INTERVIEW: Ukraine set for opportunities in electricity, gas sectors, DTEK CEO

LONDON (ICIS)–Ukraine’s annual electricity exports and imports with European countries could increase six fold once its grid synchronisation is complete, the CEO of DTEK, one of Ukraine’s leading private energy companies told ICIS in an interview.

Maksym Timchenko said Ukraine’s energy objectives lay not only in increasing its electricity exchanges with Europe, but also in ramping up gas production to take advantage of the country’s vast resources, balancing a large fleet of coal-fired power plants against higher targets for renewable generation and making headway on the energy reform front.

So far, DTEK has been the only Ukrainian company that could export electricity to Europe. This is because its 2.4GW Bursthyn thermal power plant was the only outfit synchronised with the grids of neighbouring Hungary, Poland, Romania and Slovakia. The rest of the country had been synchronised with Russia, Belarus and Moldova.

However, last year the European Network of Transmission System Operators of Electricity (ENTSO-E) signed an agreement with Ukrenergo, the operator of Ukraine’s unified power system for the integration of the grid with EU countries.

“The synchronisation of Ukraine and European energy systems has officially begun and [the country has to fulfil] a catalogue of requirements by 2022. After synchronisation is complete, electricity imports and exports between Ukraine and the EU could increase from 4-5TWh to 30TWh annually,”Timchenko said.

He explained that DTEK’s nine thermal power plants (TPPs) could operate in the ENTSO-E framework subject to frequency redesign.

Coal challenges

DTEK operates close to 19GW, or a quarter of Ukraine’s total installed capacity. Since most of its capacity is coal-fired, it relies on locally produced coal, its own coal production amounting to 24.8 million tons in 2017. Around 6% of the coal production is sold on the open market.

However, since the tide is generally turning against coal-fired generation, DTEK is also facing a number of challenges.

Timchenko said that under its commitments to the EU’s Energy Community, of which it is a contracting party, Ukraine has to make investments of €6.5bn to make Ukrainian TPPs compliant with environmental requirements stipulated under the Energy Community treaty.

“[Mean]while, no provisions are envisaged for compensation in producers’ tariffs,” he said.

Last year, there were speculations in the press that the introduction by the regulator NERC of the ‘Rotterdam Plus’ formula, may have helped DTEK to improve its financial position particularly after losses caused by the depreciation of the local currency, Russia’s annexation of Crimea and the onset of the military conflict in eastern Ukraine where DTEK holds important assets.

The Rotterdam Plus formula was calculated as the average price of the Amsterdam-Rotterdam-Antwerp coal index over 12 months plus a transport rate to Ukraine. The price is used as a benchmark in setting tariffs to industrial consumers.

However, Timchenko is keen to stress that DTEK had never received any state support, insisting that all of its investments were financed through capital markets.

Asset losses

He also pointed out that because of the military conflict in eastern Ukraine, DTEK no longer controls some mines and power plants.

According to an earlier company statement, the assets were seized by the so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR).

“[…] this has significantly reduced electricity production by our enterprises. In 2017, electricity output was 36.5TWh, which was 7.6% lower compared to the previous year, including due to loss of assets,” he said.

He added that DTEK had also started arbitration proceedings against Russia following its loss of assets in the Donbas region and Crimea.

Renewables

Timchenko, however, believes that Ukraine should also invest in renewable generation, noting that DTEK, together with Chinese partners had a 200MW solar project in southern Ukraine.

“Similarly to Europe, the role of coal will decrease [in Ukraine] and be replaced with renewable energy. According to the Energy Strategy of Ukraine to 2035, over the next ten years the role of coal-fired power generation in the energy sector will remain high, at 25-35%.”

According to the same document, Ukraine will have to raise €45bn to make its grids compliant with European standards. This has meant that, although Ukraine intends to have an installed capacity of 5GW of renewawble generation by 2020, financing for green energy has been limited because of the perceived country risk and technical grid limitations.

However, Timchenko is hopeful that reforms and higher political stability will improve the situation in the mid-term.

He also pointed out to the need for sustained market reform in the electricity and natural gas sector as well as educating the population about the benefits of liberalisation. Awareness of the process among the population is only 1%.

Increasing gas production

Ukraine has made significant progress in reforming its gas sector, although many hurdles remain.

DTEK, which has been a key player in the sector, not only in trading natural gas, but also producing it. Last year, the company produced 1.65billion cubic metres (bcm).

“In our view, it is possible to increase Ukraine’s [domestic] gas production by 35% to 27bcm/year by 2020. Speaking about DTEK’s experience, we were able to triple our production in the last three years.

“Ukraine ranks third in terms of proved gas reserves in Europe, exceeding 900bcm. There are 402 hydrocarbon deposits in the country, of which only 296 are being developed. There is more than enough potential to cover domestic demand,” he said.

However, he admitted that Ukraine still had to create a proper investment climate, including the launch of auctions for newly licensed plots and the guarantee of a transparent framework.