Ukraine needs to reform its electricity sector, said Yuriy Ryzhenkov, Chief Operating Officer of DTEK, the largest private energy company in Ukraine. The need is twofold: to bring the tariffs to the adequate levels and the reform of the electricity market. “Right now the pool model is outdated and we need to move to a more market-based mechanism in pricing of electricity sector,” Ryzhenkov said.
In Ukraine there is a single buyer for electricity for all generators regardless to where this electricity goes. Companies sell their electricity to the pool which mixes it and sells it to distributors and exporters. “So we don’t sell the electricity we produce ourselves. We basically buy electricity from the pool and export it. But because of the low population tariffs we do lose money in Ukraine because consumers are subsidized by industry. The higher than economically justifiable tariffs for industry are damaging; they mean that businesses cannot develop fast enough on the one hand and on the other hand it hurts the generators because their tariffs are artificially low,” Ryzhenkov said.
He cautioned that such reform should not be pushed too fast at a time of recession so the economy should be on the way up when the reform is introduced. “However, the Ukrainian economy seems to be showing signs of revival so it might be time to push the reform through,” he said. Also the reform is necessary in the field of electricity distribution. Right now there is no incentive for distributing companies to be more efficient. “We need to introduce those incentives, and we need to introduce incentives for investors to come in to this industry,” Ryzhenkov said. Another problem in the distribution sector of Ukraine is that the playing field is different for local companies and foreign investors. “The foreign-owned companies operate on a cost plus system and make profits and have an incentive to invest; but at the same time we have local players which operate on a pure cost recovery basis and have no incentive to invest,” he said.
Ryzhenkov said DTEK is geared towards the EU and integration with the European energy market. “The major market for us is in Europe and the major opportunities are there. We’re interested in a relationship with Russia as well, especially since we share a large common border with Russia. We are ideally placed to be a bridge between the resources in Russia and Ukraine and the consumers in Europe,” he said.
Ukraine has signed the EU Energy Charter while Russia has adamantly refused to ratify it. Asked if the company experiences difficulties in its expansion abroad, he said: “There are more barriers in Ukraine than in Europe.”
Part of the company’s strategy is the integration of the Ukrainian system and the European system. “Right now we have the right to export electricity to the EU countries. We have won auctions in December last year for the annual capacity of 150MW for this year to Hungary, Romania, Slovakia and Poland and we are planning to establish some trading operations in these countries to trade electricity from Ukraine to the final customers there,” Ryzhenkov said.
DTEK is also looking to acquire assets. “We’re looking at the available acquisition assets that have a strategic fit with us,” he said. “The easiest ones would be power stations or coal mines that can supply the power plants in Ukraine.”
All electricity DTEK produces and exports comes from coal blamed for high CO2 emissions. Ryzhenkov said his company is studying the technology of carbon capture. “We’re trying to see if it is possible to use this technology in Ukraine. At the same time right now in Ukraine there is huge potential to reduce carbon emissions by at least involving the proven technologies which already exist. Carbon capture is expensive and has to be justified by the market; it has to be justified by the existing technologies. At the same time the traditional technologies for reduction of carbon emissions and improvement of consumption of coal in the units can help reduce substantially carbon emissions themselves,” Ryzhenkov said.
He acknowledged that funding is scarce. “Because of the Ukrainian political instability and because of the balance of payments last year we couldn’t access the external markets for funding effectively enough. We did work with the financial institutions from EU and from Russia... but that was pretty much it,” he said. “To do a major breakthrough in the field of energy especially when talking about ecological aspects you do need some government support in one form or the other. It could be in the form of guarantees, could be in the form of grants, but the support is needed and stability is needed for the external investors to feel comfortable with investing into the company for the long term because the payback period for all those technologies is long term anyway,” Ryzhenkov said.
And the same is the story for connectors. “One issue is funding but that issue can be resolved with the private companies participating. At the same time, we do need the long-term horizon there which can only be achieved with government guarantees or international financial institutions present,” he said. “The same issue is the regulatory framework because the lines where these interconnectors are located belong to the state-run companies and there should be a mechanism under which they will use these lines or permit the usage of these lines to a private player,” he said.
Asked about the investor climate, Ryzhenkov noted that there are very few foreign investors in Ukraine in the energy sector. “Until the privatization takes place of the generating assets I doubt anyone else will appear. At the moment the thing to do is to privatize the Ukrainian energy sector and that will help spark interest for the foreign players. At the moment they might be interested but the privatization has been announced several times over the last few years and it hasn’t happened so far so even though some have expressed their interest.
Efficiency is important. “If you look at Ukrainian electricity generation all of it has been built in the 50s, 60s and 70s so it is very old. It needs to be replaced. Some of the capacities have to be taken offline pretty soon. And because of that the reduction in electricity consumption overall does not mean a reduction in generation for the most efficient producers. So the more efficient you are the more likely you are to stay in the game and to produce this electricity,” Ryzhenkov said. “If the pricing is right for the electricity long term then there is an incentive for the companies to put in the new more efficient facilities which can also be more environmentally friendly.”