Volodymyr Omelchenko, Razumkov Centre energy programmes director and expert, in an interview to "EnergoBusiness" magazine tells about the threat posed by debts to the energy sector and Ukraine’s economy, the priority measures required to get out of the debt loop and the events important for Ukraine’s energy industry in 2024.

Oleksandr Kurylenko, Petro Bilian

— What is the approximate amount of debts for energy today — these sums are called terrific?

— The largest debts are in the gas sector. There are different estimates, but the total debts there exceed UAH 200 billion, including UAH 80 billion accrued over the past two years.

The bulk of the debt is the indebtedness of heating companies to Naftogaz. The total amount of these debts exceeds UAH 125 billion. In addition, the indebtedness of the Centerenergo generating company to Naftogaz continues to grow at a fast rate, because Centerenergo consumes gas from Naftogaz, but its payments are low. Centerenergo is a financially poor company, it could not buy enough coal, and therefore it has to consume natural gas, which is much more expensive than coal now. But there is no other way out than to use gas units in conditions of capacity shortage, because the energy system needs to be balanced.

— Why?

— First of all, our heating tariff has been unbalanced for years, it does not include all costs of district heating companies, primarily, for natural gas. The thing is that natural gas has become more expensive, and the heating tariff was not raised, in part due to the wartime moratorium. That is why debts are growing.

Secondly, district heating companies are extremely inefficient in terms of management and huge thermal energy losses, exceeding 27% on average.

District heating companies try to solve their problems by supplying heat media to households at lower temperatures than required by the standards. This is also a problem, because people begin to consume more electricity, use electric heaters and switch to gas boilers.

Add the crisis of the gas market due to the special obligations, PSO, vested in Naftogaz. So far, there is no way out in sight.

— And what about the electricity market?

— The situation is very much the same, although the level of indebtedness seems to be lower. Ukrenergo owes the Guaranteed Buyer about UAH 32 billion. Energoatom has a debt of UAH 17 billion for the PSO, although this debt has somewhat decreased in recent months. However, the total debt on the market exceeded UAH 60 billion.

On the good side, in November, settlements with the "greens" reached 92%, for December, they are expected to be discharged almost completely. But in general, settlements with the "green" generation for the whole year make about 55%. Therefore, problems really exist here. With such a level of settlements, it is hard to hope for investments in the renewable energy sector and the energy sector in general.

— Do these debts pose a threat to the energy and macroeconomic stability of Ukraine?

— The threat is evident, because more debts mean less budget revenues. More debts mean less capital investment, while the wear and tear of our energy system is very high. If we take heat generation, it should have been closed 10 years ago. It has outlived its term, but it must work, because without it we will not balance the system. Debts mean the lack of capital investments in the volumes necessary for reliable operation of the UES.

In addition, now we experience a capacity deficit. After the collapse of the USSR, there was a surplus of capacities in Ukraine, they amounted to more than 50 GW, while we consumed not more than 25-27 GW. We had a double supply. This happened because since 1990, our industry has been declining.

— And now, there is a shortage due to the absence of Zaporizhia NPP?

— Yes. ZNPP, Zaporizhia, Luhansk, Vugleghirsk TPPs, and other stations are out, some are under constant bombardments now. 70% of the 2 GW we had of the wind generation fell out, as did part of solar generation. In total, more than 12 GW of capacities were lost, counting only those located in the occupied territory. Add the many damaged and destroyed units in the territory controlled by the Ukrainian government.

Missile and drone attacks largely destroyed the available capacities, primarily of thermal generation, along with 2 GW of Ukrhydroenergo capacities. 1 GW was restored, but a lot needs to be done to restore the rest. It is to take about six months.

We have entered a period of capacity shortage, we need to create new capacities. We need to build new stations. To do this, we should have a favourable investment climate. The energy sector and the economy generating debt cannot provide it. So, we have a vicious circle — all this, against the background of the shortage of capacities.

The main problem, apart from war, is the distorted model of the gas and electricity markets.

— Why is it distorted?

— Due to the PSO for the population. Instead of supporting the poor with targeted cash subsidies, subsidies are provided in the form of cheap energy for everyone. That is, the rich are subsidized more than the poor. People with home swimming pools and saunas get significant subsidies [in electricity and gas prices].

Currently, the tariff for households is UAH 2.64/kWh, while the final price for industry is about UAH 7. We see that the tariff for households is more than two and a half times lower. After paying universal service providers, for the distribution of electric energy, for supply, dispatching, generation, these kopecks do not even cover 25 percent of operating costs. This situation cannot continue forever.

There is only one way out: to stop this general PSO for households with cheap electricity. Apparently, as soon as next year, tariffs for households and industry should be made market-based, and low-income people should be compensated transparently from the budget — only those who need it. But it is not clear whether our politicians will do this.

— There’s going to be much ado!

— Yes, this is a big political game — our politicians pretend to be kind and care about people. No one in the world can make such wise decisions (except for North Korea and Turkmenistan) — to make gas and electricity for households much cheaper than the market price, but our politicians can. So, they "care" for the people, and should be elected!

In reality, it’s a shell game: people pay for cheap gas and electricity anyway, with missing budget revenues. They just do not receive other social services: education, culture, medicine, pensions, defence. All this was underfunded, even at the minimum necessary level. Also, do not forget about the record jumps in inflation over the past 32 years, very much caused by the policy of cheap energy. Meanwhile, populist politicians have always built their careers on the slogans "we will make it cheap." And they made it, but at the expense of the consumers themselves and the destruction of the social and defence sectors, speculating on the poor economic education of the majority of citizens.

For years, Ukraine underfunded the defence industry at the expense of allegedly "cheap" prices of gas and electricity for households. This money could be used to create missile armies and new tank brigades. Instead, politicians speculated on cheap gas for the people, and now we see the result. In the 2000s, we paid for cheap gas with missiles and aircraft, now, they bomb Ukrainians.

— And in the 1990s — the Black Sea Fleet!

— And then, the Black Sea Fleet. All this — for cheap gas. But our politicians cannot calm down. They are helped by the low general economic literacy in Ukraine, so it is easy to manipulate people. You vote for me, and I will give you cheap gas and electricity! People do not understand that this cheap gas is being provided to them at their expense, and there are shadow schemes being built through opaque PSOs that siphon money from the energy sector, which becomes a problem of national security.

— Am I right that the correct model is to eliminate PSOs, so that everyone sells electricity and gas at the market prices, the money goes to the budget, and then from the budget, targeted assistance is allocated to the poorest, for the people to be able to do without a kerosene lamp?

— Absolutely. This model works all over the world. There is no other way. Our PSO model with cheap gas and electricity has no parallel anywhere in the world. Nowhere else are millionaires subsidized with cheap gas and electricity. This is our unique experience. Until we get rid of it, we should not hope for investments, building new capacities. Nor should we count on the stability of the power system, because in general, we are on the way to increasing energy poverty to a critical level now.

— Can we get to the point of total darkness?

— Yes. The current market model is the way to the stone age. We survived only thanks to the exploitation of the capacities left from the Soviet era, and still use them. But this legacy is coming to an end, new capacities must be built. However, when an investor looks at what is happening in our natural gas and electricity markets, what kind of manual pricing there is, why does he need it? It is better to invest in Romania, Norway, Turkey, or Israel. Why take a risk and invest in Ukraine? We cannot break out of this vicious circle without radical solutions. Unfortunately, politicians are not ready for this.

— If we cancel PSO and the markets do not generate debts, will this give an opportunity to pay off the accrued debts? Should they be written off, bonds issued, or something else?

— No! Current payments can be settled, but debts cannot be paid off quickly. Perhaps in many years, if these debts are restructured through bonds, and then after 10-15 years they are repaid. There are also reciprocal settlements. Perhaps 50% can be repaid by offsetting.

The main task for today is to stop accumulating debts. There is no point in thinking about old debts if new ones are growing. It's just a waste of time.

Accumulation of debts can be stopped by building a model, which we are talking about now.

— And we actually see no other way. If someone shows another model, than we can talk about other models!

— No one will. The government or NEURC have been thinking about it for 25 years, but have not come up with anything. There is nothing better than the experience of the European Union, Great Britain and the USA. You can search for the Holy Grail for so long that all the energy sector will collapse. So, it is necessary to stop the accumulation of debts, to create a system under which these debts would be impossible. Only after that, there will be a chance to completely repay the debts of past periods.

In addition, we also have a balancing electricity market. Non-payers are sent there. Such payers have to buy electricity at a higher price, but the law prohibits disconnecting them from electricity now. There are 5,500 enterprises there. They just may not pay.

I can understand this for defence industry enterprises, although this is also wrong. A defence industry enterprise must also pay 100% for gas and electricity, but these funds must be provided for in the state budget. But the PSO in its current form is just a source of corruption that cannot be removed. Less market and more administrative influence mean more corruption. No NABU or NAPC will ever be able to cope with it.

— And this is not the kind of corruption where bribes are given, this is systemic corruption?

— Yes. Over the last decade, we have built a perfect corruption system under the social slogans of caring for people through cheap gas and electricity. We were caring enough not to turn off district heating companies, for industrial enterprises to work. However, this is not care but conscious actions of mafia groups to rob the budget and cover it up with the interests of the people by promoting unscrupulous politicians to power.

— You said that there will be positive changes next year. Why?

— We have improved settlements with the "greens". But in the spring, there will be more consumption from SPPs, while Energoatom will repair its units. Then the Guaranteed Buyer’s ability to pay will decrease, and debts will grow.

However, Ukraine has taken up certain obligations to the IMF, and everything we are talking about now is in the IMF memorandum. So, there is hope that some measures will be taken — of course, if the government, NEURC and the authorities in general have the will to create a transparent market. If there is the will, there will be positive changes. If not, we will continue to wallow in this swamp.

— The will of the NEURC is another question, because in the summer they raised water tariffs, and then the president came out and said that this should not be the case, we are raising the price of electricity, not water.

— This means interference in the NEURC work, unacceptable in a civilized country. Imagine, the President of the US or France dictates the water prices. This is not the function of the President or the President’s Office. This is an abuse of constitutional powers.

Of course, independence of the regulator is the main condition for solving problems on the energy market, including debt problems. Without an independent regulator, when it is ruled by the President’s Office, the Cabinet or the Ministry of Energy, there will be no market. There will only be a mess! Therefore, an independent regulator with appropriate powers and responsibilities is needed. Unfortunately, now it is often controlled "by phone".

However, there are certain shifts, too. The price caps are slowly being raised, the administrative influence is being removed from the market, we see the market prices approaching the level observed in the neighbouring countries: Romania, Moldova, Poland, Slovakia, Hungary. We are going to ensure market coupling, i.e. compliance of our conditions with the conditions of the whole EU.

Full-fledged import-export is impossible without financial and physical markets, and our financial market of the energy sector is not sufficiently developed, so it is difficult to buy electricity in a civilized way. We do not have long-term contracts with EU countries, both for exports and imports.

— If we talk about new ideas, is there an idea of "imported PSO"?

— This is another instance of madness. It turns out that energy companies, themselves facing debts, have to subsidize someone else. What will all this lead to? Debts will grow further, investments will decrease, the capacity deficit will increase, and next year, shutdowns will become common, including for the businessmen who are lobbying for this imported PSO.

This is how you can destroy the energy sector and be left with nothing. Who benefits from this? I have spoken to many businessmen, not all of them want their energy companies to be subsidized. Many people want a normal competitive market, like in the EU. They can work in such a market. But there are also those who think that the state and energy companies should give them something. It is a serious problem, because they have lobbyists in the Verkhovna Rada and the President's Office, they "lament" all the time. But lobbying for cheap prices is a road to nowhere; energy conservation, energy efficiency, and innovations must be engaged.

— You mentioned enterprises that cannot be switched off. What shall we do with this list — leave there those who work in the defence industry and the front-line zone, and remove the rest?

— 5,500 enterprises cannot be switched off now. We should take a look, because in addition to the defence industry and front-line enterprises, there are enterprises located somewhere in Lviv or Chernivtsi, like hotels or saunas. Apparently, they should be removed.

There are defence industry and front-line enterprises, but they also have to pay. However, the state must finance them, because defence industry enterprises are a matter of state importance, not a problem of Ukrenergo, Energoatom or Ukrhydroenergo. So, the state should provide money for this, not wait for energy to "appear out of thin air".

— It seems that in the USA or the aggressor country, the money that goes to the military industry brings orders for related industries and GDP growth. But in Ukraine, they try to do everything without money, and nothing grows here...

— Because no one in the USA or EU countries came up with the brilliant idea that the energy industry would subsidize another industry. Indeed, prices in the Ukrainian electricity market have risen significantly recently. There are enterprises that can no longer stand it. But energy companies have no excess profits, because state-owned enterprises carry PSOs. So, there are no funds to invest in new generation capacities.

By the way, there are "greens". They have their own PSOs. The wind is out, but they mainly work in market conditions. Solar generation remains, but in a normal market, solar generation should be released from PSOs, then the load on industry may decrease, because the supply tariff will go down. There are problems there, too. Prices for industry are high. But they are objectively high, because we have a shortage of capacities, and prices of imports do not get cheaper, because the neighbouring countries also have high prices now.

— Are these prices envisaged by the EGD to encourage transition to clean technologies?

— Yes, but if someone thinks that the prices in the EU are lower than ours, why doesn't he import electricity from the EU? Why is everyone waiting for Ukrenergo to buy energy at twice the market price for emergency assistance? Why are they lobbying for imported PSO, carried by Ukrenergo? Go and buy it there yourself, if you think that the prices there are lower than in Ukraine.

— Removal of households from the PSO lists. There are two counterarguments ready here. The first one — we have a war. The second — because of the war, many people became poor, they will need to be subsidized.

— Let us look impartially at people's incomes. People can pay thousands of hryvnias per month for gasoline, for mobile communication, they pay a lot for alcohol, but can't pay extra 300-400 hryvnias a month for electricity. Indeed, many people lost their income, but people who have the Internet, drive cars, buy alcohol, and most of them are like that, will spend additional 300-400 hryvnias on electricity.

Meanwhile, for people with small pensions, salaries, with incomes of less than UAH 5,000 per month, additional UAH 300-400 are a serious burden. They should get subsidies.

But if there is a market price for households and industry, then the cash flow will increase, taxes will grow, and budget revenues will rise. Then the rich and the middle class will pay more money for electricity, and the poor will receive it from the budget. I think, this will be fair.

— What key events affected the energy industry last year?

— First: the accession of our system operator to the group of ENTSO-E operators. Integration took place in 2022, but without voting rights. Now our operator has the right to vote. Ukraine has completed this huge process of physical integration. Our energy sector fully joined the EU, its legal field. While in the judicial, political system, fighting corruption we still face big tasks to be admitted to the EU, in the energy sector we have already done our homework. Our transmission system operator is integrated in the EU legal system.

Second: the Verkhovna Rada passed the legislation on REMIT. If it is properly adapted next year, we can move from administrative regulation to market regulation, minimize the risk of market abuse — because we still have such manifestations, and REMIT can remove them, as a market tool. This is one of the steps on the way to eliminate these unhealthy PSOs.

Third: raising price caps. Marginal prices have been raised, in terms of price parameters we have come close to the European market. Energy companies have seen the light at the end of the tunnel. There is hope that we will gradually get rid of these price caps and move to European marginal prices. Together with REMIT, this should create a normal market.

Fourth: the first shifts in gas production. Production increased by 4%. I did not expect that we would increase gas production during the war.

— About gas. Thanks to what? And this strange situation with the company "Ukrnaftoburinnia", where the state took the company under its control, ARMA manages it, and according to a court ruling, production was stopped from December 1. How to understand all this?

— Production increased primarily thanks to the state-owned UGV. They added new wells, increased investments in drilling.

As for Ukrnaftoburinnia, it seems to belong to the oligarchs, but there is a court ruling. In a law-ruled state, its decision must be implemented.

However, from the viewpoint of common sense, it is not a good decision, especially in wartime — to create problems for one of the largest miners and to reduce production in Ukraine.

From the viewpoint of energy security, there are issues. And I wonder who is behind this and who benefits from Ukraine reducing gas production during the war?

—What challenges do we face in 2024, specifically in the energy sector?

— At the end of next year, the contract between Naftogaz and Gazprom expires. This will be the last year of Russian gas transit. It is necessary to prepare Ukraine’s GTS for this. A lot has been done, although there may be financial problems for the GTS Operator. There is a lot of work in the government, the GTS Operator, the National Security and Defence Council to minimize losses from the stoppage of gas transit.

There were statements by our government, the government of Germany and other countries that they do not expect transit through Ukraine.

— Our statements were flexible, that we will not continue the transit, but if our partners find an opportunity, we are ready to provide transit for them, and it is good for us, because the territory near the pipeline is not shelled...

— This is a matter for the National Security and Defence Council, a matter of the highest political level. For now, there is the stand of the Minister of Energy, Herman Halushchenko, that the transit will be stopped. No one clearly voiced another position. The solutions may be different, because here our interests meet with the interests of European partners. But what is the way out for us? We cannot negotiate with Russia in wartime.

— But we held negotiations with Russia in Istanbul in wartime, another matter is that that we made such a decision, and any war ends with negotiations...

— I have no idea how we can negotiate transit with Russia.

— For example, the Chancellor of Austria can go to Moscow, then come to Kyiv, then move the gas admission point to the east...

— If the prime ministers of Slovakia, Hungary, and the Chancellor of Austria join efforts, maybe Czechia, too, if they make a correct proposal that does not involve direct cooperation with the Russian side, and Ukraine provides transit for them — this can be discussed. I am against Russian transit, but we can discuss how to use the Ukrainian GTS in the future. I am against, because we will be criticised, as we demand sanctions, but earn from the transit of Russian gas. So, this is really a question of the highest political level.

The second issue that needs to be resolved in 2024 is the change in the gas and electricity market models. Models that stop generating debts will be interesting for investment. This may be is the first problem, because it depends not only on the state of the energy sector but also on the state of Ukraine’s economy in general. Industry cannot develop without sufficient power generating capacities.

The third challenge is to improve the system of export-import of electricity, to ensure market coupling. To make it possible to conclude not only short-term, but also long-term contracts.

Fourth: we have serious plans to build wind power plants. I think that this is also a good development.

— And what can we do with ZNPP, how can it be "returned", demilitarized, using international support?

— In my opinion, we should not pin hopes to IAEA. Until the station is liberated, nothing good can be expected. And it can be liberated by a combination of military and diplomatic efforts. Political and economic pressure from the US, the EU and China can solve this issue, if there is a large international coalition accompanied with military pressure. But today there is no broad coalition on the ZNPP. We need complete retreat of Russian troops from there and transfer of the station under Ukraine’s control.

Source:

https://razumkov.org.ua/statti/borgy-v-energetytsi-ukrainy-problemy-ta-perspektyvy-interviu