One step forward, two steps back, or what is wrong in the Ukrainian energy sector

18-08-2020

How to replace expensive coal generation in the energy balance of Ukraine

One of the principles of European Union development is the decarbonisation of the economy.

This is evidenced by the establishment of strict requirements in various sectors: increasing the share of electricity and heat produced from alternative sources, adding biocomponents to motor fuel, reducing CO2 and greenhouse gas emissions, and more.

The EU supports and encourages the implementation of these requirements by neighboring states and partner countries.

As an example, the need to implement European legislation governing these issues is included in the Association Agreement between Ukraine and the EU.

The Green Deal strategy provides for a significant revision of approaches to the functioning of the economy in terms of its impact on the environment.

It includes stimulating the replacement of faulty technologies with environmentally neutral ones, including through increased environmental taxation, reuse of resources, the increased energy efficiency of technological processes, and the RES introduction.

An important component of the EU’s decarbonisation policy is the limited use of fossil fuels, especially coal.

Such a policy has one obvious drawback. The high economic costs for its implementation, and hence the increase in production costs mean a decrease in the competitiveness of EU goods on the world market.

Therefore, the next step of European countries will be to protect their market from faulty goods produced using raw materials and technologies that negatively affect the environment.

What does this mean for Ukraine? Our products may lose access to one of the world’s largest markets. In addition, it is the closest market to our borders, and this makes it a priority market for our country.

Thus, economic integration with the EU is a strategic goal of Ukraine’s foreign policy, so it is very important to prevent the worsening of our position in this area.

The share of coal in Ukraine’s energy balance is very high. About 40% of electricity is generated by coal-fired power stations, which is more than twice as high as this figure in Europe (15% in 2019).

Most EU countries plan to completely phase out the use of coal for electricity generation by 2038 (moreover, some countries, including Belgium, Switzerland and the Baltic States, have already completely phased out it).

There are the same trends in the metallurgical industry, where coal is replaced by other resources, and in other sectors.

Thus, Ukraine is at risk of being included in the list of countries, to the goods of which restrictive duties or taxes on CO2 emissions will be applied after their introduction.

At the beginning of 2020, the Ministry of Energy presented the Concept of “green” energy transition of Ukraine until 2050, which is in the trend of European initiatives. It focuses on gradually reducing the use of coal for energy production.

The concept of “decarbonisation of the economy” provides for reducing air emissions and the transition to a climate-neutral economy by 2070, as well as reducing energy dependence on other countries.

This goal should be achieved through:

  • energy efficiency and energy-saving measures that should become energy policy priorities,
  • increased energy generation from renewable sources to change the extraction of fossil fuels, including the use of renewable resources in the transport sector,
  • economical waste management that will allow returning some materials and energy to the economy.

However, the Concept may share the same destiny as many other strategic documents ‘on a bright future’ gathering dust on government shelves.

There are the first signs of this scenario. First of all, it is related to the policy of the relevant ministry in the electricity and coal industry.

During the coronavirus crisis, electricity demand has fallen significantly. As a result, there was a decrease in demand for power plant coal, and this led to a reduction in its purchase by power plants from coal mining companies.

Due to the failure of sales, mine owners reduce production or even suspend it. According to market laws, supply must be brought to the demand level.

But owners of coal mining companies, who, by the way, are also the owners of most thermal power stations (main consumers of coal), resorted to blackmail of the government by miners to maintain the demand for coal.

The government decided to ‘help’ private coal companies, primarily DTEK, at the expense of the state-owned NNEGC “Energoatom”.

Not only is electricity generated by nuclear power plants the cheapest one on the market, but it is also carbon neutral. And this is in line with the decarbonisation concept.

Instead of giving the right signals about the need to reduce coal energy and take the first step towards decarbonisation, the government took a step back.

It is worth mentioning the dubious decisions on electricity imports from Russia, contrary to the interests of Ukrainian energy companies, as well as coal imports from this country. This negatively affects domestic coal production, primarily the state production, in which losses are covered from the budget.

The companies of another oligarchic group were the main beneficiaries of the implementation of these decisions.

There is another aspect of the coal issue: state-owned coal mining companies. The mines, which were not needed by anyone during the split-up of the industry under Yanukovych, are still owned by the state.

There are several reasons for such ‘needlessness’: difficult geological mining conditions as well as depletion of formations and reserves, resulting in too high product costs.

These problems have only worsened over the years. Today, state coal mining is a black hole sucking down the state resources and producing regional social tensions that periodically spill into Kyiv.

The cost of coal produced by state-owned mines is not just high: in some companies, it is many times (!) higher than the price, at which this coal is sold. But the difference is compensated by the state, ie by each of us.

However, the state subsidizes not only unprofitable state-owned enterprises. Taxpayers also subsidize fully profitable private companies.

This is done at the expense of unprecedented tax preferences for coal mining companies. In fact, they do not pay rent for the extraction of minerals, which are the property of the people of Ukraine under the Constitution. The rent rate for power plant coal is a meager 0.75%.

Coal is not subject to VAT, and there are no environmental tax liabilities, although these companies are one of the biggest polluters of the environment.

The unprofitability of state-owned mines can be solved by closing them and replacing their products with natural gas. Today, its market price is lower than the cost of most state-owned coal companies.

And this is particularly incomprehensible given the existing differences in the policy of coal and gas taxation. Like the vast majority of other goods, natural gas is subject to VAT, and gas companies are obliged to pay rent payments.

In general, the gas production unit of Naftogaz Ukrainy alone generated budget revenues of UAH 62.7 billion in 2019. As they say, feel the difference!

It is estimated that today the products of state-owned enterprises producing more than 2.3 million tons of coal (that is almost 70% of the total production of state-owned mines) are not as competitive as natural gas in terms of prices, even without taking into account transport costs, the greater environmental damage caused by coal and some technological aspects.

The total losses of Ukraine’s economy from the use of more expensive resources are about UAH 5 billion per year.

In the case of identical gas and coal taxation, it will make no economic sense to produce three-quarters of state coal. If coal is replaced by gas during the heat and electricity production, the economic effect will exceed UAH 6.7 billion per year (this figure doesn’t include budget revenues in the form of taxes).

These funds would be enough to close mines, provide socio-economic adaptation and retraining of employees, as well as reclamation of territories to contribute to the goal of the Concept of “decarbonisation of the economy”.

Actions and decisions of the government, which are contrary to the goals of this document and the economic logic, are the second step back.

We can only say that we are witnessing a favorite game of the authorities: preparing an adequate and promising document on the development of the energy sector and making immediate decisions that do not implement it, but also move the state backward. This will continue as long as the government puts the interests of oligarchs above the interests of society.

Source: Ekonomichna Pravda

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