Problems of the Ukrainian electric energy system will be investigated in a number of materials, the first of which we are offering to our readers' attention. This important for Ukraine industry and problems connected with it, had for a long time been in the shadow of the so called gas policy. But then the situation began to change. With the current crisis in the Russian- Ukrainian gas relations as the background, we begin to realize that the electric power itself can play a key role in the energy security and independence of the country.
Ukraine, as we know, inherited from the USSR a powerful energy system, which for the last 20 years, even in the times of the bad crisis of the 1990s, has been supplying with the electric energy more or less satisfactorily. Even though together with this system we also inherited its structural problems. For example, due to the non-optimal location of the electric power stations and faults of the electric network, which redistribute the electric energy ineffectively, at the Ukrainian territory there exist energy deficit and energy unprofitable regions. In particular, in the western region due to network limits about 1 GWt of the power of RAES and KHAES are "closed”, and in the eastern region- 0.7 GWt of ZAES. As a result, these powers cannot be used, and in some places the construction was actually stopped because the new objects could not be supplied with electric energy.
The structure of the generating capacities of the energy system cannot be considered optimal either. For example, due to the surplus number of energy blocks, designed for the work in base modes of operation, or due to the lack of maneuvering capacities, when in maneuvering modes a not adapted for this purpose equipment. The demand for deficit energy blocks with high maneuvering characteristics increases the intensive construction of electric stations working on restoring the renewable energy sources as they need large volumes of reservation. Such using is not planned in the projects, as it hastens wearing out of the equipment.
In general more than 80 % of the HES equipment is already beyond the limits of its physical durability, and 40% of it needs an urgent replacement.
At the distributing network the wearing out of the equipment makes a bit more than 30 %, at main and international networks- 45 %. That is why the losses of the electric energy in the Ukrainian networks are twice as large as the European indexes.
It is clear, that things could not be different in the industry which for decades has not been getting normal investments. Besides, the unsatisfactory investment climate in the country in general also has to be taken into consideration. But there also exist specific, insurmountable obstacles for investors at the energy market.
In its current organization form the wholesale electric energy market is a classical pool[1], founded in the late 1990s. The experience attests that this form of a wholesale electric energy market is well adapted to the regulation of the energy system. This positively influences the stability of the energy supply. At the energy market there is a price competition among the producers, and there are flexible enough forms of compensation of their production expenses. But this competition is quite limited and does not create enough stimuli for the reduction of the expenses and cutting of cost.
At the level of the supplying companies, which in the role of regional monopolists have also the functions of selling and transportation, there is actually no competition.
The main fault of the wholesale energy market is too big ability of the state to interfere with its work. First of all this negatively influences the price policy in the electric energy industry, which suffers from the excessive populism and is non-transparent and ineffective.
The low prices of electric energy for the population and other preferential consumers, who pay about 25 % of its cost, are kept by the mechanism of subsidy certificates , which is in fact, a cross subsidizing According to the National Electricity Regulatory Commissionin 2011 the preferential consumers underpaid 28 billion hryvnyas for the electric energy. This money was paid by the industrial users, and due to this, the prices for them have risen by more than 25 %. The objectivity of these data is doubtful, as the mentioned above mechanism is non transparent and creates chances for misuse and corruption.
In order to weaken the negative influence of the cross-subsidizing for the industry, NERC and the concerned state offices hold back the prices at the whole sale market, limiting investment increases for generating companies, which later do not get money, needed for the modernization.
In a word, Ukraine’s population gets electric energy at possibly the lowest prices in the world, while the industry is paying for it as the European prices.
It is obvious, that the policy of holding back prices and of cross-subsidizing has exhausted itself. But giving it up, it is necessary to see about the mechanisms of social protection from the price rise of the most vulnerable categories of consumers.
Because of such ineffective price policy, electric energy industries lose their attractiveness to investors. The latter are repelled by the non transparent system of state regulation of the industry in general, and by the absence of guarantees of loading the energy blocks, as their determination for the work at the Wholesale Energy Market is done daily.
The mentioned above faults the government is planning to remove by reforming the WEM, and by introducing a model of the electric energy market at the base of bilateral contracts and balancing market[2]. Within this model the major part of the electric energy is sold through the conclusion of bilateral contracts between the producers and consumers or via stock-exchanges. This model is realized in most of developed countries and is more liberal and aiming at increasing competition among the producers, as well as suppliers. This stimulates enterprises to increase the efficiency and quality of service. But the model is very complicated for regulating the energy system.
Having quite a few faults, it demands a very thorough preparation for its introduction. Meanwhile, the changes being made in the electric energy branch by the government complicate the possibility of effective liberalization of the market reforms.
First of all this concerns the privatization of the electric energy enterprises. Its results have sharply worsened the competition conditions at the electric energy market, as the enterprises have become the ownership of a narrow circle of companies. The DTEK has actually become a monopoly owner of the heat electric power generation. The heat electric stations, belonging to this company, produce 67.1 % of the electric energy produced by this type of generation, and together with NNEGC "Energoatom" the DTEK electric stations produce 86 % of Ukraine's electric energy.
If the model of bilateral contracts is introduced under such circumstances, the producers, instead of a price competition will limit the offer, which will stimulate the price rise. Besides, if the enterprise- producer and consumer belong to the same owner, the price formation will go not according to the market principles, but according to the inner corporate economical and financial interests.
Another problem which will have to be settled on introducing the model of bilateral contracts is the differences in the costs of the electric energy produced by different kinds of generation. This problem is supposed to be removed, if the obligatory buying of electric energy of different generation in certain proportions or using regulated contracts is introduced. The law “About the foundations of the functioning of the electric energy market of Ukraine” contains yet another idea, according to which the incomes of the generating companies will be redistributed through a special fund. But all these suggestions have one common drawback. They actually bring the competition at the energy market and the stimuli for the producers down to reducing the level of such expenses which exists at the wholesale energy market with the much more complicated and expensive mechanism of regulation of the energy system.
On introduction of bilateral contracts to the market, the abilities of the state to influence the investment processes and formation of the good prospective structure of the energy system will be considerably limited. Besides, the state structures and investors may have problems with the operative (immediate) assessing of the situation at the market, as the price information according to bilateral contracts will become confidential and the access to it will be limited.
The European and world experience shows, that in its pure form the model of bilateral contracts does not allow to create sufficient market stimuli for the investment into the development of all kinds of generation needed for the work of the energy system. More so, due to the mentioned above reasons, introduction of this model right now will contain risks for the energy supply of the country.
So the transfer to the good prospective model of the market should start with the introduction of the mechanism of guarantees for the investments into the power. This must be done at the base of the existing model of wholesale energy market, but it also can be done parallel to the considerable investments into the modernization of the enterprises of the branch and creation of the new power, together with the free access to the network in 3 -4 years, thanks to increasing competitiveness of generation companies and growing of their number( from the point of view of decreasing of the concentration of actives in the hands of the limited circle of owners included), can create necessary conditions for the process of the proper transfer to the model of bilateral contracts.
This way Ukraine will have a chance within 7-8 years to carry out the modernization of the electric energy system, transformation of the energy market and to transfer to the parallel work with ENTSO-E. This means that by 2018-2020 Ukraine will have a competitive modern energy system for the effective energy supply of the country and coming out onto the European markets.
The mechanism of security of the investments into the power will allow to effectively realizing the state policy of the development of the electric energy system. There are the following two possible ways.
The first one, which is being realized at the moment, supposes the prior development of the energy industry working at the renewable sources. In this case in the future the energy system will demand higher maneuvering abilities, while the development of NES will be limited. In the heat generation the coal HES will be replaced with gas ones, with better maneuvering characteristics. The prices of the electric energy will also grow, which will reduce their competitiveness regarding other energy carriers, gas in particular.
The second way suggests a balanced development of all kinds of generation. Decisions about their development are taken on the base of technological and economical motives, aiming at the securing of economically effective and reliable work of the energy system. With such an approach, the traditional energy system will be intensively developing and also will do so the consumer-regulators at the base of the heat storageinstallation.
The policy of the balanced development of generation is more acceptable for Ukraine at the moment. It is also necessary for the proper integration of the Ukrainian electric energy system into the European energy space. Wrong decisions in the state regulation of the branch can lead to destruction of a part of generation and to reduce the competitiveness of the Ukrainian electric energy system. As a result Ukraine can not only lose its positions of an exporter, but also the ability to independently regulate the work of the energy system.
In the future the Centre will be giving more detailed investigations of the mentioned above problems of our home energy system.
[1] A pool is a model of energy market which supposes that all the producers (for Ukraine it’s the generation with the power above 10 MWt) sell energy to the common ground from where it is bought by supplying company.
[2] A model, built on bilateral contracts, supposes that the consumers have no limits in choosing a supplier of electric energy. Balancing the demand for and offer of the electric energy is realized at the balancing market. Accordingly, the model is called BCBM- bilateral contracts and a balancing market.
