubt. However, everything was changed. Since it was decided to merge the Ministry of Energy and the Ministry of Ecology into one ministry, a new candidacy for the post of its head, Oleksiy Orzhel, appeared.

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Director of ExPro Consulting Hennadiy Kobal is skeptical about the decision to combine the two ministries into one; they should confront each other, he says. The expert notes that, for example, the Ministry of Natural Resources issues an environmental impact assessment: a conclusion, without which no gas or oil field can be developed. This initially implies an independent, critical approach. Whereas the Ministry of Energy, in theory, is a department that is interested in increasing production volumes. The Ministry of Natural Resources also licensed slurry utilizers (a harmful mixture of soil and drilling fluid extracted from a well).

Until recently, little was known about Orzhel. 112.ua talked with Ihor Tynny, the co-founder of the Ukrainian Association of Renewable Energy, businessman (owns 46% of Kyivspectrans, a leading company in the field of waste management in the capital, a large entrepreneur developing hydropower, solar power plants, a biogas sector, owning manufacturing enterprises and restaurants) , who together with Orzhel created this Association and has been working with him for almost five years. In 2006 – 2014, he worked in the National Commission, carrying out regulation in the fields of energy and utilities (NKREKU). He was responsible for the direction of green energy. Orzhel was not a member of the commission, he had a senior position. Viktor Merkushov, a member of the Presidium of the Energy Association of Ukraine (he was a member of the NKREKU from August 2001 to July 2004, from July 2006 to December 2011), said that he knew Orzhel, but could not say anything about him except that he was a "good person." According to Tynny, “people who knew him from his work at the NKREKU spoke very well about him.”

Orzhel was the Head of the Energy Sector at BRDO (Better Regulation Delivery Office), an independent expert and analytical center funded by the European Union through the FORBIZ project and the U4Business initiative. Based on this, it can be assumed that Orzhel is skilled in many areas of the energy sector.

Complete integration with ENTSO-e

In June 2017, Vsevolod Kovalchuk, the head of Ukrenergo (who until today has been called the most likely candidate for the post of head of the Ministry of Energy), signed an agreement on the conditions for the future unification of the energy systems of Ukraine and Moldova with ENTSO-E. The deadline for Ukraine to fulfill the measures of the requirements for connecting the country's ECO to the energy system of continental Europe begins in July 2022. On June 26, the parties signed an agreement on transferring data on the operation of the Ukrainian energy system to the Transparency Platform. "Ukraine is still (except Burshtyn Island) integrated into a single system of flows with Russia, which is a threat to national security," said Dmytro Sydorov, leading analyst at EXPRO Electricity. According to the expert, integration with ENTSO-e will contribute to the establishment of a full-fledged electricity market. (Now the market is isolated from competition, which is also one of the factors of high electricity prices). Integration will facilitate the entry into Ukraine of European electricity traders, which will increase competition in the domestic market and will influence prices downward. Depending on the pricing environment, Ukraine will be able to export electricity to the EU markets and import it into the domestic market.

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The problem here is that Ukraine needs large investments in the technical re-equipment of its energy system in order to completely separate it from the single energy system with Russia and integration into the EU, which will allow free flows in two directions. There are several projects: in particular, the construction of a constant voltage insert at the border of the unified energy system of Ukraine and the island of Burshtyn TPP (investments in the project are estimated at $ 150 million).

The future minister will have to make a decision regarding the Ukraine-EU energy bridge project

The project involves the expansion of the Burshtyn energy island by including the power unit No. 2 of the Khmelnytska NPP, the 750/330 kV Zakhidnoukrainska substation and the interstate electric network Khmelnytska NPP - Rzeszow (Poland). It is lobbied by Energoatom (which produces 50% of electricity in Ukraine). At the same time, curtailing it will be a difficult task: the project involves public-private partnerships, and Energoatom has powerful allies. According to Energoatom, the state-owned company is interested in the project, since electricity prices in the EU countries in the next 20 years will increase by an average of 1% per year in the range of 36-50 euros / MW hour. The current level of electricity prices at Ukrainian nuclear power plants is 16.3 euros per 1 MW hour.

Achieve lower electricity prices for industry

Since the launch of the electricity market since July 1, the average price of electricity for industry has grown by 20-25%. And now prices in Ukraine are higher than in Eastern Europe. For this reason, representatives of ferroalloy enterprises are on strike near the Ukrenergo office, and the Cabinet of Ministers. The issue was considered at a meeting with President Volodymyr Zelensky, which requires a reduction in prices by 15-20%. In mid-August, a meeting was held in the Presidential Administration with the participation of representatives of the Cabinet of Ministers and relevant departments. On August 14, at a meeting of the Cabinet of Ministers, one of the options for reducing the price was approved. The decision was published on August 28.

Sign a new transit contract with Russian Gazprom

The ministry will have to participate in solving the problems that might arise when concluding a new transit contract with Gazprom, ExPro Consulting Director Gennady Kobal told: “Trilateral negotiations are planned for the transit of Russian gas through the Ukrainian gas transportation system from late September." As you know, the contract will end on January 1, 2020. Lack of transit will turn the Ukrainian GTS into a pile of iron, and Ukraine will lose $ 3 billion in annual budget revenue.

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Decide how to create a gas reserve

In case of stopping the transit of Russian gas, Ukrainian underground gas storage facilities must be filled with gas to maintain the necessary pressure level, which would allow raising gas volumes to cover peak needs. Technically, 260 million cubic meters of gas can be daily raised from storage only under the condition of one hundred percent load - 31 billion cubic meters. And with a low level of underground gas storage, the rate of gas withdrawal drops to 60 million cubic meters per day, which is clearly not enough to cover possible peak needs.

It is necessary to develop a new program to increase gas production

The new minister will have to participate in the development of a new program to increase gas and oil production in the context of the failure of the 20/20 program, Kobal says: “If the situation in the private sector is more or less favorable, then in the public sector it could be better."

To conclude Production Sharing Agreements  on the shelf and on land

The minister will have to deal with the issue of concluding an offshore production sharing agreement since the Minister of Energy traditionally heads the departmental commission, which determines the winner of the competition. As you know, the winner, who will be given the right to implement the first offshore gas and oil production project after the annexation of Crimea, has not yet been named.

Complete unbundling

The minister will have to participate in resolving the issue of separating the Ukrainian gas transportation system from Naftogaz in accordance with the requirements of the third EU energy package. A tough struggle on this issue continued throughout the post-Maidan years. “The minister will become an arbiter on these issues between Naftogaz and the Verkhovna Rada,” Kobal notes.

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Put in order in all oil field wells

Almost every segment of the fuel market in Ukraine (from the well to the gas station) has problems today, Director of the A-95 Consulting Company Serhiy Kuyun told: “ If we take oil production - this direction has been stagnating in Ukraine for more than 10 years. During this time oil production in the country has fallen by almost 30%, and so far there is no indication that it could return to growth.”

Eliminate the miners’ wages debt

There is a problem of wage arrears at state mines, now it reaches about 12 million USD. If we summarize it with the wages debt for August, the total figure might reach almost 36 million UAH, head of the Confederation of Free of trade unions of the Independent Trade Union of Miners of Ukraine, MP, member of the Committee on Energy and Housing and Communal Services, Mykhailo Volynets, outlines. As you know, in mid-August, about a hundred miners of state mines in the Donetsk region stopped traffic on the Kurakhovo-Kyiv highway for two and a half hours. They demanded that they pay their debts for almost three months of work.

Put in order in state mines area

The situation in the coal industry is more than complicated: it is plundered with the participation of the previous government. So far, miners have been running by the local undebosses, with the participation of whom the mines have been robbed for a long time, Volynets said. "The reform of state mines, which was widely publicized by the Cabinet of Ministers and former Minister of Energy and Coal Igor Nasalyk, envisaged the consolidation of state coal mines into the state-owned enterprise" National Coal Company.

Establish coal imports to Ukraine

The new minister will need to look for ways to resolve the problem of banning coal supplies to Ukraine, which became especially acute after the Russian government introduced restrictions, Volynets said: “Only a few companies received permission for limited deliveries: in particular, companies controlled by oligarch Igor Kolomoysky, holding Evraz and Arcelor Mittal, which owns mines in Kazakhstan, while the representatives of Arcelor said that they were allowed to import into Ukraine only 10% of the required volume (met coals and anthracite)).

Related: Ukraine's Ecology Ministry proposes to enlist Ternopil caves in UNESCO sites

As you know, Russia imposed restrictions on coal supplies to Ukraine from June 1. Ukrainian companies (in particular, metallurgists) imported almost 60% of coking coal from the Russian Federation (subject to restrictions). Against the backdrop of total coal imports to Ukraine in 2017, 19.8 million tons ($ 2,7 billion) were imported 15.8 After the outbreak of hostilities in Donbas, there were no mines that could produce coal from the anthracite group in the controlled territory.

It is necessary to replace the Soviet normative with European

An important issue that will be relevant for the new minister is the development of regulatory acts, including those that regulate the fuel trade, Serhiy Kuyun, director of A-95 Consulting Company, said: “Many documents are still not harmonized with the requirements of EU law, some of them were adopted in the Soviet Union.”

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