February 24, 2015

What are Ukraine Power Industry’s Losses and Gains?

Bohdan Sokolovskyi

Some analysts argue that the development and introduction of renewable and alternative energy sources will reduce volumes of the EU's purchases of Russian energy carriers, and thus will decrease the volumes of their transit through Ukraine, and therefore — budget revenues will decrease too. For some reason, it all comes down to the transit of gas through the Ukrainian GTS.

This is not true, because for transportation of oil and gas through its territory “Naftohaz of Ukraine” annually gets about 1.5 billion US dollars while the state budget is 31 billion US dollars (based on the December 2014 rate of 17 hryvnyas for 1 US dollar). On the one hand — this is an impressive amount, on the other-for a country with the population of 45 million people — it is more than modest. Even if we assume that the NJSC transfers all this money to the budget of Ukraine, leaving nothing for itself (is it possible?!), it makes just 3-5 %. This amount can be easily compensated for by development of new industries. That is — because of deep reforms of the independent state of Ukraine, and not of the former Ukrainian SSR, the structure of the economy of which has changed little. About the need to radically reform the entire Ukraine, including its economy in the early 1990s were talking to the leadership of the independent state of Ukraine patriotic Parliament Members I. Yukhnovskyi, V. Chornovil, S. Khmara (but unfortunately without success), and others, as well as Leonid Kuchma (until he became President in 1994). It is no secret that the economy of the Ukrainian SSR was created, for the most part, as part of the Soviet economy and was significantly excessive — we had been producing a lot more products than had been consuming. Some products had not been manufactured at all. Now they are delivered from... China and other countries of that region. And that we could do ourselves to create jobs for our citizens. For comparison, there are a number of countries that do not carry out any transit, of energy carriers included. For example, Hungary, Finland. And, despite the absence of transit, the standard of living in these countries is significantly higher than in Ukraine. Ultimately, for the state with 45 million people talks about income even of 1.5 billion US dollars somehow sound funny. On the other hand, it is necessary to point out once again that the Ukrainian gas transportation system has a dual function: it delivers gas to Ukrainian consumers, and transits it. Therefore, the relevance of our GTS is primarily determined by internal needs.

The argument about the export of electricity can also be disproved easily. Here one needs to remember that Ukraine exports 3-5 % of the electricity. Most of exporters are private structures. In itself the insignificant volume of electricity exports indicates that it cannot be pivotal in terms of filling the state budget.

Absolutely unacceptable are approaches to development in other countries of such promising areas of power industry as reduction in emissions and development of shale deposits: it's better to “block” the development of these technologies and thus to protect transit revenues, the sale of quotas for greenhouse gas emissions, electricity exports and so on. The matter is that development of power industry in these directions will help to reduce the cost of modern technologies and, accordingly, their implementation in Ukraine. Financial, technological and other benefits of our state may be substantially higher from introduction of these developments than the gain as a result of restraining the development of these technologies abroad. Especially because Ukraine does not have many opportunities to influence the development of new technologies in advanced states. And in general — to influence other states.

At the same time, it should be noted that the energy security of Ukraine is being negatively influenced by the mentality of the Ukrainian SSR in the energy sector, which, unfortunately, has been preserved to this day since 1991… In particular, the following factors: a high level of monopoly dependence on the RF on the main directions — oil, electricity and gas.

Least of all Ukraine depends on monopoly supplies of Russian gas, although this is the most spoken and written about. It is worth pointing out the current government's positive actions aimed at importing gas from the West. Of course, that our main resource is a general decline in gas consumption at least to the level of domestic production. After all, the current situation is unacceptable, when our country produces just over 20 billion cubic meters, and consumes more than 50. It is obvious that the reduction in gas consumption concerns both, the private sector (our citizens directly and indirectly consume 25-27 billion cubic meters of gas), and industry — maybe we should abandon certain industries, mostly contributing to the enrichment of individuals, not caring about improving the financial condition of the state.

At least by 75-85 % Ukraine really depends on Russian oil supplies. For the most part it refers to the delivery of Russian oil to refineries in Russia, Belarus, Lithuania, Romania and Poland. And from there oil products go to Ukraine. And this despite the fact that we have 6 large privatized refineries, which are hopelessly technologically backward. It looks as if it is more profitable to import oil products than to modernize the refineries, transport crude oil there and thus provide jobs not for Ukrainians, but for foreigners. The easiest way to solve this problem can be through creation of a new refinery, which would be decisively influenced by the Ukrainian state. Such a project had been carefully considered for almost 3 years and was fully formed (including the financial component) in 2008 on the initiative of the then President of Ukraine. But has never been implemented... It would be worth to return to it today.

No less than for oil, we are dependent for electricity. In particular, Ukraine almost 100 % depends on Russian nuclear fuel for Ukrainian nuclear power plants. And this is almost half of electricity. There are two ways to solve this problem: 1. To develop cooperation with the Japanese-American company “Westinghouse”; 2. To introduce in nuclear power technologies, alternative to Russian ones, which allow to do without uranium enrichment, to which Ukraine has no right. In particular, the most promising for Ukraine are Canadian technologies CANDU, which are successfully used in Romania to mention just one. No less important in the sphere of electricity and heat power industry, are Ukrainian TPP and CHPP, most of which were designed in the Soviet times and designed, at least partially, to use coal from the mines of the Donbas. Today these thermal power plants and central heating and power plants should be re-equipped to use a different type of coal — from the Lviv-Volyn coal basin or similar coal from overseas. Then such re-equipped stations would have a choice: there is coal from the Donbas — good; there is not — additional problems, but not a tragedy and no need to stop TPP and CHPP, just using the other coal.

The situation is complicated by such “Soviet” phenomena as the opacity of tariff formation, technological dependence, cross-subsidies and the like.

Of course, a complete solving all the above-mentioned issues needs time (2-3 years at least), and funding. In the meantime, while the issue is not resolved, it would be worth to immediately take a set of measures aimed at “softening” potential problems. This, first of all, requires a clear inventory of needs and opportunities.

Any delay with implementation of the abovementioned is useful to the Kremlin. Today it is an aggressor.