Due to the war, Ukraine expects a budget deficit of 50 billion dollars by the year end, the Presidential Office predicts: about a $5 billion every month. It is covered at the expense of international financial aid and the NBU issue of military bonds, although it is getting even more difficult to do this without side effects for the economy (reduction in expenditures, inflation).
Every day of the war affects the "buoyancy" of the Ukrainian energy sector. In recent months, it has experienced more than one tsunami: damage, destruction and Russian occupation of energy facilities (like the seizure of the largest nuclear power plant in Europe — Zaporizhia), infrastructure, early synchronization with ENTSO-E. The market lost liquidity. Electricity consumption fell by a third. Bills for consumption "sagged", while prices increased for everything — for repair of damaged facilities, for purchase of materials, for logistics, for preparation for the winter. This list can be continued.
In such conditions, the Ukrainian energy system is preparing for perhaps the most difficult winter in its history. How will the financial situation in the sector affect it?
Good news
Ukraine increased electricity exports to Europe (Romania and Slovakia) 2.5-fold, to 250 MW per hour. It also continues exporting to Poland and Moldova. The volumes are still not too big, but the trend is upward. In the first month of exports to the EU, Ukrenergo earned UAH700 million. Exporters pay the state 80% of the export proceeds, and this money is used to lower electricity rates for households. What is important, foreign currency and working capital are entering the country and the market right now. The export potential of Ukrainian power generation to Europe in the medium term is up to 2.5 GW, worth more than UAH 70 billion per year. Ukraine’s Ministry of Energy plans to increase exports to 6 GW. Of course, this is a more distant perspective — a lot still needs to be done, with account of the electricity needs of domestic consumers, which is an absolute priority.
Main challenges
Firstly, against the backdrop of the Naftogaz default (creditors have not yet agreed to defer Eurobond payments) on the one hand, and record-high gas prices in Europe (again exceeding $2,000 per thousand cubic meters) on the other, the Government plans to import 3 to 4 BCM of gas for underground gas storages before winter. This means that the reserves are to rise from the current 12.1 to 19 BCM (pursuant to the CMU decision). But in fact, due to a significant decrease in gas demand (by 40%) as a result of the Russian aggression, on the condition of preservation of the gas transit and production infrastructure in the 2022–2023 heating season, domestic gas will be enough.
On the other hand, the risk of Gazprom stopping gas transit at the Kremlin's order is very high, so it will be necessary to import up to 2 BCM in order to maintain the reliability of GTSU operation to provide the Ukrainian economy with blue fuel. In my opinion, 19 BCM in underground gas storages by October 15 look absolutely unrealistic due to about USD 8 billion additionally required and lack of solvent demand. It is more rational to expect 15 BCM of gas in underground gas storages at the beginning of the heating season.
Secondly, mutual debts on the electricity market grow, while not everyone gets these "crumbs". Russian aggression disabled more than 50% of thermal power, 30% of solar, and 90% of wind generation.
Settlements with electricity producers from alternative energy sources under the "green tariff" remain critical low. Although the amount of payments has recently increased to 30%, they still barely cover the operating costs. The fact that Ukrenergo promised to minimise restrictions on green generation by the end of the year inspires optimism in the RES market players. That is, there may be more clean energy in the energy balance. In addition, the "greens" got an opportunity to partially solve the problem of the lack of funds, which will allow them to keep their power plants operating.
The thing is that according to the plan, Ukrenergo will use half of the funds received from electricity exports to the EU to pay off its debts to RES producers. Hence, thanks to Ukrenergo's income from export sales (3 to 4 billion) and resumption of direct payments by the company to RES market participants, we can stabilise green energy generation and save it from default. However, it is difficult to say how it will be in reality because of the particular "commitment" of the Ministry of Energy to renewable energy generation, being among the Ministry's priorities in words, but not in practice.
The government’s debts to heat generation are also growing. Recently, thanks to the target loan from the EBRD, Ukrenergo fully paid for the auxiliary services provided as of July 1. It was a good signal for the market. But not everything is rosy with the market balancing. The debts of the system operator to generating companies amount to at least UAH 14 billion. In the midst of preparations for the most difficult winter in history, these funds for heat generation, which, together with nuclear, will bear the main burden in the heating season, will not be superfluous. Partial settlement of the issue of debts to generating companies was a good decision of the recent days: 50% of the proceeds from electricity exports to the EU will be used by Ukrenergo to pay off its debts to electricity producers for balancing services.
Such challenges are enormous even for a protracted war. Success on the power generation front also depends on success on the military front. This is what every Ukrainian believes and expects. The Ukrainian energy market also believes in the best.
