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Why Ukraine reached stalemate in deep energy crisis?

Author : Olena Holubeva

Source : 112 Ukraine

The authorities still have not demonstrated any progress in resolving the crisis in the energy sector
12:00, 14 July 2020

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The authorities still have not demonstrated any progress in resolving the crisis in the energy sector. One of the important stages, which included an increase in the tariff for the transfer of 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 (oblenergos), - ed.), failed. Last Saturday, National Commission for State Regulation of Energy and Public Utilities (NCSREPU) was not able to increase the tariff of the state operator of backbone networks from 5 USD to 12 USD per MW / hour, increasing it slightly - to 8 USD MW / hour. This will lead to a slight increase in the price of electricity for violently protesting against the increase in industrial consumers - prices for them will rise within 5%, experts say. At the same time, the new tariff will not allow to fully cover current payments to Guaranteed Buyer state enterprise, to which Ukrenergo will compensate for the shortage of funds for fulfilling special obligations at a high "green" tariff, as well as PSO for the population. This means that if the issue of attracting bank loans to pay off accumulated billions of dollars is not resolved in the near future, the rules of the game on the electricity market are changed at the legislative level, the crisis will worsen, debts will continue to grow, and the threat of bankruptcy of Ukrenergo will become more realistic. Soon, authorities may face the need to abandon the artificial containment of electricity prices for the population.

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Why the tariff was increased

As a result of fulfilling the obligations undertaken by the state to maintain the ability of the population to buy electricity at a price lower than the market (the first 100 kW - 90 kopecks (including VAT), and the rest - at 1.68 UAH (including VAT) ), and at the same time to pay the “green generation” price twice as high as the market - about 5.6 UAH at an average market price of 2.5 UAH (1 USD= 27.1 UAH), a very serious bias was formed, which provoked a serious crisis of non-payments and an increase in debt.

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Reduced electricity consumption due to the warm winter and Covid-19 exacerbated the situation.

Guaranteed Buyer state enterprise mired in debt. The debt to green generation, in which a significant part is the projects implemented by foreign investors, reached about 590,000 USD in the first half of the year, and by the beginning of August, it is expected to grow to 738,000 USD. Over the past four months, the level of settlements of the "green generation" did not exceed 5-10%, which created serious problems for the functioning of enterprises, said the chairman of the Ukrainian Renewable Energy Association, Oleksandr Kazakevych.

According to him, there are serious problems in servicing bank loans and interest rates on them. In addition, problems began with the payment of taxes and salaries to employees: profit tax of generation enterprises is paid according to the calculation method, that is, for the entire amount of electricity for which they must receive payment. In the current situation, they do not have the means to fulfill these obligations.

Guaranteed Buyer state enterprise has also accumulated debts to Energoatom, which is selling it without fail 80% of the electricity (as part of the PSO). As of May, it reached 185 million USD, and, according to Petro Kotin, president of the Energoatom NAEC, it increases by 74,000 USD every month. This creates problems in payroll calculations and the purchase of fuel for nuclear power plants. In June, Energoatom was even forced to take a large loan – 14,700 USD from Taskcombank.

The operator of Ukrenergo backbone networks is obliged to compensate for the deficit of funds from the transmission tariff. Until recently, the tariff (5 UAH per MW / hour) was not enough for this, the debt of Ukrenergo had already reached 738 million USD. In order to cover debts and ensure rhythmic payments in full, the rate of the state operator should have been increased to 22 USD MW / hour. However, NCSREPU previously approved an increase of half less, to 12 USD MW / hr.

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Industry against higher transmission tariffs

The decision on a possible increase in tariffs was met with a flurry of criticism from large industrial enterprises and relevant Associations representing their interests. Despite the fact that according to calculations, with the increase in the Ukrenergo tariff to 12 USD, the current price for end consumers could rise by an average of 16 kopecks per hour from the current level, which is not higher than the market price in 2019, industrialists said about the upcoming catastrophic consequences.

"How can we compare prices with 2019? There was no crisis in 2019. The economy was growing. There was no Covid-19," head of the Transport Federation Volodymyr Husak states. He assured that over five months of the year, industrial production fell by 10%, freight rail transportation decreased by 16%, and passenger transportation by 43%.

"With the adoption of a decision (to increase the transfer tariff), metallurgists will pay an additional 191 million USD per year. And this despite the fact that last year metallurgists have already suffered 1,2 billion USD losses," said Oleksandr Kalenkov president of the association of enterprises Ukrmetallurgprom. “You are pushing the products of enterprises that already suffer losses beyond the limits of all possible not only profitability but also the ability to cover real and variable costs. In reality, enterprises, where electricity has a large share in the cost of production will be forced to reduce volumes production and stop," he said, recalling that a similar position in the course of public discussions of the tariff were ferroalloy and electrometallurgical plants.

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Representatives of the Zaporizhya Ferroalloy Plant and the Marganetsky Mining and Processing Plant also tried to speak at a meeting of the regulator, however, for technical reasons they could not do this.

The call to prevent a double increase in the tariff for electric power transmission from August 1 to the Cabinet of Ministers and NCSREPU was also made by the innovative electric steelmaking complex Interpipe Steel. The company said that the proposed tariff increase would increase the cost of electricity for metallurgists by 13%.

"According to the results of the first half of 2020, domestic metal enterprises significantly reduced steel production.  Only Interpipe Steel for 5 months of this year reduced production by 17%. In addition, Interpipe enterprises continue to operate amid a sharp decline in demand for products. In the first half of the year, production volumes decreased by 30-40%. The outlook for the second half of the year is also negative. An increase in the tariff for the transmission of electricity will mean a blow to 250,000 people - workers of the mining and metallurgical complex and 600,000 people, taking into account allies," the company said in a statement.

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Our enterprises has 11,000 employees, and about 50,000 members of their families depend on whether the factories will continue to work in the current conditions. Moreover, the demand for our products in the domestic and foreign markets has fallen sharply amid the economic crisis caused by the pandemic. Today 85% of our products are exported, and the rise in the price of electricity will lead to disastrous consequences - up to a complete loss of sales in foreign markets and the shutdown of our enterprises,” said Denys Morozov, Interpipe CFO.

The Federation of Employers also urged President Zelensky not to allow raising the tariff, where they calculated that in the event of a double increase in the tariff, the real sector of the economy would pay an additional 425,000 USD, and industry – 315 USD.

Good for nothing

Having listened to all the parties, last Saturday NCSREPU voted for raising the tariff to 12 USD. The decision did not get enough votes for approval: the commission representatives retired to a closed meeting. According to its results, they reported that from August 1, the tariff will be increased to UAH 8 USD MW / hour. In part, the increase will be offset by a decrease from August 1 on the tariff for electricity distribution services, on average in the country for the first voltage class - by 2%, the second - by 1%. Relevant decisions were also approved at a Saturday meeting.

Thus, final prices for the industry will rise slightly - on average by 5%. At the same time, the funds will not be enough to cover Ukrenergo’s current obligations to Guaranteed Buyer state enterprise, which will put the network operator in need of raising loans in a larger amount than originally planned. The analysts assure that if loans cannot be raised at all, and no other tools for resolving the situation are proposed, it will still have to return to the issue of raising the transfer tariff.

The way out of the situation could be a decision to release prices for the population into a free float, however, the authorities still cannot decide on this. Acting Minister of Energy Olga Buslavets recently reiterated that electricity tariffs for the public would not increase. "I want to reassure our population, which has an approved electricity tariff. It has been unchanged since 2017. And, as the Prime Minister has repeatedly emphasized, no one is preparing a decision to raise this tariff," she said.

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This fall, this position will change under the pressure of circumstances. This can happen if the points provided for in the memorandum are not implemented at the legislative level, in particular regarding tariff restructuring. In early July, after the Rada did not agree to consider bill No. 3658 in the second reading according to the shortened procedure, it became clear that MPs would not accept it before leaving for the summer holidays. Recently there were reports that the bill could be considered at an extraordinary meeting on July 14.

"If the law is postponed" after the holidays, "this threatens the industry with default," said Andriy Konechenkov, head of the board of the wind energy Association.

In this difficult situation, the government behaves strangely - like an ostrich, which hides its head in the sand, experts say. In fact, the Cabinet of Ministers threw the problem to Ukrenergo and continues to remain inactive. But the government, not the operator of the backbone networks, should seek the opportunity to attract loans to pay off debts, perhaps issue government bonds (to cover debts). This is the state’s function.

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