End power import fee, lift gas output – DTEK tells Ukraine

LONDON (ICIS)–Ukraine should keep its reformist momentum going, scrapping import electricity fees and aiming for higher domestic natural-gas production, the head of Ukraine’s leading private energy group DTEK told ICIS.

Efforts in these directions could quadruple cross-border electricity capacity by 2023 using the existing interconnectors and potentially turn Ukraine into a gas exporter in five years, DTEK CEO Maxim Timchenko said.

The statements came as Ukraine approaches the 1 July deadline for the liberalisation of the wholesale electricity market, while the dust from the electoral battle that took newcomer Volodymyr Zelensky to the presidency on 20 May has yet to settle.

Shortly after his inauguration, Zelensky called a snap parliamentary election whose legitimacy is currently being disputed at the constitutional court.

Electricity market reform

According to Timchenko, Ukraine’s political transition should not affect the transformation of the electricity market.

“1 July will be a historic date because Ukraine has worked towards transforming its power market for 15 years and we finally have the necessary level of preparation as regards secondary regulation, tests with trading and producing companies and the general predisposition of the key market players: it is time to switch to an open, transparent market,” Timchenko said.

DTEK’s CEO played down fears that the process could be delayed .

“What we hear from the statements of the national energy regulator and the government is that they support the 1 July deadline and will do anything needed for the market to start on that date.”

If the liberalisation of the wholesale market seems set to proceed, this is unlikely to happen to regulated retail tariffs. This, however, is not a major concern for DTEK, despite tariffs for households and industrial consumers being amongst the lowest in Europe.

“The transition will be quicker for industrial consumers. The regulator announced that industry tariffs will remain regulated for six months, with a 10% cap on price increases. At the end of this period, limitations will be lifted.”

The transition is bound to last “several months or even years” for households, which face the risk of a price shock as tariffs “should go up by more than three times to bring them to a feasible level from an economic point of view,” Timchenko said.

Barriers to power exports

Under the new wholesale electricity spot market model, Ukraine will be split in two bidding zones: a border zone including the two power plants synchronised with the EU’s grid overseen by ENTSO-E and a domestic zone covering the non-synchronised grid.

A full synchronisation of Ukraine’s grid with ENTSO-E’s would allow to unify the market and unlock vastly untapped cross-border potential, Timchenko said.

“We expect cross-border capacity to increase by more than four times when Ukraine will be fully synchronised with the EU grid, which should happen by 2023.

“Today we have a potential of 5TWh in exports, but with the synchronisation we can reach 18-20TWh in both directions based on the transmission assets that are already in place.”

Power import fees are another hurdle that the government needs to clear, DTEK maintains.

“The government should do everything it can to make free trade in both directions possible in the Burshtyn production island [which is already synchronised with ENTSO-E],” Timchenko said, adding that prices in a liberalised Burshtyn would provide the domestic wholesale market with a benchmark.

Gas independence

Questioned on the prospects for Ukraine once the transit contract for Russian gas expires at the end of the year, Timchenko said that the government should push for the full opening of the gas market, including unbundling incumbent Naftogaz, and increasing national production.

“We ask only one thing to the government: give companies the opportunity to participate in open auctions for new licences and adopt market rules that are equal for all participants.

“If these conditions are fulfilled, we can expect that Ukraine will be able to afford to export gas in five years, rather than thinking about its relationship with Russia,” Timchenko said.

DTEK’s ability to triple its gas output to 1.7bcm/year since 2013 from the same fields by using better technology proves that the same can be done elsewhere in the country, the CEO added.

Higher production would also allow price spreads between the UA-VTP hub and UA-Border prices to level off, he said.

By Riccardo Patrian and Aura Sabadus