Konstantin Ushchapovsky: The Energy Sector Needs to Build its Potential

Publications about reform20 November 2017

When moving toward the new market, it will be necessary to solve many issues on the basis of the new Energy Strategy and the Law on the Electricity Market. These documents contain principles that will be implemented in course of the reforms and will enable a consumer-oriented market to be established. Konstantin Ushchapovsky, an advisor to the minister of energy and coal industry, discussed this in an interview with Energoreforma.

Konstantin Ushchapovsky: The Energy Sector Needs to Build its Potential

– What is your opinion on the current situation in the industry and the main legal initiatives aimed at reform?

This year, the Cabinet of Ministers adopted the new Energy Strategy. This is not a step-by-step action plan for the achievement of particular goals. It is a statement of intentions – our vision of the country's energy sector by 2035. Moving forward, we need to describe methods and mechanisms for the implementation of this strategy. One of these mechanisms is the self-sufficient Law on the Electricity Market. It envisages the full liberalization of the energy market and the achievement of certain goals laid out in the Energy Strategy.

The single-buyer model is exhausted. There is incredible debt within the market and cross subsidies still exist. This hinders the implementation of all the initiatives aimed at reform. Thus, by implementing the Energy Strategy and the provisions of the law, we will be solving fundamentally difficult problems that are currently keeping us from moving forward.

No reform provides results at the very beginning. Within a few years of the new electricity market becoming operational in 2019, we'll see a fall in tariffs due to proper competition.

For us, consumers of light and heat, service quality is the most important thing: if you're not sure whether you'll get electricity continuously, you are unable to plan your daily life.

Prices for services are also important. If you get a high-quality service, as a consumer, you are willing to pay an adequate market price for it. Today, in the mechanism that is currently operational, consumers don't see adequate prices. Tariffs are rising, and they don't understand why this is happening. In the old energy market mechanism, there's no indicator that can tell consumers that they're paying a fair price for the service. This results in certain manipulations, populism, etc.

There are transparency issues, as well. Our energy companies and their expenses need to be fully open and clear to consumers. There are people who would like to see the structure of the tariff of regional energy companies or of particular generation facilities in order to understand that they've invested this money in developing the grid and substation, improving the accounting system, etc.

These three conditions – quality, price, and transparency – currently form the basis of the Energy Strategy and the Law on the Electricity Market.

The principle of the Law on the Electricity Market is to turn around and face consumers. In the old model, everything was done for the sake of the market players. In the new model, the service supplier, company, and consumer are equal partners. All consumers needs to understand that in the future they'll be able to enter into partner relations with companies by providing certain services aimed at regulating and accumulating electricity, etc.

– What are the main problems to be solved as we move toward the new market?

Energorynok's debt to generating companies and the debt of power supply companies to Energorynok remain the major problem in the market. In the implementation of the Law on the Electricity Market, the primary objective is to eliminate these debts. If they remain, it will mean an additional load on all financial indices of the companies, and thus their extremely low investment appeal. So this problem has to be solved. There are a ton of mechanisms for this. In general, this will be the task of the groups established within the Coordination Council under the Cabinet of Ministers of Ukraine. This is the main problem.

– This summer, Ukrenergo signed an agreement on the terms of a future merger with ENTSO-E. What does this mean for the Ukrainian energy sector and the country in general?

The importance of this event is underestimated, and unfortunately, it's not getting much little attention. It is comparable to the adoption of the Law on the Electricity Market and the Energy Strategy, as the implementation of this agreement essentially opens European markets to us. Today, our export opportunities are limited to 650 MW for Burshtynsky Island and 225 MW for the directed Dobrotvorskaya TPP – Zamost 220 kV transmission. With the amalgamation of energy systems, technologically, we'll be able to achieve 5,500-6,000 MW eventually. Electricity can become one of the top three exported Ukrainian goods.

An analysis of the European market suggests that the energy deficit in Europe will increase due to one simple reason: strict environmental legislation preventing the active development of certain types of generation. Ukraine has to be be ready for this.

Attached to this agreement is a list of measures that Ukraine is obliged to perform, after which it will be possible for it to join. This may result in momentum not only for the industry, but for the entire Ukrainian economy.

What does integration into ENTSO-E mean for the energy sector? This is a new stage in the technical development of energy enterprises. We're switching to European technological standards, and we need to upgrade and replace lots of equipment and switch to a higher standard for operating it. There will be fewer emergency failures and other problems.

Clearly, significant investments will be required, but we have the benefit of the experience of our European colleagues, who have already gone down this path and are operating under new standards. We don't need to invent anything, just take the list of measures and implement it.

– What is your opinion about the possibility of exporting electricity in the context of the current reforms?

Ukraine has fairly powerful energy facilities. These include four NPPs and 14 powerful TPPs. The installed capacity of Ukrainian power plants is approximately 52,000 MW, with current consumption at around 20,000 MW, which means the excess of our installed capacities is almost 2/3. Thus, if our intention is to import or export something, we first need to draw up the balance of energy resources and see what would be beneficial for us.

Electricity is a high-tech product, and its price is high. It is much better to provide our generation with fuel and sell electricity abroad, securing currency for the country. Today, the price of electricity is good in Moldova, in Belarus. Our electricity is competitive in these markets, subject to the elimination of cross subsidies, so it is possible to enter them.

At the same time, many issues have to be settled. First, it must be understood that exporting electricity is not an end in itself; it's only good if the main condition is met, which is that there be no deficit of this product within the country.

Thus, the only option is to increase our energy potential. We have highly professional experts. This is precisely the kind of personnel needed for work at energy facilities. But we don't fully use this resource, or the capacities available to us. It is not important who owns these facilities; it's not the owners of companies who determine the future of the energy system, it's the state. Players are obligated to observe the rules envisaged in the laws and the Energy Strategy.

And here we've come to the main point. In fact, the adoption of the Energy Strategy and the law is an extremely important step, but this is just the first step, and it is not a guarantee of success. Subsidiary acts need to be prepared clearly and professionally to define the further work of this mechanism.

I think the adoption of the law and the Energy Strategy represents no more than a quarter of the actual market reform. We still have to take care of three quarters.

To this end, a Coordination Center was established under the Cabinet of Ministers to perform the function of the supreme authority for the consideration of relevant subsidiary legislation. Expert groups have been formed, and what's called the project office has been established. It will take part in developing subsidiary legislation, arranging for it to be considered, including at public hearings, and later present it to the Coordination Council, which will make certain adjustments to it and make decisions on its approval and further implementation.

The law implies that the national regulator, the NEURC, will essentially become the main organization to approve the entire legal framework (subsidiary legislation) in the energy sector. Here's the next issue: while the establishment of a Coordination Center under the Cabinet of Ministers is an important step, and these high-level people will consider documents and settle conflicts between industries and ministries arising in the course of the compilation of this legal framework, it will still be the regulator that adopts this legal framework.

Therefore, it is necessary to ensure the timely rotation of the regulator's members in strict compliance with the Law on the NEURC. It needs independent experts who will make competent decisions based on relevant experience and a balanced attitude toward innovation. The main thing is to do no harm.

– How relevant is RAB regulation implementation in Ukraine?

This is the correct mechanism. We need to have sources to upgrade our grids. They really are over 60% obsolete. I managed Ukrenergo for several years, and I know that some of our transmission lines were commissioned in 1948. Some substations are over 50 years old. This equipment is operating only thanks to the highly skilled staff and proper maintenance and repairs.

However, the service life of any mechanism is limited. Thus, RАВ regulation is a very advanced step. However, the truly essential thing is that all possible political speculations associated with the receipt of surplus profit be fully excluded from it. Most importantly, the end consumer must be able to see where this money will be sent. This additional source of funds should be used for upgrading, developing, and replacing equipment and major repairs.

This is quite right, we have to do it. This is the only way that investment will come to the Ukrainian energy sector.

– What else can help attract investment?

Strategic investors require clear rules, above all. They have to understand that these rules won't change for quite a while. Then they're willing to enter. If RАВ regulation is implemented, the investment appeal of our companies will increase many times over.

Investors will understand that by investing a billion in purchasing a regional energy company today, they'll get 12.5% of the investment in the form of the tariff next year. They'll get that money, 100%; they just need a strategic plan to use this money to build or upgrade something. This plan is an investment program.

- What is your opinion on switching from manual industry regulation to market pricing? How difficult will the liberalization of the market be?

It will be a rather painful procedure, and in my view, in the beginning, it will result in higher tariffs. However, no one anywhere in the world has been able to think up other mechanisms for improving performance.

It is necessary to use the experience of our Western partners, as the mechanisms of the operation of open, competitive markets have long been known. We have to adopt them and gradually adjust them to the conditions in our country. At the same time, the social and technical components have to remain the priority. The reliability of the Ukrainian energy system's operation and a low tariff load on end consumers are the priority.

Source: Energoreforma