Dear Mr. Oligarch

15 March 2017, 15:45

The ongoing blockade of trade (predominantly in coal) with the occupied parts of Donetsk and Luhansk oblasts (ORDiLO) has stirred a heated debage. In response, members of the Government and Presidential Administration have been taking every effort to make statements that should make society think as follows: Ukraine’s thermoelectric generation system has no reasonable alternative option, but to buy anthracite coal from ORDiLO. If the current blockade continues and halts the delivery of anthracite coal from those parts of the Donbas, the country will face a deficit of electricity and massive blackouts. Any other source of coal for thermal power stations will lead to a spike in electricity prices for households.

The analysis below shows how misleading each of these statements is when faced with facts. At this point, they rather look like an attempt of Ukraine’s most influential pro-Russian oligarch Rinat Akhmetov to preserve the mechanisms ensuring Ukraine’s socio-economic support of the occupied territory of the Donbas. The price for that is his pledge to help preserve the current fragile majority in parliament.

Unnecessary anthracite addiction

The dependence of Ukraine’s electricity generation system on anthracite coal from the occupied territory is linked directly to the lobbying of the interests of Akhmetov’s DTEK (anthracite sections of the business, primarily) through the officials of the Ministry of Energy and UkrEnergo, the energy network operator. These officials and entities are in charge of building the balance of Ukraine’s energy system. This impact of this lobbyism was particularly visible in 2016.

Based on the statements of the Energy Ministry, the facilities on the government-controlled territory generated 149.66bn kWh in 2016. This was almost as much as 150.03bn kWh generated in 2015. Meanwhile, EnergoAtom, the national nuclear power generation operator, produced 6.68bn kWh less in 2016 compared to 2015. The output at Zaporizhia Nuclear Power Plant, the key competitor for Akhmetov’s anthracite thermal power stations, shrank by 8.28bn kWh. The amount of energy generated at NPPs in Western Ukraine barely changed in 2016 compared to 2015. Overall, the amount of electricity generated by TESs on the government-controlled territory went from 46.56bn kWh to 49.9bn kWh.

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A closer look at individual power stations that use various sorts of coal reveals more interesting details. Zakhidenergo TESs operating on gas coal in Western Ukraine cut their output from 17.26bn to 14.82bn kWh. DTEK’s Zaporizhia TES, also gas coal-based, followed suit (down from 5.9bn to 5.22bn kWh). Meanwhile, two other power plants that are part of Akhmetov’s DTEK and use anthracite coal (Kryvyi Rih and Pryndiprovska TESs) increased their output from 4.07bn to 7.69bn kWh. Power generation facilities on the government-controlled part of the Donbas show similar dynamics. The anthracite coal-based Sloviansk TES increased output from 2.35bn kWh in 2015 to 2.99bn kWh in 2016. The gas coal-based Kurakhovo TES produced virtually equal amounts of energy in 2015 and 2016.

Overall, seven big anthracite coal-based TESs located in south-eastern Ukraine (Dnipro, Kharkiv and Donetsk oblasts) generated 17.65bn kWh in 2016, up from 11.05bn kWh in 2015.

After the government imposed a “state of emergency” in the energy sector, driven by the impact of the blockade, some changes seemed to kick off. On February 18, 2017, Ukraine’s NPPs generated 303mn kWh of power. This was just 91.2% of their full capacity, but it still was a record high of the past thirteen years when the nuclear power generation sector had been discriminated against in favor of Akhmetov’s DTEK. Yet, on February 19, DTEK’s lobbyism became visible: administrative restrictions (a cut by 0.8 kWh at any one time for EnergoAtom) drove the output of nuclear power plants across Ukraine down to 289.3mn kWh (it was thus underperforming by 18.9mn kWh).  From then on, the accomplishments of the emergency regime began to fade rapidly.

On the night of February 25, a turbine generator at Section 2 at the Rivne NPP was shut down to comply with the restriction plan. As a result, the section lost 50% of its capacity. On February 26, NPPs generated 31.8mn kWh of electricity less than before. At the same time, the output plans for Zaporizhia NPP, the key rival of Akhmetov’s anthracite TESs in southeastern Ukraine, were limited to 4.62 mWh out of 6 mWh of their full capacity. This administrative restriction of NPP power generation cut the output from 62.8% on February 19 to 61.8% on February 23, to 59.3% on February 27. Meanwhile, the share of coal-based TES sections grew from 18.2% on February 23 to 21.1% on February 27.

This administrative restricting of NPP generation in late February and early March hardly has any explanations other than lobbyism of DTEK’s interests by the controllers of UkrEnergo. A traditional argument is that this restriction is justified by the fact that NPPs are not flexible in terms of electricity output when consumption falls during the day. But this statement does not explain why NPPs are facing today’s discrimination.    

In the current circumstances, anthracite coal-based TESs should be used exclusively to balance out the energy system in the peak periods of electricity consumption. This is why their electricity is rated at a threefold price compared to that of NPPs. If this approach was used, NPPs could generate 27.6bn kWh over November 2016-January 2017, the first three months of the heating season. In actual fact, they produced only 23.55 kWh, i.e. over 4bn kWh less than possible. This forced Ukraine to consume an additional 1.6mn tons of predominantly anthracite coal in those three months. If NPPs operated at their full capacity, this figure could have been half of what it actually was. This is how the Ministry of Energy continues to push Ukraine’s energy system into the overproduction of expensive electricity from anthracite coal, while cheaper nuclear power is generated in smaller amounts (1 kWh of electricity from TESs was 97.7 kopecks in the first half of February 2016, while electricity from NPPs cost 42.2 kopecks).

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A permanent state of emergency

Most measures listed as part of the “energy emergency state” plan of February 17 should have been implemented a long time ago on a permanent basis. The key ones are the minimum operation of anthracite-based TESs, maximum use of hydroelectric and nuclear power stations, as well as the TESs that use gas coal which is plentiful on the government-controlled territory. The deficit anthracite coal should only be burned in cases where other capacities can fail and the risk of massive blackouts emerges. Today, it is burned as if this sort of coal was plentiful on the government-controlled territory. 

When criticized for increasing generation at TESs (at the expense of NPPs), DTEK has been claiming that nuclear power generation entirely relies on the delivery of fuel from Russia while thermoelectric generation uses coal from Ukrainian enterprises. Energy Minister Ihor Nasalyk and Rinat Akhmetov’s lobbyists in power have recently been exploiting this argument actively.

However, anthracite coal from the occupied territory cannot be considered Ukrainian until the occupied parts of the Donbas return under government control. Nor can its deliveries be more reliable than the fuel for NPPs from Russia supplied under long-term contracts.

Also, it is wrong for Energy Minister Nasalyk to permanently focus on the dependence of Ukrainian NPPs on Russian fuel elements: it is his duty to keep up the pace of diversification of nuclear fuel for Ukraine, a process that actively evolved in 2015-2016.  

Ukraine was using exclusively Russian nuclear fuel in the first six months of 2015. In the second half of 2015, the share of nuclear assemblies supplied by the Swedish Westinghouse reached 10%, and exceeded 38% in the first six months of 2016. When Ihor Nasalyk became Energy Minister in May 2016, a noticeable rollback took place: Westinghouse’s supplies of fuel for Energoatom went down to 31.2%.

If the government continues to increase deliveries of nuclear fuel for NPPs from Western transnational corporations, the statement about reliance on Russian assemblies will no longer be reasonable. Meanwhile, the problem caused by the reliance on anthracite coal from uncontrolled territory will only grow worse. In any case, it is better to import fuel assemblies for nuclear power plants (their electricity being much cheaper) than to generate power from coal extracted in the occupied territory.

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Is it really too expensive?

Based on the formula from the National Energy and Utility Service Regulator, the price of the coal for TESs is currently UAH 1,730, as stated by Minister Nasalyk. In August 2016, bulk carrier Coronis delivered 71,700 tons of anthracite coal for Tsentrenergo from South Africa at USD 4.57mn. A ton of it thus cost UAH 1,600 at the then interbank exchange rate. In early November 2016, 78,700 tons of South African anthracite coal were delivered for DTEK. According to the State Statistics Bureau, this delivery of coal cost USD 5.27mn or UAH 1,700 per ton at the then exchange rate. 

This shows that Ukrainian TESs could import South African anthracite coal at UAH 1,600-1,700 per ton in August-November 2016. This is perfectly comparable to the infamous Rotterdam+ coal pricing formula currently used in Ukraine. Yet, Ukrainian TESs only bought 150,000 tons of South African anthracite coal over those four months (they could have purchased at least 1.8mn tons as allowed by the capacity of Ukrainian ports). Starting from May, this amount could have been higher. It wasn’t. Why? Apparently, the priority was to purchase coal from the occupied territory, while the South African imports was more for a show and justification of the pricing formula constructed by the regulator.

Another powerful argument fed to the wider public to justify continued purchase of coal from the occupied parts of the Donbas or fuel assemblies from Russia (which is used intensely by DTEK lobbyists in government) is that electricity will be far more expensive if generated from the more costly South African anthracite coal. Minister Nasalyk, too, states that utility bills will rise at least 20% and the government will have to spend UAH 15bn annually to buy it.

In fact, no serious spike in electricity prices should be expected. An increase of electricity output by NPPs (which cost 0.47 kopecks by contrast to UAH 1.36 per kWh in early February) can easily compensate for the costs of TES generation operating on imported coal.

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In 2016, the share of NPPs in electricity generation was 53.74%, compared to 31.78% for TESs. If the share of NPPs grows to 59-61% annually, the price of electricity will be around 95-93% of the current price.  

Moreover, anthracite coal can be replaced with the coal extracted in the government-controlled territory. Switching anthracite-based sections of TES to gas coal would make sure that nobody could, in the future, bring in Russian or Donbas-extracted anthracite coal disguised as fuels imported from South Africa, USA or Australia.

Based on the figures provided by Minister Nasalyk, the switching of two blocs at Zmiyivska TES (their total capacity is 350 MW) to gas coal would cost UAH 240mn. This probably includes the price of corruption through overpriced public procurements that is traditionally included in the rates. According to his estimates, the switching of the 710 MW Sloviansk TES would cost UAH 500mn. Akhmetov’s DTEK has more powerful facilities, so the switching would be more costly. According to estimates by DTEK’s Maksym Timchenko, the transfer of three of the group’s anthracite-based TESs to gas coal would cost around UAH 0.6bn.

These figures should persuade an average Ukrainian household that such a reconstruction is impossible. Yet, Sloviansk TES burned 1.4mn of the anthracite coal purchased from the occupied territory in 2016. It was worth UAH 2.4bn. Energorynok, the electricity market operator, paid UAH 3.71bn (less VAT) to Sloviansk TES in 2016. Given these prices, the investment of UAH 0.5-0.7bn to switch anthracite-based TESs to gas coal no longer seems so shocking.

Translated by Anna Korbut

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