Practical aspects of energy sector problematics and ways to solve them: Andriy Kurmaz on the state of Ukraine's energy sector, green energy and the need for reforms

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Practical aspects of energy sector problematics and ways to solve them: Andriy Kurmaz on the state of Ukraine's energy sector, green energy and the need for reforms

Tue, 04/25/2023 - 23:21
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You are reading a translated version of the interview from 04.15.2023

Member of the Public Council at the Ministry of Energy of Ukraine and Deputy Chairman of the PA «Association of the Gas Market of Ukraine», Andriy Kurmaz, answered a number of challenging questions about Ukrainian energy sector and its actual state.

Thank you for joining me today, Mr. Kurmaz. Ukraine has officially gone through the toughest season in the history of energetics. Where do we stand now? How would you describe the atmosphere on the energy market?

The heating season was incredibly difficult. This year due to air strikes not only objects of power industry (substations, distribution devices) suffered damage, but also numerous elements of our gas infrastructure (gas pipelines, distribution points, wells). The most challenging task was to maintain the power system in working condition to provide energy to all territories of Ukraine. Oftentimes, damage required immediate intervention, especially during rocket attacks – our employees would perform their duty under life threatening circumstances.

The energy system of Ukraine managed to cope. However, throughout the heating season consumers in all regions were forced to limit themselves to warmth for several hours a day, during the hot phase of rocket attacks there could be no heating provided for days in a row. 

When it comes to the prompt restoration of damaged infrastructure, our heroic workers of the fuel and energy industrial complex answered the call. Teams of energy companies in western and central parts of Ukraine provided assistance to colleagues in combat zones, including the de-occupied territories. For instance, teams of employees from distribution companies restored electric and gas networks in places of connection with consumers. In this most difficult period, we were able to observe the highest self-organization among Ukrainian energy sector employees, similar to the notion of territorial defense volunteers. Unfortunately, there were losses among the staff. In addition to tragedies in the combat zone, there were cases of our workers being blown up on mine devices in the de-occupied zone.

We find ourselves, nevertheless, in uplifted spirits: our will to freedom and victory will overcome any difficulties. There is no doubt, with the help of our Western partners the entire energy infrastructure will be restored.

That’s very pleasant to hear. Recently, a document was signed, allowing to start the process of renewing electricity export subject to surplus generating capacity. How soon will export be possible and how likely is it to reach pre-war volumes?

Ukraine has a serious electricity export potential through neighboring states of Eastern Europe. Let me remind you that at the very beginning of the full-scale invasion, a historical event took place: the energy system of Ukraine was completely disconnected from the post-Soviet power system of Russia and synchronized with the energy system of continental Eastern Europe.

Unfortunately, due to missile destruction of our energy facilities, a significant deficit arose, which led to the introduction of electricity supply restriction-schedules throughout Ukraine. However, with the end of the heating season and the seasonal increase in generation from solar panels, a surplus of electricity began to appear in the power system at certain hours of the day.

At the beginning of April 2023, due to the gradual planned shutdown of heat generation, our operator of the system – National Energy Company «Ukrenergo» – began to seriously limit access of solar generation to the electric power system. The needs of consumers in electrical energy are now met in full.

Therefore, I consider the decision of the authorities to restore the right to export electric energy to be right on time: it drives the economy, we really need that now. As far as I know, first volumes of exported electricity arrived in Moldova on April 11 at the level of 350 MW per hour. I believe, in the near future Ukraine will be able to reach pre-war electricity export volumes: the total technical potential of Ukraine in pre-war times was up to 850MW per hour, and Ukraine is trying to increase this figure by building new interconnection points of electricity flow between power systems.

The Ministry of Energy of Ukraine in cooperation with the USA is preparing a program for reforming the energy sector – what reforms in your opinion can be in question? Which ones would you like to witness as soon as possible?

During the war, certain major problems became obvious on the surface of Ukrainian energy system. Their solution is key to strengthening the security of energy resources supply and satisfying consumer demand. During the period of air strikes, repair and restoration, it became impossible to supply electricity to such critical infrastructure facilities as hospitals, heating plants, water canals, etc. Therefore, the issue of expanding the facilities of distributed generation, to put them within reach for these points, as well as providing them with autonomous energy sources (generators, energy storage facilities, etc.) is acute.

The next need we have is to create protection against missile attacks for critically important energy facilities. Such as: distribution gas and power stations of interregional importance, generating stations, etc. I’m talking about building a shelter, which does not exclude their possible transfer underground.

The United States Agency for International Development (USAID) oversees and supports many energy projects in Ukraine from the US side.

As for my personal beliefs, I would add the following to the priority energy sector reform measures aimed at quick results:

•    Measures for the construction (restoration) of overhead power transmission lines between Ukraine and the countries of Eastern Europe to increase Ukraine's export opportunities. We have four operating nuclear power plants (one, in Zaporizhzhya, is currently occupied), and they create a significant potential for increasing the export of electricity, which is an excellent financial tool for feeding the state budget.

•    Measures to expand natural gas storage volumes in underground storage facilities of Ukraine provided to Western companies (non-residents) in customs warehouse mode. Such measures do not require significant capital investments, as we already have storage facilities, the largest in Europe. By measures, I mean increasing investment attractiveness, return guarantees, preferential conditions, etc.

•    Measures to reduce energy consumption in the residential sector, more precisely, reducing heat consumption in multi-apartment buildings by installing individual heat points (IHP). Of the 200,000 multi-apartment buildings in Ukraine, the vast majority are connected to the city's central heating networks without a possibility of individual heat regulation in a specific building (based on its state of thermal insulation and weather conditions). Terrible consequences are observed especially in the off-season, when we see wide open windows in houses just because the coolant supplied to the apartments is too hot. And it’s understandable, because its regulation is carried out at the Thermal Power Plant, which sets the temperature regime for the entire city. We have energy efficiency programs – for example, «30/70» – which allow residents, with a certain compensation from the state, to organize arrangement of IHP themselves. But it’s very slow this way: it will not provide a quick and significant reduction of heat consumption, and therefore energy resources, on a national scale! Currently, people need to gather, agree among themselves, raise funds. I am sure that no more than 10% of the houses took advantage of these programs. A comprehensive state program must be implemented, that covers all houses, regardless of the will of their residents.

What do you think is missing in order to achieve a quick result today?

We need to roll up our sleeves! Listen more to people with practical industrial experience, who, by profession, are able to foresee the outcomes of innovations and initiatives on the fly. As I like to put it – «they understand how that brick will affect the integrity of the wall where it’s mounted». They can tell an elephant from a fly when it comes to the importance of something for the industry. I feel strange observing how minor aspects are being inflated, without really fundamental problems and directions of growth being noticed. Unfortunately, we do not always see a sufficient level of competence, knowledge and experience in the field among people who shape the state policy in the energy sector. I believe that their level of expertise and knowledge is one of the most important factors of national security and the development of the industry. The quality of Energy Strategies and Reform Programs depends on it.

Could you provide an example of the most painful problems – including those, which remain unsolved due to the lack of action from the government?

The fuel and energy sector of Ukraine needs innovations and reforms in many areas. This can become a long discussion, especially if we talk about separately about electricity, gas, coal.

Answering your question, I would like to emphasize problems dependent on the decisions of the authorities and bring the situation in the energy sector much closer to collapse:

We are talking about active cross-subsidization in the electricity and gas market, which is formed by relevant resolutions of the Cabinet of Ministers of Ukraine on imposing special obligations on certain participants of these markets. Debts in the electricity and gas markets are horrendous.

While on the subject, the total reason for debts lies in unjustified tariffs of the distribution companies, which do not cover their justified costs. The tariffs of operators of gas distribution systems are particularly striking. At the same time, in addition to major legal conflicts between the participants of these markets, the debt crisis causes underfunding of technical measures, which are meant to support electricity and gas distribution networks in an operational and accident-free state. And this is as much an important factor for secure supply of energy resources as the diversification of sources of their origin.

In the natural gas market, measures have been implemented to date, which level out all the performance of this market since 2015 aimed at complying with the Third Energy Package of the European Union. Almost all directions of this market are accumulated by the hands of the authorities under the brand of Naftogaz of Ukraine. JSC «Naftogaz of Ukraine»:

•    It is the only gas supplier for the population. That means about 11 million consumers, whose total consumption in the pre-war period was 12 billion cubic meters per year;

•    Provides gas at a discounted price to thermal energy producers and budget institutions. This stands for another 6 billion cubic meters in the pre-war period;

•    Formally it remains a supplier in the segment of industrial consumers on a competitive basis, the volume for which is defined as not exceeding 10 billion cubic meters in the total balance of gas market in Ukraine. (As a result, the share of Naftogaz in the segment of gas supply to consumers exceeds 50%);

•    Manages state-owned gas production enterprises under the brand of JSC "Ukrgazvydobuvannya". The annual production volume of this enterprise is somewhere at the level of 11 billion cubic meters;

•    Manages all underground gas storages;

•    Starting from the middle of 2022, Naftogaz received corporate control over approximately 20 gas distribution enterprises (their share in the gas market is about 80%), and now, in essence, by raiding actions, changed the management of four enterprises, and promises by the end of the year to have changed the management of all gas distribution systems operators.

In fact, today Naftogaz of Ukraine does not control only the Ukrainian Gas Transmission System Operator. But there is a nuance. As a result of Naftogaz's repeated disregard of duties assigned to it and speculation on the gas market, the Gas Transmission System Operator is essentially on the verge of bankruptcy. And due to the strange decision of the authorities to oblige TSO to pay Naftogaz yearly 3 billion UAH 5 times in compensation for the fact that the shareholder - the Cabinet of Ministers of Ukraine - took away control over gas transportation system from Naftogaz and assigned it to the Operator, the financial condition of the Operator worsens even more. At the same time, it should be taken into consideration that in order to ensure accumulation of these 3 billion UAH, the state included generation of these funds in the Operator's tariff, which is ultimately paid by the Ukrainian consumer!

«Investor will follow where the investment will pay off faster» – development of biomethane and «green» energy in Ukraine

What achievements in transition to green energy could be witnessed in Ukraine over the last year?

When it comes to green energy in Ukraine, last year is not a key one. Indeed, the war also became a challenge for green energetics. Lost facilities in the occupied territories, damage from missile attacks, the economic crisis and the crisis with state subsidies – all this significantly affected the state and development of green energy. But the fundamental push in the development of green generation in Ukraine (solar, wind, hydro, biogas, biomass) took place in 2009, when certain preferences for investing in green energy were established in Ukrainian laws. For example, first solar stations were granted a tariff that compensated them at the level of UAH 10 per 1 kWh. While the price for consumers in Ukraine was less than UAH 1. At the same time, the green generation tariff was tied to the US dollar exchange rate as of 2009, which ensured the protection of investors against further fluctuations in the hryvnia exchange rate. Let me remind you that in 2009 the exchange rate of the hryvnia to the US dollar was 8 hryvnias for $1. Before the war - 27 hryvnias, and now - 40 hryvnias.

By the beginning of 2023, about 1,000 licenses for green generation business entities have been issued in Ukraine. The installed capacity of their stations is currently 10 GW (this is without taking into account the stations owned by consumers themselves). In the total balance of electricity generation, they occupy approximately 7%, although in European countries this percentage, as far as I know, does not exceed 3%. Regarding the monetary equivalent in the balance of the cost of electricity produced by all types of generation in Ukraine, the share of green generation is significantly higher than 15%. This creates a significant financial imbalance in the energy system and cross-subsidization among participants in the electricity market.

The war also revealed flaws in the concept of green generation development: as it turned out, the vast majority of stations do not have additional sources of energy to meet their own needs. Therefore, when the power consumption restriction schedules were introduced, such stations turned out to be inoperable and unable to provide electricity neither to themselves nor to the objects of critical and social infrastructure close to them. As for the energy storage facilities for such stations, they’re practically absent.

If we were to talk about the development of green generation over the last year, the Biomethane industry is developing rather quickly. At the end of 2021, the Law of Ukraine «On Amendments to Certain Laws of Ukraine Regarding the Development of Biomethane Production» was adopted. Since then, the industry has undergone significant progress. Relevant by-laws are now being adopted, including those regarding the simplified connection of biomethane plants to gas transportation and gas distribution systems. The Cabinet of Ministers of Ukraine, by its decision dated 07/22/2022 under No. 823, introduced the "Procedure of functioning of the biomethane register". At the beginning of April 2023, the first Biomethane plant in Ukraine was connected to the gas distribution system and began to supply to the system biomethane, adjusted in terms of physical and chemical properties to the parameters of natural gas. It happened in Chernihiv region.

Undoubtedly, biomethane is one of the leading green technologies today. Why is its production in Ukraine not developing as quickly as expected?

The reason for slow development of biomethane is purely economic – the attractiveness of the «green» tariff for production of electricity is much greater for owners of biogas plants than the benefit from production of biomethane.

It’s with understanding of the need to boost the development of biomethane, that as early as 2015, the Law of Ukraine "On the Natural Gas Market" stated the right of free access and connection of biomethane plants to the gas transportation and gas distribution systems, provided that biomethane meets the parameters of natural gas.

At that time and until now, many biogas plants were built in Ukraine, but in 7 years, none of them expressed interest to abandon the production of electric energy and convert their equipment for the production of biomethane.

Today, approaches have changed somewhat. Factors in favor of the development of biomethane branch, in addition to the global concept of decarbonization and measures for Ukraine's energy independence, include for instance the approximation of prices on the electricity market to those of the «green» tariff and the boom in natural gas prices. All this makes biomethane attractive to new investors compared to the construction of a biogas plant for the production of electricity.

Also, today, investors and specialized associations for the development of biomethane are reaching agreements with legislators about the possibility of exporting biomethane by LNG method.

In which other sources of renewable energy do you see the potential for development and wide application in Ukraine?

In my opinion, the fundamental mistake at the start of the introduction of green generation in 2009 was the underestimation of the so-called tariff coefficients for the «green» tariff for biomass and biogas in comparison with the coefficients for sun and wind. The green tariff for first solar stations exceeded the price on the Ukrainian market by 10 times, meanwhile, tariffs for biomass and biogas exceeded the market prices by only 3-4 times. It is clear that investor will go where the investment will pay off faster. This was the policy of the government, which at that time was headed by the fugitive president Yanukovych (who is also accountable for the war that Russia started against Ukraine).

I think now these branches (biogas and biomass) will begin to develop more through the concept of biomethane.

The importance of LNG technology for Ukraine is in question

In 20 years, liquefied gas is predicted to account for 60% of world trade in «blue fuel». What do these changes mean for the energy industry of Ukraine?

I am not particularly an expert in statistics and dynamics of key energy sources in world markets, but I will say the following about Ukraine. LNG is a method of gas delivery from the source of its extraction/production to the consumer (buyer). Ukraine is a unique country with own gas transportation system, the largest in Europe, capable of transiting up to 300 billion cubic meters of gas per year. If we assume that Ukraine will achieve equality between the volume of natural gas production and the volume of its consumption – such ambitious plans are floating around – then Ukraine does not, in principle, need its own LNG terminals. By the way, in 2022, due to a significant drop in natural gas consumption, its volume almost equaled the volume of extracted gas. If in the pre-war period, consumption in Ukraine amounted to 28 billion cubic meters, in 2022 it lowered to 18 billion cubic meters. LNG for Ukraine can be considered only as a method of import substitution for its needs in case of an attractive price situation, as well as an export potential due to an increase in our own production of gas.

Two years ago, it was economically unprofitable to sign long-term contracts for the supply of large volumes of liquefied gas to Ukraine: «LNG can be bought in small batches and only as needed». Did anything change because of the war?

I think that this year, the year of the war, confused established business processes regarding the formation of requests and offers for natural gas both in Ukraine and in Europe. Before the war, Russian gas played a significant role in the diversification of natural gas sources. And Ukraine is no exception: de facto Ukraine bought natural gas on the border with Europe, but it was in reality mostly of Russian origin. While de jure, according to contracts, this gas belonged to European companies. The war mixed up everything. Ukraine needed guarantees of receiving large volumes of natural gas, especially in the conditions of missile blackmail from Russia.

Therefore, I would not talk about large future contracts for the supply of liquefied gas to Ukraine at the moment. Especially in the context of what we have already discussed about the prospects and necessity of LNG for Ukraine, as well as against the background of gas reserves in underground storages, which Ukrainian private gas production companies have accumulated over the past six months.

The situation with them is similar to the situation with the export of electrical energy. At the beginning of the 2022/23 heating period, the authorities banned private mining companies from exporting the natural gas they produced. At the same time, during the heating period, government refused to buy gas from them, instead providing social needs for natural gas (population, heat producers, budget institutions) at the expense of gas produced and imported by the Naftogaz of Ukraine. As a result, the majority of private gas production companies were forced to move the extracted gas to underground storage facilities. The only source of sales of their gas in Ukraine were industrial consumers who remained able to work and with whom they managed to negotiate.

So, the supply of LNG to Ukraine in conditions of shortage became a rescue strategy?

Import substitution became one of the decisions of the authorities to meet the needs of Ukrainian consumers, although as time has shown, it was possible to treat the dire straits in a completely different way. As I have already mentioned, the volume of natural gas consumption in Ukraine for 2022 was practically the same as the volume of natural gas produced. In fact, the amount of gas produced in Ukraine would be enough to get through the heating period. But the authorities resorted to tricks and refused to buy gas from private mining companies, which were forced to transfer almost all production to storage. I could be slightly wrong, but private companies mine 5 billion cubic meters per year. Instead, the government, through Naftogaz of Ukraine, ensured the replacement of gas volumes for the needs of the population, heat producers, and budget institutions at the expense of imported gas, including contracts for LNG.

In the conditions of war, it is not always appropriate to criticize the government, but the fact that the state refused to buy gas from private gas-producing companies during the heating period, I personally call outrageous. In this way, the authorities insured themselves in case of a crisis situation with a shortage of gas, and I think it was planned to easily nationalize the gas of private companies for a certain period to cover this shortage. And meanwhile, while private gas production companies were accumulating gas in underground storages (which, by the way, led to a drop in prices on the local gas market compared to Europe), JSC Naftogaz of Ukraine was importing expensive gas. As far as I know, private gas production companies did not claim to receive a price higher than the import parity, memoranda were repeatedly signed between them and the authorities, which never were brought to life. There was also a comical situation when the government demanded rent payments from private gas-producing companies, while it did not allow them to sell the extracted gas, thereby creating a deficit of working capital for them.

To finish up our LNG talk: in your opinion, does Ukraine need its own terminal or you'd say deliveries via neighboring countries are planned?

The terminal is not on time. We will solve the question with neighbors as it approaches.

By the way, in my opinion, the regulatory basis for the introduction of an LNG terminal or LNG installations in Ukraine has serious shortcomings. The regulatory framework is written in such a way that LNG receiving point means something large (exclusively a terminal), which can only be connected to the gas transportation system (GTS). At the same time, necessarily with:

•    obtaining a special license;
•    setting an adjustable price;
•    all requirements valid for gas storage facilities being applied for it;
•    difficulties of customs clearance for such gas, etc.

Instead, in my opinion, sources of diversification can be small LNG plants that are connected to a more extensive network of gas distribution systems, liquefied gas will be delivered to them by trains and road transport. At the same time, for the attractiveness of investment, I’d offer a simplified mechanism for entering the natural gas market:

•    without a license (like what works for gas companies);
•    without agreeing the cost of their services in state institutions;
•    without the spread of requirements identical to the requirements for gas storages;
•    with the possibility of connection to gas distribution systems.

JSC "Naftogaz of Ukraine" is a monster in the natural gas market

Regarding natural gas: Ukraine recently launched the most powerful gas well in the last 2.5 years. Is the gas sector thriving? What is the forecast for its development?

It is difficult for me to comment on this, since this is taking place under the management of Naftogaz of Ukraine group, and as practice has shown, they know how to hide their eyes and manipulate data. I suggest waiting for a longer period to draw conclusions.

Let me remind you that in 2016, Naftogaz of Ukraine presented the ambitious «20/20» Program. According to this program, by 2020, gas production companies under their brand were to produce at least 20 billion cubic meters per year. Instead, they extracted 14, according to the results of 2020, and now - no more than 13 billion. To implement their ambitious plan, the authorities took an unpopular measure and increased the price of gas for the population by 7 times. From UAH 1,000 per cubic meter to UAH 7,000 per cubic meter. This is despite the fact that the cost of production did not exceed UAH 2,000 per cubic meter, and Naftogaz of Ukraine fully provided gas resources for the population, which in the pre-war period was approximately 12 billion cubic meters per year.

That is, the state has significantly financed the ambitious plan of Naftogaz of Ukraine with its measures. In fact, there was no increase in production. Moreover, when in 2017-2018 JSC Naftogaz of Ukraine began to be publicly criticized for disrupting the 20/20 Program, the company resorted to data manipulation and at the expense of an artificial (abnormal) increase in the calculated technological gas losses in general slightly increased production compared to 2016 according to the results of 2018. The manipulation was discovered by state auditors during a routine inspection. According to the results of 2019, the production rate fell below the rate of 2016 – less than 14 billion cubic meters were being produced. In 2021, together with other members of the People's Council under the Ministry of Energy of Ukraine, we tried to get explanations about the actual reasons for the failure of the 20/20 Program during public discussions with representatives of the Ministry and JSC Naftogaz of Ukraine, but, unfortunately, received no thorough explanations or justifications whatsoever.

Therefore, I'm sorry, but after this experience I am not ready to comment on patriotic statements from Naftogaz of Ukraine. It is a monster in the natural gas market, with a spread in so many areas of activity that it’s impossible to understand anything in its consolidated financial statements about the efficiency or loss in one or another area. The current structure of JSC Naftogaz of Ukraine does not fit into the requirements of the Third European Energy Package, and unfortunately, the authorities encourage such approach and seem to have no desire to fix it.