Coal industry should be restructured to ensure the Ukraine’s energy independence

31-01-2020

Coal plays a significant role in the fuel balance of Ukraine. In 2018, its consumption volumes amounted to 54.8 million tons. Although there are about 3.3% of the world’s coal reserves on the territory of our country, only 61% of our domestic resource needs are met by domestic production. Compared to 1990, coal production in Ukraine has fallen five times and continues to decline. 39%, or 21.4 million tons, of coal required for the economy is met by import. This situation is caused not only by the fact that the Russian Federation occupied the main coal mining territories, but also by the ineffectiveness of current state policy in this area.

The government and business representatives worked on the ways of solving the industry’s problems during the Roundtable “Coal Industry Transformation: steps towards efficiency and greening” on January 30. The event was organized by the Better Regulation Delivery Office with the support of EU4Business/FORBIZ as part of the Public Dialogue #PRODialogue.

BRDO experts conducted a systematic analysis of the coal industry and concluded that the current regulation does not create the necessary environment for the industry’s development and restructuring and does not offer opportunities to replace coal with other energy resources. Moreover, one in five of 88 industry-specific legal acts that regulates the industry are illegal or irrelevant.

“It is necessary to change approaches significantly and restructure the coal industry to ensure the Ukraine’s energy independence. Now it is disappearing and can’t meet not only the domestic coal needs, but also requires huge government subsidies. In addition, coal mining enterprises have a significant negative impact on the environment. The decarbonisation and greening of production should be the focus of special government’s attention,” Anton Zorkin, Head of the BRDO Energy sector, said.

The shortage of coal of domestic production and the chronic industry’s unprofitability are explained by the fact that there are mostly non-profit mines with the highest cost of coal production in state property. At the same time, insufficient investments in new construction and renewal of fixed assets of such enterprises do not allow to modernize production and create additional operational and safety problems. It is worth noting that 96% of domestic mines have been operating without proper reconstruction for more than 20 years, and 2/3 of the existing equipment expired their service life.

Another layer of problems is the lack of effective regulatory solutions, including fiscal ones, to prevent further negative environmental impacts of coal enterprises. Currently, the rate of rent for coal is 20 times lower than the rate for the extraction of natural gas, while the environmental tax is not applied to the coal market players at all.

Another problematic aspect of the industry is the high level of market concentration. For example, over 80% of the coal market is currently controlled by the DTEK Energo private company.

Thus, there are currently 2 scenarios for the further development of the coal industry: either to continue the current ineffective policy with further aggravation of industry’s problems and increase of relevant subsidies; or to introduce a “new energy” – a more constructive approach that involves defining new short and long-term goals in the industry and developing a roadmap to achieve them.

Therefore, according to the BRDO Office, the following steps are necessary for systemic changes in the industry:

  1. Privatization of assets of state-owned coal enterprises and involvement of investors in their restructuring and modernization.
  2. Liquidation of unprofitable mines with provision of social protection of workers.
  3. Strengthening the anti-monopoly legislation to maintain an influence balance in the market and create conditions for competitive pricing.
  4. Cancellation of tax preferences and adjustment of the rent to gas extraction rent.
  5. Establishment of taxes and fees for emissions of harmful substances and bringing rock to the surface as well as fines for waste heaps burning that will help to reduce the negative impact of coal mining enterprises on the environment.

In addition, according to BRDO experts, shifting the economy to low-carbon development is an important task of the Government in the longer term. For this purpose, it is necessary to develop the Concept of decarbonization of the Ukrainian economy with targets for the gradual reduction of coal use for energy production.

The phasing-out of coal-fired TPP and CHP plants, increase of the share of RES in electricity to 25% by 2035 and implementation of European legislation in energy efficiency and climate protection are the steps that will help to reduce harmful emissions, protect the environment and health of citizens as well as reduce energy dependence of the country.

The event was also attended by Ivan Plachkov, Chairman of the All-Ukrainian Energy Assembly, Ihor Shumelyuk, Deputy Chairman of the State Labor Service of Ukraine, representatives of the Ministry of Energy and Environment Protection of Ukraine, energy companies, the public and the media.

For information:

The Ministry of Economic Development and Trade and the State Regulatory Service with the assistance of the BRDO Office are the initiators of the regulatory reform. The process is supported by the EU as part of the EU4Business/FORBIZ initiative.  

BRDO is a leading independent expert-analytical center for regulatory policy in Ukraine.

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