On 1 July 2019 Ukraine started the roll-out of the liberalized electricity market, in accordance with its international obligations under Energy Community Treaty, Association Agreement with the EU and the agreement on the Conditions for Future Interconnection with ENTSO-E.
Consistency and quality of the new electricity market model was undermined from the beginning by the rush to launch it before the expiry of the authority of the Groysman’s government after the whopping defeat of president Poroshenko by Volodymyr Zelensky. Previously, under Groysman and Poroshenko rule, Ukraine’s richest man oligarch Rinat Akhmetow was enjoying exceptionally high profits for his DTEK energy company, the largest private energy company in Ukraine, secured by Rotterdam+ coal pricing scheme.
Outgoing politicians in their final days have distorted electricity market reform, excluding state owned nuclear power plant operator Energoatom and (in lesser extent) large hydro dam operator Ukrhydroenergo from the emerging competitive market by introducing Public Service Obligation: a duty to sell electricity at regulated low cost to the state enterprise “Guaranteed Buyer”. This provided a way to subsidize low prices for households, while leaving a lucrative part of the consumer base – industry and businesses – to be reaped by DTEK’s monopoly, especially in Burstyn energy Island – where over 90% of electricity is produced by DTEK.
Ironically, the monopoly arrangement was disrupted only by the international free trade and competition, which were previously praised by DTEK and the ruling political class, following the neoliberal mainstream. Independent traders started to import electricity from Slovakia and Hungary to Burshtyn Energy Island (BEI bidding zone), and from Belarus and Russia to Ukraine’s main system (UES bidding zone). Electricity imports created competition on the market and lowered wholesale electricity prices.
Availability of cheap electricity imports from Belarus and Russia was particularly important for energy intensive electrometallurgical plants, owned by Igor Kolomoysky – Akhmetov’s long standing rival, who seems to lose the political power battle once again, after major oligarchy stand off in mid 2000-ies .
By early 2020 due to competitive price dynamics and surge in electricity production from renewables, which was not unaccounted for in the hasty launch of the reform, the liberalized electricity market became uncomfortable for DTEK. Renewables have priority dispatch according to the electricity market law, and, with 4,5 GW added in 2019, they push coal plants out of the daily load coverage.
The Coup Begins
On 4 March 2020 in the course of abrupt reshuffling of the government, former DTEK employee Denys Shmyhal became prime minister of Ukraine. In 2018-2019 Shmyhal was in charge of 2,3 GW Burtstyn thermal power plant – the cornerstone of DTEK’s monopoly in western part of Ukraine, main source of electricity export capacity to EU and the poster child of carbon leakage.
Sunrise – Unexpected and Unwanted
On March 15 and for select days thereafter solar and wind electricity generation exceeded coal for the first time in Ukraine. This predictable fact (in 2019 Ukraine added 4,5 GW of solar and wind capacities) came rather as a surprise for many oldfags in the industry, who were not taking renewables seriously. On March 26 renewables output reached 3,4 GW, at this time coal was running at 2,4 GW. Thereafter renewables output continues to grow due to seasonally higher insolation, displacing coal from daily load coverage. Together with exceptionally warm winters due to climate change, this affects huge stranded volumes of steam coal sitting idle near mines and power plants.
Rogue Default
On 27 March 2020 DTEK declared a default, blaming the COVID-19 pandemic.
This comes at the time, when DTEK holds a monopoly on steam coal mining and controls a large part of thermal power generation. Meanwhile company’s owner Rinat Akhmetow in January 2020 purchased the most luxurious villa at French Riviera for 200 million USD.
Akhmetov also holds 25% of renewable capacities, with a number of vast wind parks and two large solar farms 200 MW each, constructed in 2019 to reap the exceptionally high feed-in tariff for solar power. Will he manage to monopolize sun and wind?
Electricity Market Stop, Switch to Manual Mode
Nearly at the same time (end of March) Shmygal’s new government proposed fundamental rearrangement of the electricity market. The proposal includes placing additional burden on state-owned nuclear power plant operator Energoatom, which would further distort the market in favor of DTEK. On April 3 this proposal was criticized as inadequate and dangerous by industry experts.
On 8 April national energy regulatory commission (NKREKP) banned electricity imports from Russia and Belarus, effectively ruling out market competition. Next day wholesale electricity prices at day a head power exchange spiked +20%.
Power Play
Ukraine’s electricity sector as of May 2020 is literally beheaded, with key positions vacant:
- Ministry of energy and environment: minister is not assigned, functions delegated to temporarily acting head.
- Energoatom: chief executive not assigned, functions delegated to temporarily acting head.
- Ukrenergo (transmission grid operator): chief executive not assigned, functions delegated to temporarily acting head.
- The Ministry recommends stopping all new renewable energy projects in the country and retroactively decreasing the green tariff. The Energy Transition Coalition in Ukraine expresses deep concerns and initiates a letter to the President of Ukraine
Shortly after initial government reshuffle Olga Buslavets was promoted as key candidate for the position of Minister of energy and environment. She consecutively held number of high level positions in the Ministry since 2014, being responsible for electricity sector and delivering policy work under Groysman’s government. In March 2016 serving in the ministry as Director General for energy markets she signed executive order approving infamous “Rotterdam+” scheme (see background information below).
This all signals the very real possibility that Akhmetov’s DTEK, the largest private electricity company in Ukraine can take over the whole electricity sector and dismantle nascent liberal electricity market reform, crush emerging massive renewable energy deployment and establish total monopoly. This is pandemic Coronavirus Capitalism in action.
How did we get here? See background below >>>
Historic background: how European private banks, their greed and addiction to coal are killing Ukraine
- European private banks funding carbon leakage
In 2005-2013 Deutsche Bank, Uni Credit Bank and ING Bank were the largest investors in the fossil fuel industry in Ukraine, providing numerous loans for Ukraine’s biggest coal company DTEK, supporting the rise of the dirty energy monopoly owned by Ukrainian infamous oligarch Rinat Akhmetov.
Between 2010 and 2013, DTEK energy company strategically increased its coal production and power generation. This included DTEK’s acquisition of two coal-fired power plants in western Ukraine (Burstyn and Dobrotvir) and a significant increase in their output, allowing increased electricity exports to Ukraine’s neighbours Hungary, Slovakia, Romania and Poland. However, the cheap electricity from Burstyn and Dobrotvir which EU businesses and households have received has resulted in increased greenhouse gas emissions and toxic air pollution in Ukraine.
Financing from European commercial banks has been central to this export of carbon intensive, coal-based electricity from Ukraine to the EU. In 2013 Deutsche Bank, together with Raiffeisen Bank, Erste Group, UniCredit Austria and the Russian Gazprombank, granted a structured pre-export financing loan for DTEK, providing $375 million for export-oriented activities.
- Default of DTEK, missing money problem for lenders
In 2014 military conflict in the Donbass region has damaged a significant part of DTEK’s mining assets, which along with other factors is driving DTEK out of the business. On 13 March 2015 DTEK posted a full-year net loss of 19 bn hryvnia (US$833m) after a net profit of 3bn hryvnia (US$161m) in the previous year.
In October 2015 NGO Banktrack had sent letters to DTEK’s european financial partners, cautioning them on expected default and urging banks to be responsible and avoid carte blanche bailout:
By February 2016 DTEK became officially default, failing to provide principal payments to private banks for loans totaling 528 million USD:
- Bailout driven by Rotterdam+
In March 2016 to provide quick cash for defaulted DTEK conglomerate to pay out loans and Eurobonds to European private banks, Rotterdam+ coal pricing scheme was introduced, spiking the electricity prices for non-household customers (industry, commerce, services) and further drowning Ukraine’s war-stricken economy.
On 28 April 2016 DTEK was due to pay $200m for mature eurobonds to European Banks. Thanks to Rotterdam+ banks got these money with only slight delay.
This is how Ukrainian citizens with little knowledge of that unwillingly bailed out Deutsche Bank and other European private Banks, which supported and funded the rise of Akhmetov.