Millions of Ukrainians are in the dark over why there are regular power outages in their towns and villages. Attempts to shed light on the situation have generated a lot of elaborate theories, but no clear answers – even from the experts.
Most market analysts say chronic non-payments, poor market structure and rampant barter deals are most to blame for rendering what should be one of the economy’s most lucrative sectors a loss-maker.
Add to the mix the government’s bungling attempts to reform the sector, and there is a recipe for almost continuous blackouts in some regions of Ukraine. Money is the root of the problem.
Analysts say the flow of cash from consumers through distributors has all but dried up by the time it reaches the electricity generators. Last year, the generators were paid for only about 40 percent of the power they produced. As a result, they were left critically short of funds to buy fuel this year.
Many of the sector’s problems stem from consumers’ failure to pay for power, experts say. Industrial and residential consumers on average pay for only 70 percent to 80 percent of the electricity supplied, and much of that comes in the form of barter.
Valery Antonov, an analyst with brokers Alfa Capital, said only about a fifth of payments come in cash, though the percentage of cash payments varies from region to region. In Kyiv, for example, 60 percent of electricity is paid for in cash, while in some areas the rate of cash payments dips below 20 percent.
The rest of the power is ‘paid for’ via barter or through the exchange of promissory notes – which experts generally view as another blight on the sector.
The problem is that promissory notes are rarely redeemed, said Antonov. This is reflected in promissory notes’ market value, which usually hover around 20 percent of their nominal value.
How can the non-payments problem be solved? Unfortunately, the obvious answer – cutting off offenders – is often not an option for the regional power distributors, or oblenergos.
Most chronic non-payers are included in a long list of enterprises that the government has ruled may not be disconnected under any circumstances. These include ministries, Ukrainian defense sector companies, vital municipal service providers such as water treatment plants, and a host of others.
And some enterprises, notably the metallurgical plants, cannot be disconnected for fear of irreparable damage being done to their production equipment. These industrial giants, both state- and privately-owned, play this factor to their advantage, refusing to pay for power even when they have the funds to do so, analysts said.
‘As soon as talk of disconnecting a debtor company is in the air, the company’s managers go to Kyiv to negotiate, instead of working out how to pay,’ said Maksym Karizhsky, an analyst with the Agency for Humanitarian Technologies – an independent political and economics think tank.
Privately run oblenergos have a better record than their state-owned counterparts in squeezing debts out of residential and industrial consumers.
Volodymyr Brynzyuk, spokesman for the National Electricity Regulating Council (NERC), a sector watchdog, said oblenergos with private majority ownership boast an ‘excellent’ money collection record – although he would not cite figures.
Private power distributors are better funded and equipped, enabling them to invest more in ensuring they collect payments. The state-owned oblenergos, in contrast, don’t have the resources to uncover cheating by consumers.
‘If a war veteran gets electricity at discounted rates somewhere in a village, seven households get hooked up to him and then we have eight households receiving electricity at discounted rates,’ said Karizhsky.
Even though their collection record is said to be good, the privately run oblenergos are reluctant to part with the cash they wring out of consumers. According to Brynzyuk, the private oblenergos use various legal loopholes to avoid passing on money to Energorynok, the state-run energy wholesaler that distribute cash among market players, acting as a middleman between energy distributors and generators.
Brynzyuk said the NERC has often taken the private oblenergos to court over their failure to pay debts, but so far the energy sector watchdog has yet to win a case.
And the very structure of the market is one of its biggest problems, analysts say.
Independent electricity suppliers, touted by the NERC as an ‘element of competition’ for the oblenergos, draw concern from experts.
The independent suppliers strike deals directly with generators – something the privately run oblenergos are also clamoring to do – and provide up to 70 percent of power supplies in some regions. The independent suppliers, which set their own tariff rates, have won the right to supply electricity to some of the country’s industrial giants. Unlike the oblenergos, these suppliers may accept goods instead of cash as payment for electricity, and most payment indeed comes in the form of bartered goods.
Opaque barter schemes render financial reporting meaningless. Many companies that make losses on paper are in fact profitable, according to Alfa Capital’s Antonov.
And the independent suppliers’ fondness for barter causes extra overheads for generators, which have to set up subsidiaries to sell the goods they receive in lieu of payment. In contrast, the suppliers and cash-strapped industrial consumers often benefit from the convoluted schemes, Brynzyuk said.
In response, the government at the beginning of the year declared the energy sector to be in a state of emergency, and banned barter payments between energy distributors, consumers, and generators. Under the emergency measures, all money raised from the sale of electricity is supposed to go directly to the generating companies. In addition, suppliers were required to make a 15 percent mandatory advance payment for electricity supplies, and the exchange of promissory notes was banned.
‘We had to introduce the emergency state to save the sector from collapsing,’ said Brynzyuk, adding that fuel stocks at the generators had fallen to a critically low point.
He said cash payments to Energorynok have increased slightly since the state of emergency was introduced, but are not likely to grow any further.
And according to energy sector analysts, Energorynok has seen its overall income, which used to consist of cash and promissory notes, fall since the ban on the exchange of promissory notes.
Unable to pay in anything other than goods, many consumers simply stopped paying. That starved the whole sector of cash and led the generators to cut back on electricity production, which in turn led to power outages throughout the country.
Energy sector observers admit they are at a loss to explain some aspects of the working of Ukraine’s energy market. Lack of transparency is a major concern, and industry experts complain that the market is, if anything, becoming even more disorderly, complex and opaque – especially in the light of recent government moves to reform the sector.
‘If earlier we had some understanding of what was going on in the sector, now it’s very difficult to grasp what the government’s motives and goals are in initiating changes in the market,’ said one analyst.
