Energoatom is 'doomed to succeed', says vice president

Ukraine launched an electricity market in July last year, but this tied Energoatom to selling 85% of its electricity production to the Guaranteed Buyer at a fixed low price within the Public Service Obligation (PSO) mechanism. The other 15% could be sold on the day-ahead market. On 20 May, the Cabinet of Ministers approved two resolutions on regulations governing PSOs and electronic auctions for bilateral contracts. The first reduces the 85% restriction to 80%, meaning Energoatom may sell 5% of the electricity it produces under bilateral contract via electronic auctions.

In the 17 July interview with Energy Club, Halushchenko said having a wholesale market was "a big plus", but only when there is a level playing field and a guarantee of full payment. Unfortunately, neither condition is being met at present, he said. As a result, market participants have accrued a huge amount of debt - more than UAH30 billion, which will grow to UAH100 billion (USD3.6 billion) by the end of this year if nothing changes, he added.

"This isn't Energoatom’s fault but a case of how the market is functioning," Halushchenko said, adding that even before the wholesale market was launched, the company's debt from non-payment was already as much as UAH11.7 billion. It was welcome therefore, he said, that President of Ukraine Volodymyr Zelensky signed a law 'on measures to pay off debts on the wholesale electricity market', which was adopted by the Verkhovna Rada on 17 June.

"It's good that this is being solved, but the fact remains that the conditions of the 'new market' mean the amount of money the company is owed has almost doubled!" he said. "Therefore, I believe that the market needs improvement from meaningful and well-thought though solutions."

The "uniqueness" of state-run Energoatom is that it provides affordable and reliable electricity and as such already meets the "social mission", he said, so the PSO mechanism ought to be designed in a way that enables this to continue and without short-changing the company.

Absurd competition

The Guaranteed Buyer, or GarPok, effectively takes over 80% of Energoatom's electricity generation that the utility could otherwise sell directly through bilateral contracts. Instead it is competing with GarPok in the wholesale market for trade in its own product, which is "absurd", he said.

"GarPok is an inefficient trader and we need to ask ourselves, is its presence in the market justified. To date, GarPok alone owes Energoatom more than UAH7.4 billion and so there needs to be radical change in our financial relationship. We have a vision of how to improve the situation. For example, we can sell part of our electricity to the public directly, fulfilling the social mission of the PSO, and selling the rest in the market for bilateral contracts. A small part could be given to GarPok to compensate it for the 'green' generation tariff, but the key point is that we are ready to work directly with the population and trade independently through bilateral agreements, which would give us the opportunity to significantly improve the company's financial state," he said.

Referring to the 5% restriction on Energoatom’s entry into the bilateral contract market, he said: "We have already held the first auction and it was successful - 5% of our electricity was sold on the market. The auction showed, firstly, our ability to sell our own electricity and, secondly, that our products are generally in demand."

He added: "This is how the 'atom' works in most countries: Contracts are concluded there even for 2-3 years in advance, which is beneficial for all since we would understand our revenues and can plan future costs, and consumers would know that their nuclear generation is a contracted amount of electricity at a reasonable price, which gives them stability."

The problem of having special (high) tariffs for 'green' energy was created by "several previous governments", he said, and means that investors in renewables would be able to sue the state if it "changes the rules of the game" and they incur losses.

"Unfortunately, Ukraine is not a country that is so rich as to be able to afford to pay such high tariffs for the ‘green’ generation … Any sharp movements in the market are quite dangerous for the state, because it would then face lawsuits [by investors in renewables] against Ukraine," he said.

"The essence of market functioning is having no state intervention. Of course, the state must establish the rules of the game, monitor the market and, if necessary, use certain levers to balance the system. On the other hand, the market must be fair for the participants, and this is possible only in conditions of fair competition. If this is provided, this will be the main 'plus'."

The obvious disadvantages are the ability for intermediaries to make money in a balancing market, he said.

"Unfortunately, this is what's happening now. How exactly? If you have access to all market segments, you declare that you will supply a certain capacity. Then you see that you don't have enough because you are only able to buy nuclear power in the balancing market and at, until recently, a 45% discount. The problem is that this outright speculation is legal with the established rules. Some companies are making a lot of money like this - everyone sees it, but no one's doing anything about it. The [National Commission for State Regulation of Energy and Public Utilities] has reduced the discount on the balancing market from 45% to 20%, which may already be improving the situation.”

Corporatisation

Energoatom's constraints in the wholesale market are against the backdrop of its 'corporatisation'. At the end of last year, "contrary to logic and legislation", the company's articles of association were amended in a way that made any reform impossible, Halushchenko said, since any change needs to be agreed with the Ministry of Energy.

"Our hands were tied and so we developed a new charter and submitted it for approval. It was returned to us once and then a second time. We exhausted all the workable ways of resolving this issue and so went to court, but then our dialogue with the ministry was resumed, after which Energoatom withdrew its legal action."

On 14 July, Energoatom submitted for approval a new version of the relevant statute and the formation of a supervisory board is being discussed. This requires the consent of the European Bank for Reconstruction and Development, which is helping to fund upgrade work at Ukrainian plants. Energoatom wants the creation of a supervisory board to be prescribed in its charter, but after its corporatisation and not before, he said.

Energoatom will need to start decommissioning some of its units from 2030, which Halushchenko says will cost about UAH10 billion per unit. It has no plans yet to build new units and its project to build Khmelnitsky units 3 and 4 has been put on hold. This project was part of Ukraine's so-called Energy Bridge, according to which it would have started supplying electricity to the EU network as early as 2019, and would complete the project by 2025.

Energoatom operates all of Ukraine's four nuclear power plants - Zaporozhe, Rovno, South Ukraine and Khmelnitsky - which comprise 15 units. The Energy Bridge would link Khmelnitsky 2 to Burshtyn Energy Island and connect with power lines to Rzeszów in Poland and Albertirsa in Hungary.

Halushchenko said he is still a fan of this project.

"I believe that with such potential, such capacity and understanding that there is a shortage of electricity in certain countries, we could safely export it - especially since we still have transportation systems built in Soviet times that are not being used fully. I’m convinced that [the project] should be a priority for the government."

Alongside this, Energoatom recognises that the diversification of nuclear fuel supply is "not only a prerequisite for Ukraine's energy independence", but having two suppliers "leads to higher quality and a competitive price", he said.

Energoatom buys nuclear fuel from Russia's TVEL and the USA's Westinghouse, which are currently the only two companies technologically capable of producing fuel for VVER-1000 reactors.

Zaporozhe unit 5 will this year become the latest Ukrainian reactor to receive an extension to its operating licence, he said, but from 2030 the company will need to start decommissioning its first units. Asked whether the country plans to build replacement capacity, Halushchenko said public investment in new nuclear power plants was a debate taking place now at the global level, particularly in the context of economic recovery.

Energoatom employs 34,000 highly-skilled workers. "Our staff are our pride and that’s why, despite the difficult financial situation, we pay them their wages in full and on time. Our units, equipment and machinery are worth nothing without these specialists."

The full text of Halushchenko's interview with Energy Club is available here.