MARINA PETROV: The task of EBRD is to help everyone negotiate and agree on the continuation of the power market reform in Ukraine
Deputy Director of the European Bank for Reconstruction and Development (EBRD) Marina Petrov. Appointed on January 19, 2015. Having started her career at the bank in 1995, she was among those who opened the Permanent Representative Office of the EBRD in Moldova. In 2001, Marina went over to the financial institutions department, first in London, then in Moscow. In 2009, she became the head of the St. Petersburg office, which is responsible for EBRD's activity in Russia's Northwestern Federal District. In Russia, she was also a member of supervisory boards of several financial institutions and investment funds.
Deputy Director of the European Bank for Reconstruction and Development (EBRD) Marina Petrov. Appointed on January 19, 2015. Having started her career at the bank in 1995, she was among those who opened the Permanent Representative Office of the EBRD in Moldova. In 2001, Marina went over to the financial institutions department, first in London, then in Moscow. In 2009, she became the head of the St. Petersburg office, which is responsible for EBRD's activity in Russia's Northwestern Federal District. In Russia, she was also a member of supervisory boards of several financial institutions and investment funds.
An Energoreforma correspondent talked to Ms. Petrov about problems and risks for the country's energy sector during the stage of reform.
The dismissal of Naftogaz supervisory board members and the failure of NEURC member rotation revealed conflicts over the course of the reform of the Ukrainian energy sector. In this situation, who should take responsibility and become the "headliner" of the reform process in Ukraine?
There cannot be a sole headliner in this process. The joint efforts of all types of authorities are required, along with their cooperation to implement positive changes. At the current stage of reform, teamwork is extremely important. By the way, that kind of well-coordinated style of work can be observed in the energy sector. For example, the Verkhovna Rada fuel and energy committee employs the following method: prior to voting on important draft laws, it creates communications platforms at which agreements can be achieved between the regulator, the Ministry of Energy and Coal Mining, the main market players, and the main donors. Such platforms, where it is possible to agree on a general agenda, are very helpful in promoting the reform.
Indeed, the Law on the Electricity Market was passed in large part thanks to the work of that Verkhovna Rada committee. What's next? Its implementation depends on the government and the regulator. When will a European-style electricity market actually be introduced in Ukraine?
As we know, the Cabinet of Ministers has established a Coordination Center for the implementation of the new power market. It is expected that the Law on the Electricity Market will be implemented within a year and a half. The process could take longer. The government has a lot of work to do. There's another circumstance that I would like to point out. Even if all the mechanisms envisaged in the law are implemented, there will still be one other significant issue: approximately 60% of all electricity in Ukraine is produced by Energoatom. Its joint share with DTEK in total electricity generation is over 80%. Thus, it is already extremely important to initiate a dialogue on how the energy market will form given the presence of such major players. Unfortunately, this issue is hardly being discussed.
What does EBRD do in this situation? The bank supports green energy in Ukraine. Increasing its share will result in a decreased share for traditional energy producers. This is not all that needs to be done. Right now, the privatization of Tsentrenergo is being prepared, and it is our hope that once this asset is sold, new players will enter the energy market, and there will be no consolidation of the existing ones. The presence of multiple players is an important condition for a healthy, properly operating market.
What might be the impact of importing electricity from major European companies on the establishment of the Ukrainian energy market?
The electricity import issue is an issue of market synchronization. In fact, the full synchronization of the markets is a huge task that will take many years. We have to start working on it today. At the same time, it is necessary to understand that we won't see results overnight. A possible temporary solution might be to allow external players into the internal market with permission to operate there, while simultaneously preparing for integration into the European electricity market.
Western partners have repeatedly criticized Ukraine for not completing the reform of its tariff system for energy products, particularly gas tariffs. Have you noticed, in this connection, a desire in the government to suspend the energy reforms?
First of all, the gas sector reform is a very ambitious program that was approved for implementation back in 2014. This program covers a very large number of players. Thus, it would be wrong to expect this to be a light reform. Of course, the current situation, with the resignation of Naftogaz's supervisory board, is a warning to us that the reform is failing. It is our task, as an important player in this reform, to help everyone negotiate and agree on how to continue the reform. Gas sector reform is also a national security issue. EBRD money and the money of other creditors (this was the first financing for reverse gas purchasing) helped Naftogaz avoid purchasing gas from Gazprom for a long time. This makes it possible for Naftogaz, on the one hand, to negotiate from a position of strength more actively. On the other hand,
in our view, the higher gas prices finally created incentives for the internal production of this kind of fuel. Look at how much gas Ukraine produced in the 1970s and '80s and how much it produces now. The figures are depressing. In fact, an important reason gas production is not increasing is that Ukraine was purchasing expensive Russian gas, and the gas produced at Ukrainian deposits was bought by the government for nothing. As a result, Ukrgazodobycha and other state companies got insufficient investment and failed to implement new gas production technologies. Given the lack of investment, production decreased, so it was necessary to purchase even more expensive Russian gas.
In the gas sector, increased prices stimulated investors' interest in gas production and thus in the modernization of the industry. Is this possible in the energy sector? For example, if prices for Ukrainian coal increase?
Coal is a sensitive issue for EBRD. Under the Paris Agreement, we cannot finance anything pertaining to coal. So I'm not going to discuss coal. Anyway, it's indisputable that new facilities need to be commissioned. EBRD, for its part, finances state generating companies, such as Ukrhydroenergo, so that they can increase their capacity and the volume of electricity supplied, as well as green energy companies. It would be a pleasure for us if other players appeared and started investing in other types of traditional energy. However, unfortunately, there are no such projects yet.
What about biofuel? Does it have a future in Ukraine?
In general, green energy in any form is very important and necessary. When discussing the development of renewable energy sources (RES) in Ukraine, it is important to remember the country's energy security. We all know that Ukraine is still dependent on external sources, both for nuclear fuel and gas.
This is why it was extremely important to establish a special tariff regime that would enable the development of green energy. For launching the market, the mechanism chosen (the green tariff) was probably the right one. However, we can see that methods for promoting RES are changing. In the modern world, auctions for facilities, and not the currently applied green tariff, are considered much more appropriate. Our view of the situation would be this: it is necessary to maintain the current regime (the green tariff) for those who have either already invested funds, built a RES facility, and gotten guarantees at the time of investment that this regime will remain in place, or those who are currently launching. At the same time, the need to develop new legislation to replace the current green tariff mechanism and propose new forms of incentivization is already being discussed with the Verkhovna Rada and the Ministry of Energy and Coal Mining. These new forms may include the holding of auctions, where potential green electricity producers could submit price offers: the tariff at which they are willing to sell energy from newly built facilities. We see that in countries where such a mechanism is operational, this results in a significant decrease in electricity tariffs. However, doing this in an administrative way by simply reducing the tariff strikes us as unadvisable. It is necessary to test the market and try to obtain a competitive offer from the market, and the market itself will tell us at what price it's willing to introduce new facilities.
There is another problem: we need to know how adequately the depreciation of current fixed assets is reflected in the price of traditional energy. This will become clear when the first player builds new traditional-energy facilities and announces the price at which it is willing to sell electricity from them. The market will show us. However, there are no guarantees that the price of electricity from a new TPP will be significantly lower than the sale price for green energy if competitive bidding is arranged.
In your opinion, what are the reasons for the government's contradictory claims with regard to the implementation of incentive tariff-setting? Do you think RAB regulation is necessary?
Absolutely, RAB regulation is a must. It is our hope that incentive tariff-setting will be introduced. We see that the regulator is willing to introduce RAB regulation. As long as there's no incentive tariff-setting, prices for the energy assets that will be sold will be extremely low. There is a risk that institutional, strategic investors will simply not enter the Ukrainian market. The reason is that for them, the risks pertaining to unclear pricing methodology and an unclear model of market functioning will be so high that they'll refuse to buy energy assets, even at a low price.
The other issue for investors is the transparency of privatization. We know that amendments to the law on privatization have already been submitted to the Verkhovna Rada. When packages of shares of energy distribution companies were offered for sale, foreign investors expressed enormous interest in them. European and American companies came. But they're concerned about how the privatization process is organized, things like the minimum price and time limits for the submission of applications. There are a range of procedural issues that have shown that privatization in the form envisaged by the previous law is not working. This is why our work with the government and the State Property Fund (SPF) to develop a new law on privatization is very active.