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3 February, 2015  ▪  Oleksandr Kramar

New Energy Addiction

Opting for imports of coal and electricity from Russia on the background of the still existing gas and nuclear dependence makes Ukraine totally vulnerable to Kremlin's potential blackmail

After nine months of full-scale Russian aggression, involving not only the military invasion of Crimea and the Donbas combined with the information and ideological war, but also the outright trade, economic and energy blackmail, the recent decisions to re-orient the country towards coal and electricity supplied from Russia are puzzling. 

A country that for the last few years tried to overcome the negative effects on its sovereignty of its total dependence on Russian natural gas, today willingly chose to be dependent on imports from Russia of those same energy sources that could have provided the fastest path to its energy independence.

 

A staged collapse

Today, it is difficult to determine who exactly in the current government and/or in the country's energy sector has masterminded the dramatic "energy collapse that needs to be overcome at all costs." However, the fact that we are dealing with a problem that was artificially created as a result of criminal omission or criminal activity is glaringly obvious.

From August, when experts and the media started ringing alarm about the anticipated problems with thermal coal deliveries to Ukrainian thermal power plants, to November–December, when this led to massive blackouts, becoming a convenient excuse for strengthening the country's energy dependence on Russia, nothing was done to prevent this from happening.

This was especially manifest in the case of TPPs operated by Tsentrenergo State Energy-Generating Company, that are totally dependent on anthracite coal produced in Ukraine almost entirely in the territory of Donetsk and Luhansk oblasts occupied by Russian troops.

Even though Tsentrenergo as a public company should have set an example of how to solve coal problems through imports, coal stocks in its TPP's warehouses steadily waned: from 970,000 tons in July to 690,000 tons in August, 205,000 tons in September, 98,000 tons in October, and 58,000 tons in November, before being finally exhausted in December, which led to the shutdown of all power units at Trypillya TPP in Kyiv Oblast and at Zmiyiv TPP in Kharkiv Oblast.

This resulted in an absurd situation, when against the background of the critical and real gas deficit, due to the artificial shortage of coal, power and heat were generated at these plants by burning natural gas. The shortage of power in the system had to be compensated at the account of electricity generated by other power plants using gas-and-oil units.

When a warm spell arrived in the second half of December, rolling blackouts reached the unprecedented scale of 2–6,000 MW, which is equivalent to the power capacity of the country's largest nuclear power plants or thermal power stations. Representatives of energy companies and "experts" persistently stirred up hysteria in the media, claiming that power system deficiency amounted to 20% of the electricity market demand in warm weather, and predicted a full-scale disaster with the onset of the cold weather.

RELATED ARTICLE: Mission Possible: Survival Without Russian Gas

Their chorus was joined by Arseniy Yatseniuk, who at the Cabinet meeting could not think of anything better than stating that "If the temperature goes down, coal consumption will increase immediately and rolling blackouts will become massive," and urged the new Energy Minister Volodymyr Demchyshyn to settle the issues related to coal and electricity imports for Ukrainian power plants from Russia.

As if he did not advise the population from the same chair back in summer to switch to electricity as the main alternative to gas heating, as if during the next six months he was not aware of the growing problems with providing TPPs with coal, as if he has done everything in his powers to prevent the collapse in winter. Or as if he did not know that it's impossible to rely "on the treacherous and deceitful enemy," Russia, when planning to import the lion's share of coal from the aggressor country, which totally predictably blocked it at its border, and would do it time and again.

Even coal imports from South Africa arranged in rather inadequate quantities by the previous management of the Energy Ministry, which could have somehow resolved the situation with providing Ukrainian TPPs with fuel from alternative sources, were disrupted due to a corruption scandal. The media have reported enough facts to show that the prime cause for this was actually the desire of certain high-ranking Ukrainian government officials (with the chain leading to the management of the Presidential Administration) and energy sector structures to control the new profitable business scheme. Management reshuffle and even arrests of a number of departments’ heads and companies’ CEOs in the industry are also evidence of the intensive redistribution of the energy market.

However, the struggle of various business groups and decision-makers for the tender bits of the Ukrainian so-called energy market, and especially of government procurement, is a sad but true statement of facts. The real problem is not so much that the market has been redistributed and that the coal import margin, including its corruption component, will go to some other "influential people," as that due to the redistribution at this stage the country's dependency on Kremlin-controlled territories has increased.

According to media reports, recently the main participants of the meetings at the Ministry of Energy and Coal Industry of Ukraine chaired by Volodymyr Demchyshyn were Maksym Tymchenko, head of DTEK owned by Rinat Akhmetov, and Serhiy Kuzyara, who is close to the structures associated with Oleksandr Yanukovych. Needless to explain that both of these oligarch groups are exclusively interested in lobbying the schemes aimed at increasing Ukraine's dependence on coal and electricity supplies from Russia and Russian-controlled areas of Donbas.

Meanwhile, the information space regularly received signals of the artificial nature of the steady shortage of Ukrainian coal extraction. In particular, Hennadiy Moskal, head of Luhansk State Oblast Administration, called upon the government to resolve the issue of shipping coal from the warehouses located in Luhansk Oblast (142,000 tons of thermal coal still remained in Ukrainian-controlled territory). The problem with shipping it was caused by the sabotage of Donetsk railway management, which still remains in the Russian-occupied territories, while the Ukrainian government proved to be incapable of replacing it. After all, the mines of the Lviv–Volyn basin also have over 93,000 tons of coal, according to Mykhailo Volynets, Chairman of the Independent Trade Union of Miners of Ukraine. The Energy Ministry procrastinated until the last decade of December with granting independent legal personality to YuzhnoDonbaskaya Mine No. 3, which is located in the territory of Donetsk Oblast controlled by Ukraine, but used to be a part of the company with headquarters in Donetsk occupied by Russian troops. As a result, the mine's warehouses overloaded with fuel have accumulated 24,000 tons of thermal coal, while the mine itself on December 12 had to switch to emergency operation, reducing coal production to a minimum.

RELATED ARTICLE: Fueling Energy Independence

 

You get what you pay for

After preparing the public opinion, the large-scale "single option" coal and electricity imports from Russia and its subordinate districts of Donbas were presented as "the only possible rescue from the country's energy collapse."

During a press conference on December 29, Petro Poroshenko announced that on December 26 the deliveries to Ukraine of the coal purchased earlier in Russia were unblocked, and according to the agreement made on electricity imports, its supplies started at midnight on December 29, at the capacity of up to 1,500 MW. Dmitry Kozak, Russian Deputy Prime Minister, confirmed that Russia would supply electricity to Ukraine at surprisingly low Russian domestic rates (that are even lower than wholesale Ukrainian prices). The deliveries would also include about 0.5 million tons of critical ranks of coal per month, the price of which for January is reportedly set at about $73.

However, at the same time the President announced the intention to buy coal also on the occupied territories of Donbas in order to "block its illegal traffic" and "only in cases where we will be able to ensure that the received funds will be used to pay the miner's salaries." Even though it is totally clear that in any case this would mean making life easier and revenues higher for the region’s occupying authority, as well as creating a permanent threat of deliveries being sabotaged to put pressure on Kyiv with respect to Donbas or Crimea issues.

In parallel, instead of looking for alternative sources of coal in the world market, the Ukrainian government is arranging its supplies from Kazakhstan, even though such supplies would depend just as well on the goodwill of the Kremlin and may at any time be blocked.

RELATED ARTICLE: On the Road to Total Divorce

 

Gas: The Sequel

In the meanwhile, there is a growing threat that in February and early March the critical situation similar to that with coal that the whole country followed in December will be repeated, only this time with gas.

As of January 13, working gas reserves (minus 5 billion cubic meters of base gas) in UGSFs fell to 5.5 billion cubic meters. This figure is extremely low, taking into account that in less than three months of the heating season with mostly warm weather (which started on October 20), 6.3 billion cubic meters of gas were withdrawn from storage facilities. Recently, Ukraine consumed about 70-100 million cubic meters per day. And there are still more than three months of the heating season ahead, including the second half of winter, which is traditionally the coldest.

In December, natural gas consumption quotas were largely exceeded by district heating providers and industrial consumers. In particular, according to Naftogaz data, only from 1 to 20 December their consumption amounted to 197 million (27%) and 216 million cubic meters (31%). The irrationality of this excess of quotas by district heating providers which, same as the population, use gas for heating purposes, is evidenced by the fact that the population consumed 315.7 million cubic meters less than its quota allowed. At the same time, instead of completely turning off gas supplies to chemical industry enterprises that waste natural gas as a raw material for export production, the government supported the launch of additional capacities, including Dmytro Firtash's Severodonetsk Azot Association that was idle since summer.

The procrastination by the Cabinet and Naftogaz with adopting tough decisions to ensure compliance with gas consumption quotas by industrial enterprises, especially those using it as a raw material, inevitably brings nearer the gas collapse and the threat of the country left to freeze. It would be better losing additional 2–3% of industrial production in QI of 2015 than leaving tens of millions of people without heat in their homes or getting closer to another capitulation to the Kremlin, this time on the gas issue. Maintaining or, even worse, increasing the current rate of exceeding natural gas consumption quotas may lead to its overconsumption by the end of the heating season at the level of 2–2.5 billion cubic meters, making the country face exactly this kind of threat.

At the same time, Naftogaz from 9 to 24 December used only 350 million cubic meters out of 1 billion cubic meters of Russian gas paid for in advance for December. This policy of Naftogaz seems strange, since Russia may at any time suspend its supplies under one or another vain pretext to aggravate the situation in Ukraine. It would have been much more prudent to quickly withdraw as much of the paid gas as possible and to inject it into storage facilities. The more so that the pretext for reducing the supplies of gas even on advance payment terms, as we have already said, may be provided by the claim to Firtash's structures for the confiscation of 5 billion cubic meters of gas that are allegedly stored in Ukrainian underground storage facilities.

The above set of factors rapidly reduces the working gas stocks in storage to critically low levels, making the country potentially vulnerable to Russia's blackmail in case of simultaneous suspension of Russian supplies of electricity, coal, and natural gas. Reverse-flow gas supplies from Europe in this situation is not a cure-all solution. For instance, in October and November Ukraine imported 0.9–0.95 billion cubic meters of gas. Even taking into account that the gas capacity of connection pipelines ensuring supplies from Slovakia was increased starting December 15 to 40 million cubic meters per day, and that reverse-flow supplies from Hungary that started in January amount to several billion cubic meters of gas, the imports from the EU (including via the Polish pipeline) can be expected to increase up to 1.2-1.3 billion cubic meters at most in January and February.

RELATED ARTICLE: Diversification Pains

 

What to do?

Anthracite coal extracted in Ukraine only in the territory of Donbas occupied by Russian troops is if fact sold by very few countries. However, the market can offer enough coal that in certain mixtures can burn at the coal-fired units of Ukrainian TPPs designed to burn anthracite. Besides the hostile Russia, other countries that offer it to the global market include the friendly US, as well as Vietnam, China, South Africa, etc.

After all, despite the corruption scandal and the allegations of its unsuitability for Ukrainian TPPs, 240,000 tons of South African coal shipped to Tsentrenergo TPPs have been successfully burned. This means that we can and must find additional millions of tons of coal outside of Russia, Kazakhstan and the Russian-occupied Donbas territory. If we take full advantage of all available options, the first supplies could arrive to Ukraine already in March, when storage facilities stock is expected to be completely exhausted.

Besides, the capacities of TPPs burning gas coal that is in large supply today both in Ukraine and in Europe are not being used to the full extent, although electricity production can be significantly increased if this type of fuel is used. The overall capacity of the units operating today on gas coal (without the TPPs of Donetsk and Luhansk oblasts) is 5.8 GW. These are the three power plants operated by Zakhidenergo and the coal units of Zaporizhzhya TPP. Basing on the example of Zaporizhzhya TPP owned by DTEK, the production at such plants may be increased almost by a third: while the overall capacity of its units that can operate on gas coal is 1,200 MW, only 925 MW are currently being generated.

The problem is that all these plants still belong to a prominent lobbyist of the Russian interests in Ukraine, Rinat Akhmetov. Therefore, the government's task is to make the management of Akhmetov's DTEK stop lobbying Russian interests in Ukraine or the interests of its mines located in Donbas territories controlled by terrorists (as it is doing today), and to use all available reserves to reduce the country's dependence on Russian supplies. If required, certain assets should be nationalized, or interim state administrations introduced.

There will be enough time until the next heating season if in April or May the reconstruction of all TPPs thermal units designed for anthracite is launched in order to switch them to gas coal ranks. Recently, former Energy Minister Yuriy Prodan estimated the cost of reconstructing one boiler at a symbolic $1.5–2 million figure. In this way, dozens, or at most hundreds of millions of dollars that can be obtained from international lenders for target programs will be enough to forget by the next heating season about the need for anthracite coal that is in short supply. According to expert estimates, the project approval, construction and installation of the equipment may take from four to the maximum of six months. And this process can be started already today, in order to complete this stage by the end of the heating season and by the time of the gradual shutdown of energy units in May–August.

RELATED ARTICLE: After Gas

In the future, Ukraine will be able to build more TPP units burning lignite, more than 2 billion tons of proven deposits of which are concentrated in Central Ukraine. Despite its lower calorific value, it has been successfully used to generate electricity in Germany, Poland, Czech Republic, and several other European countries. Previously, lignite was neglected because of problems with selling Donbas coal, but now it seems it is high time to resume its production.

And finally, it's necessary to stop playing populist games and bring gas prices for all consumers to the market level. Firstly, to allow for its steady import from different sources. And secondly, to stimulate its production in Ukraine from deeper levels and from less profitable dormant mines. Experts estimate that this would help in the next several years to increase production to 5–6 billion cubic meters in the traditional gas-bearing areas of Western and Left-Bank Ukraine. At the same time, real fuel prices will help understanding the real demand for it in the Ukrainian market and creating effective economic incentives for introducing large-scale energy efficiency measures and investigating alternative energy sources.

In the meanwhile, the current situation with gas prices remains disastrous. In October, Ukraine imported natural gas from Europe at $316 per 1,000 cubic meters, while the price for 2015, according to Deputy Finance Minister Ihor Umanskiy, is set at $345. But even if, due to the drop in oil prices, the average price will be $280-300, still taking into account the exchange rate of 20 hryvnya to the dollar, the VAT and the shipping costs, the price of the cubic meter of gas for Ukrainian consumers should be at least 7-8 UAH per cubic meter, whereas today not only the population, but also district heating providers, nonprofit organizations and even commercial consumers are paying less.

During this heating season, the authorities still had at least some excuse to justify the dependence on Russian coal and electricity by the force majeure and the lack of time required for the large-scale diversification of supplies and the modernization of power generation facilities. However, in the next three to six months, it will have to clearly state its position with respect to the critical energy dependence on Russia formed as the result of switching to large-scale imports of electricity and coal and the Kremlin-controlled territories.

Telling tales about the impossibility of finding an alternative will not work for the next heating season, because until then there is every technical and technological capability to entirely give up any gas, coal and electricity supplies to Ukraine from (or via) Russia or Russian-occupied Donbas territories. If this is not done, there will be no more illusions left as to the ability of the current Ukrainian government to ensure the country's energy security and, consequently, its ability to withstand Russia's political blackmail.


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