Atoms of Security

14 March 2016, 12:00

Amidst economic crisis and military conflict, the power generating industry of Ukraine had to stand serious trials. It was a reliability test for the United Energy Systems of Ukraine (UESU), the centralized power generation and supply grid system. Given the shortage of anthracite coal (it is mainly extracted in the occupied parts of the Donbas), the loss of a number of thermal power plants (TPPs) in the occupied Donbas, and the third low-water season in a row preventing hydro power plants from operating at full capacity, the UESU worked stably only thanks to its nuclear power component in the autumn and winter seasons of 2014-2015 and 2015-2016. As of the end of 2015, the share of nuclear power in the electricity market was 57%, and in 2014, 50%. These are the best performance results in the past 10 years. This is despite the fact that the country's 15 NPP units account for only 13.8 GW of installed capacity, i.e., for about 25% of the country's total generating capacity.

A Cinderella of Ukraine’s power sector

This is not the first time that nuclear power industry provided a life-line to the country's power sector. Due to the economic crisis that followed the collapse of the USSR, 1993-1995 were the critical years for the UESU. Prices for traditional energy sources surged, resulting in rolling blackouts. They were due to the fact that TPPs could not afford to buy enough fuel to ensure sufficient energy production during consumption peaks, and the country lacked capacities to maneuver between different sources. Meanwhile, nuclear power plants operated safely and stably. In late 1995, unit 6 of Zaporizhzhia NPP was commissioned and put into service, making it the largest in Europe.

In 2004, two more power units were put into operation: unit 4 of Rivne NPP and unit 2 of Khmelnytsky NPP, which meet all modern nuclear safety requirements. Ever since Ukraine gained independence, no new TPP units have been built, and most TPPs are mostly privately owned.

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On the one hand, all governments maintained the rhetoric of how important nuclear power generation is. It is also reflected in program documents, such as the Energy Strategy of Ukraine until 2030 and decisions of the National Security Council, supported by Presidential Decrees. The latest National Security Strategy as of May 26, 2015, also states that to ensure the country's energy security, priority is given to the development of the nuclear energy sector, along with power generation from renewable sources. Of course, this includes compliance with the latest standards of environmental, nuclear, and radiation safety.

On the other hand, all governments used nuclear energy to solve purely tactical tasks and achieve their obvious electoral or lobbying objectives. Amidst permanent elections, electricity tariffs for households were kept at the minimum that was three times lower than its real cost. Companies owned by financial and industrial groups close to governments, not to mention state-owned mines and water utilities, enjoyed their support in the form of discounts to purchase electricity on the Wholesale Electricity Market (WEM). Since our WEM has only one customer to this day, the state-owned Energorynok, all types of generating companies have to sell their electricity to it. State-owned NPPs and HPPs sell it at regulated tariffs set by the National Electricity Regulatory Commission (NERC). To keep household tariffs low, the regulator raises electricity prices for industrial consumers to compensate for the losses of electricity suppliers, that is, mostly privately owned regional power companies (oblenergos). This phenomenon is called cross-subsidization, and is an economic absurdity. Globally, with the exception of Ukraine and Belarus, electricity prices for industrial consumers are about 30% lower than household tariffs. Based on the latest data, the cost of cross-subsidization in January 2016 amounted to UAH4.66 bn, despite the fact that household tariff was raised twice in the past year.

Since the share of nuclear generation in the market is significant and amounted to 44-50% in different years, and even to 57% in 2015, all governments kept the tariffs for electricity produced by NPPs low in order to avoid raising household tariffs and to maintain the market average in the WEM. The price of power generated by state-owned NPPs is less than half of that for TPPs. Under Azarov's government it was 1/3. The rate of the state-owned Energoatom, the operator of all Ukrainian NPPs, was reduced on January 1 to 41.9 kopecks per 1 kWh. Even though it is only 0.7% lower than in the previous year, the company will lose about UAH 248mn if generation stays at the 2014 level (82.6 bn KWh). Another important issue is that the market underpaid Energoatom over UAH 4bn for the electricity it has already supplied in 2015 alone, as consumers are increasingly failing to pay for it.  With the debts from previous periods added, the aggregate debt of Energorynok to Energoatom now amounts to the painful UAH 10bn. Neither Energorynok nor relevant ministries know how to reimburse these amounts.

As of the end of 2015, fuel factor and spent fuel (SNF) management accounted for 52% of Energoatom's tariff structure. The investment component was a mere 11%. By contrast, European NPPs allocate at least 30% of the kilowatt-hours price to the investment component. As the lifetime of Ukrainian NPP units is being extended beyond their installed life, the need for a construction of the centralized SNF storage grows, and the completion of the Tashlyk PSPP is needed to cover the shortage of maneuvering capacities in the unified energy system, the rate is disastrously low. The budget of Energoatom investment program for 2016 is only UAH 3,993mn, which is insufficient for its development and, above all, for the construction of new generating capacities.

Ukraine and European energy security in the nuclear sector

Ukrainian social and political crisis, followed by the Russian occupation of Crimea and destabilization in the South-East forced EU member-states to take measures to ensure reliable energy supplies beyond the traditional oil and gas, and to start talking about EU energy security.

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On May 28, 2014, the European Energy Security Strategy was released. It was developed on the basis of a detailed study of the European energy security conducted by a team of European experts (and published on June 16, 2014). In section 7.2, "Uranium and Nuclear Fuel," the Strategy states that Russia is a key competitor to European companies in terms of nuclear fuel production, and that it offers integrated investment packages for the entire nuclear generation chain. In this context, it is particularly important to watch investment in new NPPs built in the EU with non-European technologies: it is necessary to ensure that they will not depend on Russia for the supply of nuclear fuel. The option of supply diversification should be a mandatory criterion in any new NPP construction investments. Moreover, all NPP operators need diversification as well. This is absolutely a game changer in European energy policy.

Diversification of nuclear fuel supplies and services at different stages of the cycle has been considered in Ukraine for the past 15 years as one of the main components of energy security, as recorded in the new edition of the National Security Strategy. Compared to the diversification of supplies of traditional energy sources, the situation with NPPs is more complicated, since nuclear fuel assemblies (FA) for Ukrainian reactors are produced by only two manufacturers in the world: the Russian TVEL and the Japanese-American-Kazakh Westinghouse.

Ukraine made the first steps to diversify its nuclear fuel supplies back in 2000, when the US-Ukraine Nuclear Fuel Qualification Project was launched, involving FAs manufactured by Westinghouse Electric. In 2014 and the first half of 2015, efforts were also made to diversify services at different stages of nuclear fuel cycle. In spring 2014, Energoatom extended its contract with Westinghouse for the supply of nuclear fuel to Ukrainian NPPs; on December 30, 2014, an addendum to the contract was signed to supply additional volumes in case of emergency. On April 24, 2015, Energoatom signed a contract for the purchase of U-235 enriched uranium with the French company AREVA. Enriched uranium is supplied for the production of nuclear fuel for Ukrainian NPPs by Westinghouse to a plant in Sweden.

The establishment of a Ukrainian-Russian joint venture (Nuclear Fuel Production Plant PJSC) after TVEL OJSC won the competition for the transfer of FA technology in 2010 no longer meets the objectives of diversifying the sources of nuclear fuel. TVEL has almost equal ownership rights in the joint venture (50-1 share), with the Ukrainian shareholder, Nuclear Fuel SC (50+1 share), and coordination of bilateral decisions is mandatory. At the same time, in the license agreement for the transfer of FA production technologies, TVEL tries to attach to the operation of this joint venture the conditions, which are unacceptable for us and which enhance Russian influence on the supply of fuel assemblies to Ukrainian NPPs. For example, one of its clauses is the exclusive use of isotopically-enriched uranium and/or fuel pellets and cladding tubes for fuel elements (cartridges) manufactured in Russia. After the outbreak of the military conflict, the project was shelved. Even though the plant design underwent the government expert review, it was not approved by the Cabinet. In November 2015, the State Nuclear Regulatory Inspectorate of Ukraine denied Nuclear Fuel SE the license for plant construction due to the expiry of the deadline for the consideration of application documents.

However, Ukrainian NPPs remain largely dependent on the supplies of new nuclear fuel from Russia, while Westinghouse-manufactured FAs are still in pilot operation. Half of the reactor core at power unit 3 of the Yuzhnoukrayinska NPP is loaded with this fuel. In 2016, 42 Westinghouse fuel assemblies are planned to be loaded in the reactor of unit 5 of Zaporizhzhia NPPs. The slow pace of the implementation of FAs from non-Russian suppliers is explained by the need to address a number of engineering problems, primarily related to the fact that Westinghouse FAs are used jointly with the Russian ones, in the so-called "mixed areas," and adequate security needs to be ensured. According to experts, Westinghouse fuel assemblies have shown good results, and not a single case of cladding leakage was revealed during their operation. Let's hope that the diversification goal will be achieved in the next couple of years.

An important project for Ukraine's energy independence from Russia is the construction of the centralized storage of spent nuclear fuel for the operating power units of Rivne, Khmelnytsky  and Yuzhnoukrayinska NPPs. It is currently being implemented using the technologies of Holtec International (USA). Zaporizhzhia NPP has its own dry storage facility for spent nuclear fuel.

The operator of all NPPs, Energoatom, is currently implementing a program to substitute imported equipment of NPPs, involving major state companies, such as Turboatom, Electrotyazhmash, Malyshev Plant, and Sumy Machine Building. The R&D support of exploitation is also provided by Ukrainian entities.

Another way to minimize the dependence on Russia is to build new power units with the assistance of non-Russian companies. The debate on the need to complete the construction of power units 3 and 4 of the Khmelnytsky NPP has been going on since 2005, when the Cabinet issued the decree "On preparatory activities for the construction of new power units at Khmelnytsky NPP." This project was included in the current Energy Strategy until 2030 and in the Cabinet Program dated December 2014 as a priority task.

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Given the current state of Ukraine’s economy and the military conflict, finding investment for the construction of the new nuclear power units within the country is unrealistic, and external financing is necessary.

On June 15, 2015, the Cabinet issued Decree No. 671-r "On launching the Ukraine-EU Energy Bridge pilot project" addressing the issue of investment for the new constructions. It proposed to raise funds for the Khmelnytsky NPP-3,4 construction under the guarantee of a long-term contract for electricity supply from its power unit 2 to Poland, making it part of the Burshtyn Energy Island. On July 31, 2015, the Ministry of Energy and Coal Mining approved the Action Plan to implement the project planned to be completed in 2017.

In January 2015, the Ministry of Energy and Coal Mining held a meeting on the construction of Khmelnytsky NPP-3,4 to discuss the reliability of the existing constructions and the possibility of using VVER-1000 reactor plant manufactured by Skoda on the basis of the Conceptual Solution agreed in October 2014 with the State Nuclear Regulatory Committee, the Ministry of Energy and Coal Mining and the Ministry of Regional Development and Construction of Ukraine in view of the modern, post-Fukushima safety requirements. However, in early 2016, the Ministry doubted the feasibility of Khmelnytsky NPP-3,4 construction. This is stated in the report on the implementation of the CMU Program Ukraine-2020, published on its website.

The Ministry saw the risks of using the existing constructions and requested an additional independent examination of their resilience and compliance with the safety requirements to the operation of nuclear power plants. In addition, according to the Ministry, the engagement in the construction project of Skoda JS a.s., a Czech company, also carries risks, since it is owned by a legal entity registered in the Russian Federation. "Skoda JS a.s. does not manufacture the equipment, but orders it from the Russian Federation," the document says.

The arguments provided by the Ministry of Energy and Coal Mining to reject the Energoatom proposal are surprising. In their interviews, the Ministry's management also said that electricity consumption in the country is declining, therefore, the construction of new nuclear power units is not feasible. Indeed, power consumption in 2015 dropped considerably, especially in the production sector – by 17.8%. By quoting such arguments against the construction of the new units, the officials who define and implement the state policy in the energy sector are actually stating that they do not believe in the recovery of the Ukrainian economy in 5-8 years, because if the construction works at the Khmelnytsky NPP site begin today, it is the time period required to put the units into operation. The statement regarding the production capacity of Skoda JS a.s. is also inaccurate. The company has the necessary production facilities, geographically located in the Czech Republic.

Fuelling the economy

It doesn't take a great economist to understand that the implementation of such major energy and export-oriented projects would provide an impetus for the development of the internal market. The more so that, according to Energoatom expert estimates, possible share of Ukrainian manufacturers in the project would be about 70%. It would revive not only power engineering, instrument engineering, high-tech security and process control systems production, but also the related industries of reinforcement steel, pipes and cement, and the construction industry. The R&D support for the project would also be required, making it possible to use the potential of Ukrainian scientists and engineers and provide incentives for young people to study science and engineering.

If the country wants to develop, those in power should abandon populism and stop solving their political tactical tasks at the expense of the energy security. Such approach can compromise not only the nuclear energy sector and the economy, but ultimately the society in general.

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