Ukraine’s state energy regulator on March 10 fined Ukraine’s largest energy firm DTEK as hard as it could.
The regulatory body, formally known as the National Energy and Utilities Regulatory Commission (NEURC), has claimed that DTEK failed to supply enough coal to three of its thermal power plants in December–January and neglected to notify authorities about the critical fuel situation.
For that, NEURC has imposed the maximum possible fines on three subsidiaries of DTEK, the giant owned by Ukraine’s richest man, oligarch Rinat Akhmetov. Now they must collectively pay Hr 5.1 million, or $180,000.
If the charges against DTEK are true, this could mean that the company, which runs 17 mines and is responsible for a quarter of Ukraine’s electricity, deliberately cut coal supplies in the middle of winter’s coldest months and posed a threat to Ukraine’s national energy security by risking power outages.
DTEK has called the charges against it “baseless” and, in turn, blamed the regulatory body for incompetence, “market manipulations, selective application of European norms and direct administrative interference in the operation of the market.” These are the reasons for the current crisis, DTEK stated.
DTEK’s explanation
In its public statement published on March 10, DTEK claims that an unpredictable increase in electricity consumption and a decrease in electricity production from nuclear power plants made it impossible to quickly increase its coal reserves.
Five thermal power plants of DTEK Energy — the part of DTEK responsible for coal production, electricity generation and distribution — burned 1 million more tons of coal in November–December than they forecast. This led to a significant decrease in coal storage at the company’s thermal power plants in January, according to its statement.
DTEK says that it did all it could to solve the crisis. This includes supplying needed coal to Ukraine’s state-owned energy producer Centrenergo to prevent it from shutting down, extracting coal at full capacity, and importing coal from Kazakhstan and Poland to ensure the stable operation of the energy system.
The chairman of NEURC, Valery Tarasyuk, isn’t buying it. In his statement on March 10, he said DTEK committed “such glaring violations that have led to a situation where the whole country is at risk of disconnection from the power supply and are deserving of the most severe penalties.”
In fact, NEURC, constrained by legal maximums of fines, is hoping to significantly increase the fines in court.
Andriy Gerus, President Volodymyr Zelensky’s representative to the Cabinet of Ministers, told the Kyiv Post he believes the likelihood that DTEK simply miscalculated how much coal they would need to burn is low.
Instead, Gerus believes that DTEK may have wanted to flex its muscles a bit.
“They wanted to create pressure to show that without them, we can’t get through a cold winter and to show that without coal burning heat generation, the country can’t have a stable energy market,” he said.
‘Strange behavior’
Thermal power plants in Ukraine create electricity primarily through burning coal. Coal-fired generation currently makes up 40% of electricity production in the country.
In 2020, Ukraine, one of the world’s most carbon-intensive economies, set a target for net-zero emissions by 2070, as interest grows to align with the European Union’s energy market and emissions targets. The EU’s deadline is in 2050.
European countries have introduced carbon taxes to curb emissions, but those taxes still remain low in Ukraine. Gerus thinks that DTEK may have wanted to scare the Ukrainian government away from increasing carbon taxes if it felt that DTEK’s survival was necessary to get through a cold winter.
But in December 2020, DTEK adopted a 2040 target for carbon neutrality and claimed that it planned to align itself with the EU’s energy market by 2023.
Gerus referred to DTEK’s actions as “strange behavior,” especially when their balance sheets for December 2020 showed Hr 1.6 billion ($57 million) in extra cash that could have easily been used to purchase 1 million tons of coal.
At the same time DTEK and its loyalists heavily lobbied for closing coal imports from Belarus and Russia. But during a cold winter, these imports were crucial for Ukraine.
“Why would they want to do that in January?” Gerus said. “It looks really strange. Close imports and put the country at risk? Why? Those imports would help us get through the winter and this difficult period.”
Centrenergo has been sounding the alarms about DTEK’s “strange behavior” ever since entering into an agreement for DTEK to supply coal to Centrenergo’s combined-cycle power plants in central Ukraine last year.
Centrenergo’s reserves
According to state-run power company Ukrenergo, electricity production at Centenergo exceeded the forecast balance by 29% in November and by 56% in December. The company was forced to expend an additional 128,000 tons and 233,000 tons of coal, respectively, leading to a critical reduction in Centenergo’s reserves.
DTEK’s director of corporate communications, Olga Zakharova, said by email that Centrenergo used the record coal reserves for electricity generation solely due to errors in the regulation of the power system.
The company’s thermal power plants were operating at maximum load in November through December 2020, while many other thermal and nuclear power units were idle due to repairs.
In its statement yesterday, DTEK also blamed these repairs for the shortage in electricity generation.
Centrenergo’s press service said that DTEK stopped shipments of coal to Centrenergo, violating the terms of its contract, despite receiving a prepayment of $3.7 million. On Jan. 13, DTEK sent a warning to Centrenergo to increase the price of coal from $59 to $75 per ton.
Centrenergo accused DTEK of disrupting coal supplies and raising fuel prices ahead of the projected temperature drop, after which Ukrenergo announced the coal shortage. This prompted NEURC to launch audits of five energy companies.
Regulation problems?
Zakharova wrote that NEURC is trying to “hide obvious failures in regulation by the industry, including the failure to prepare for the autumn-winter period.”
“The mistakes made by the regulator resulted in the accumulation of multibillion-dollar debts on the market to electricity producers, the most difficult situation in generation and the threat of power outages in winter,” Zakharova said.
DTEK is planning to appeal the decision of NEURC. It will also apply to the anti-corruption committee with a statement on the need to eliminate distortions of market mechanisms created by the regulator; it will also apply to the National Security and Defense Council to assess the threat to national energy security due to the incompetent actions of the NEURC.
Dmytro Sydorov, journalist at EXPRO Electricity, says it’s too soon to make any final judgment calls.
“Now that both the regulator and DTEK have sent their claims to the Security Council and anti-monopoly committee, we should wait until their decisions before choosing sides and determining who’s right here,” Sydorov told the Kyiv Post.
Both Gerus and Sydorov noted that fortunately this crisis did not affect the average person in Ukraine.
Sydorov noted that this crisis mostly posed a risk for the market without altering consumer prices. And even if the prices went up, it was only in February and it was only for the industries involved, he added.
Now that winter is ending, the crisis is over, but “if a situation like this happens next winter, it is seriously a question of national security. In winter you can’t have this,” Gerus said. “You can’t close your eyes to something like this.”
