WILL UKRAINE FACE ENERGY CRISIS?

The launch of the electricity market takes place within the EU Third Energy Package. This is one of the conditions for cooperation between Ukraine and the IMF to receive macro-financial assistance from the EU in the amount of EUR 500 million this year. For market players - this is a new "window of opportunities" and huge challenges, while the end consumer can face the next energy crisis in the country

 

It is expected that with the introduction of a new model of the market electricity prices for non-residential consumers will grow by 5-6% during the longest month. This is also confirmed by the official statement of the Minister of Energy and Coal Industry, who appeals to the fact that in Ukraine the tariff for both the population and industry is 2-2.7 times lower than in neighboring Belarus and Russia.

 

During the penultimate meeting, the Cabinet of Ministers of Ukraine tried to temporarily settle the tariff for the population, which for today is significantly lower than the market one. First of all, the keeping of the tariff for the population has a political genesis and is connected with the elections to the Verkhovna Rada that will take place this month. For the population, the tariff, subject to its "freewheeling", may grow by 40%. But politically, the tariff will be kept hold by both the acting government and, potentially, the new one after the election of the parliament.

 

At the same time, with at least a 5% raising of the electricity cost, the number of subsidies in the country will increase by at least 150-200 thousand people, which is proportional to the population of Ternopil or Lutsk. Just imagine the burden on the budget from the transfer of the entire regional center on subsidies.

 

So far, the Cabinet of Ministers assigned special duties to compensate for the low prices for the population and stipulated it in NEC Ukrenergo’s tariff for the electricity transmission. But the casus is that such a decision will lead to the distribution of additional load between consumers, but not electricity producers, since electricity producers do not pay the transmission tariff, this tariff is paid exclusively by the consumer. According to the head of Ukrenergo and the NEURC calculations, such a compensation model will result in an increase in prices for industry by 42%. According to the NEURC official information, the additional burden on industry (and, therefore, on the population) and the budget as a result of the implementation of such a compensation model will amount to UAH 37 billion a year (as much as twice higher of the macro-financial assistance expected by Ukraine in 2019).

 

Therefore, the growth of the tariff for industry is inevitable. And this will result, first of all, in the growth of the cost of at least 1/3 of the "grocery basket" (such electric intensitive products as bread, milk, sausage) and the cost of communal electric transport services, the difference between the cost price and price for the passenger of which cannot be covered by the municipalities, as budgets are already formed, and no significant new revenues are expected.

 

Anomalous heat has been observed in Ukraine for the past three weeks that, due to an increase in the amount of cold production (industrial cold generators, office and domestic air conditioning systems), led to a significant risk of energy supply imbalance, resulting in "rolling blackouts" and unpredictable switch-offs of consumers. Heat generation, as the basis for balancing the power system, could potentially have failed to cope with the task, since 7 blocks of TPPs (3 – DTEK’s and 4 – Tsentenergo’s with a total capacity of 2,857 MW) fell beyond the reserve due to the lack of coal. For 10 days of heat temperatures coal reserves decreased by 10%. The situation was complicated by the withdrawal into the emergency repair of another 8 units of TPPs (6 – Tsentrenergo’s, 1 – Donbassenergo’s, 1 – DTEK’s with a total capacity of 2,320 MW). Weather conditions and the commissioning units at the Zmiiv and Trypillya TPPs made it possible to move beyond the crisis, but this is only the beginning.

Ukrainian TPPs, as a basis for balancing the grid, are currently not an example of the technology development. Therefore, the country's TPPs gradually reduce electricity generation for years. Upgrading of TPP units is a costly and long-term process. For example, the transition of one of the four power units of the Zmiiv TPP (Tsentrenergo, Kharkiv region) from the anthracite coal to the gas coal amounted to USD 50 million. This funding is currently the responsibility of the Ukrainian taxpayers, since Tsentrenergo does not have such funds for investing in its own energy division, while the European financial institutions do not credit projects that contradict the latest energy packages of the EU. It is expected therefore that the electricity generation will be gradually reduced. It is required to find an alternative to maneuvering at peak hours of the power grid load. The situation looks better in the hydropower industry.

First, Ukrhydroenergo PJSC is actively being credited from the European Investment Bank for the reconstruction of equipment and turbines, thus, only in February, another tranche of credit was received for EUR 22 million. Thus, with the keeping of the development trends of Ukrhydroenergo PJSC, Ukrainian HPPs can maintain the level of electricity production both through maintaining plants and the commissioning of a new Kaniv Pumped Sgorage Plant (PSP) and new units of Tashlyk PSP.

 

From the first view, the situation is more optimistic in the nuclear power sector. NPP is basic generation, which is permanent and is aimed to meet the basic needs.  The total generating capacity of the Ukrainian nuclear power sector accounts for a little more than 13 GW. This is a lot, but not enough to meet all the needs of the state. Moreover, NPPs are not able to quickly increase/decrease electricity generation. SE Energoatom NAEC got out of dependence on Russian fuel, switching to TVELs by American Westinghouse. And here one could remain calm, counting on this basic kind of electricity generation, but 12 of the 15 operating power units practically worked over their resources (according to the IAEA and Energoatom NAEC), but they still operate according to the decision on extending the service life. However, this is not a panic phenomenon, since each of the reactors has a projected margin of safety and needs major overhaul of the reactor vessel.

However, such actions cannot be limitless, and according to the IAEA, the 2nd reactor of the South-Ukrainian NPP will stop first in 2025. It means minus 1 GW of generating capacity. The wave of reactor stops will begin during the period 2030-2035, and only 3 out of 13 GW of generating capacity will be available in 2036 provided high-quality and professional servicing of power units of the NPP. It should be noted that this is quite complicated, because, according to SE NAEC Energoatom, power units of the Ukrainian nuclear power plants suffered emergency shutdowns in the first half of 2016.

Taking into account the above facts, the electricity generation in Ukraine, under a pessimistic scenario, will decrease thrice by 2035. And this means the coming of an irreversible energy hunger that will result in falling into the energy dependence on another state. And, most likely, getting out of the long-term gas needle of the northern neighbor, the country will have to get a new historical dependence on energy resources, in particular, electricity. According to the scenario of the energy development least resistance, it is necessary to increase the generating capacity of heat and hydropower.

However, Stakhanov's pace will fail here. First, the hydropower resource of the rivers is limited, however, the economically efficient hydropower potential in Ukraine is only used by 60%, therefore, only 4 GW are available for the development (equivalent to 4 power units of the NPP). At the same time, this figure is realistic, since today united power grids of Ukraine are capable of receiving 5.4 GW of electricity (according to SE NEC Ukrenergo). Secondly, the TPP development requires the use of additional resources of fuel minerals (unavailable coal or gas) or environmentally not compatible fuel oil.

A significant obstacle to the development of heat generation is the impossibility of crediting the construction of new generating capacities at the expense of international, first and foremost, European financial institutions (due to environmental constraints); therefore, such projects will either fit into electricity tariffs as an investment component or can be implemented for the expense of the state budget and domestic investments, which is rather limited resource and allows constructing no more than 2.3-3 GW in the next 7-8 years.

According to the technocratic scenario, the Ukrainian energy system should be enriched through the construction of new reactors. On average, the construction of a 1 GW unit costs USD 5 billion. The world practice shows that the construction of one unit will take a period of 10-12 years (this is the average world value). Such a project, however, is credit by countries that reduce nuclear dependence but require electricity. The 1 GWh currency earnings from electricity exports to the EU amounted to USD 2 billion. That is why the return of such a loan does not exceed 8-10 years and is a successful state investment. However, social and environmental risks appear in the area of construction of new reactors.

At the same time, an investment of USD 50 billion is required to restore 10 GW of power units, which is extremely difficult with regard to Ukraine’s credit record to receive an international loan. In addition, a problem exists with the design and construction of reactors, where Russia significantly succeeded, but geopolitically, it is extremely unfavourable partner. There are developments and implemented projects in China and the Czech Republic, but the risks of exploitation appear, the American school of nuclear power energy is ready to provide Ukraine with projects with a full cycle of construction, but this will double the investment cost of construction.

The "green" (alternative) energy is actively spreading worldwide and in some countries such as Germany, Iceland, Sweden, Denmark displaces and even replaces nuclear and thermal power. There are a lot of advantages: from a high level of environmental safety to the simplicity of construction (especially solar power plants) and quick payback.

Here is a simple calculation of the economic efficiency of alternative energy. Modernization of one power unit of the Zmiiv TPP (Tsentrenergo PJSC) costs USD 50 million, which will increase the generation of electricity by 10-15 MW (the project will take 2 years). Using 50-million investment, it is possible to construct and connect to the network 55-60 MW of solar power capacities in six months.

However, the project requires 110-115 hectares of land, which is extremely difficult in Ukraine with the highest factor of plough-disturbance of tilled areas in Europe. Thus, the issue of promoting land reform, the introduction of open and transparent land market is one of the main obstacles to the development of the alternative energy.

On the other hand, obstacles to the development cause the absence of green light for "cheap" loans for the development of the Ukrainian green energy. It should be noted that the economic calculations to determine the payback period of green energy are made based on the energy sales to the state at the "green tariff", which today varies in the country (set for each seller separately) from 15 to 19.5 euro cents per 1 kWh. Equivalent to hryvnia, the cost of the "green" energy in the wholesale market is about UAH 5.63.

For the consumer (taking into account the cost of transportation, losses and extra charges of the sales organization), the price grows up to about UAH 7.5 per kWh. It is clear that end users do not pay such a price - compensation of different tariffs takes place at the expense of cheap energy generated by nuclear power plants with the cost price of 1 kWh of about 42-45 cents - 13 times lower than the "green tariff". If NPPs disappear and their capacities are replaced by plants operating on a green tariff, Ukrainians (both domestic consumers and industry) will be forced to pay for electricity at least 5-7 times more (given the announced plans of the government on the gradual reduction of green tariff).

However, amendments to the Ukrainian legislation regarding green auctions for generating capacity of solar power plants of 1 MW and over will result in a significant slowdown in the solar energy market and lower foreign investment.

In 1991, when Ukraine inherited the power system of the Ukrainian SSR (it did not change much from that moment), household consumption did not exceed 30% of the total volume. Today, with a several-fold increase in the number of home appliances and the expansion of the housing stock of the country by 38% led to the absorption of household consumption to half of the total electricity produced. And here a problem arises of peak load on the energy grid in the evening. On the one hand, industrial facilities continue to operate, the number of urban electric transport and home appliances grows up.

It is in order to overcome these peaks, the electricity generation is increased through burning more coal at the Ukrainian TPPs. It should be noted that in such a culture, more properly its absence, energy consumption, energy independence of the country and the threat of energy hunger is the challenge not only to the government, but also to every citizen. For example, if to replace 10 incandescent lights with 15 energy-saving lamps in 15 million Ukrainian households, this will save 2200-2500 MW of electricity during the peak load hours - exactly as much as the Zmiivka TPP generates.

Such a project, with its comprehensive funding, will have a very prompt effect. At the same time, Ukraine has one of the highest share of energy consumption per USD 100 of GDP - 42, with China - 14, Germany - only 4. Therefore, along with the modernization of power generating capacities Ukraine should become the European leader in terms of the tendencies of introducing energy saving technologies both in industry and everyday life, forming a culture of rational use of electric energy. And this is the name of the entire government program.

Thus, Ukraine will likely be restored after the rapid rise in electricity prices primarily due to lower energy consumption at the household level and energy saving policy. But - a great energy crisis is ahead related to obsolete technologies and generating equipment, more than 50% of which will be decommissioned in the next 10 years. This is a challenge the energy industry and the entire population of the country currently face.