In early January the government published the information on electricity exports from Ukraine. During the year electricity exports have grown by 19.4 percent up to 6.2 billion kWh in 2018, which is equivalent to approximately 3 million tons of coal.

Electricity export has been almost completely monopolized by Rinat Akhmetov’s DTEK, which controls 99 percent of such electricity supplies. This situation is a result of DTEK vertical integration – the company alone controls coal mines producing 85 percent of all Ukrainian coal, as well as coal-fired power stations from which the electricity is being exported (e.g. Burshtynska and Dobrotvirska Power Stations) and this vertical integration gave Akhmetov an unfair competitive advantage.

The largest amount of electricity was exported to Hungary: Almost 3.6 billion kWh or 58 percent of the total amount.

Electricity export from Ukraine Billion kWh Fraction from total Hungary 3,6 58% Poland 1,4 23% Moldova 1,0 16% Slovakia, Romania 0,2 3% In total 6,2 100%

Source: NPC “Ukrenergo”

How does the export scheme work?

Despite the fact that there are coal-fired power stations in Ukraine that are aimed directly for export, they still operate under the tariffs set out by the National Energy Regulator (NKREKP), and all financial settlements are made through the state-owned enterprise EnergoRynok.

Therefore, at first DTEK’s mines produce coal which is sold to coal-fired power stations at “Rotterdam+” price. In fact, it is coal that causes the greatest margin rise. Afterwards, these power stations burn the coal, produce electricity and sell it to EnergoRynok at high “Rotterdam+” tariff. Later DTEK buys back the electricity from EnergoRynok, but at a lower price. And later the losses incurred by EnergoRynok as a result of such operations are later attributed and divided among all the consumers. The consequence is that the whole Ukrainian economy and all Ukrainian consumers are subsidizing DTEK’s electricity export.

DTEK also uses this scheme to avoid paying taxes and to withdraw currency from Ukraine. For this purpose, electricity is sold to DTEK’s Swiss trading company at a low price, which, in its turn, sells it to the actual buyer in Hungary or Poland. In this case, according to the documents, electricity from Ukraine goes to Hungary through Switzerland. Furthermore, in a similar way, according to the documents, DTEK imports coal from its Russian mines to Ukraine through Switzerland, where the coal price rises up to “Rotterdam+”. The profit from these operations stays with DTEK trading company in Geneva, Switzerland.

The monthly difference between the tariff (price) at which EnergoRynok buys electricity from thermal power plants, and the wholesale market price at which EnergoRynok sells electricity for export, is the exact amount that is subsidized by all consumers (the discount for DTEK at the costs of other consumers).

The monthly difference between the tariff (price) at which EnergoRynok buys electricity from thermal power plants, and the wholesale market price at which EnergoRynok sells electricity for export, is the exact amount that is subsidized by all consumers (the discount for DTEK at the costs of other consumers).

Such subsidizing was the largest in March and August. Each kWh of electricity for export was subsidized by Ukrainian consumers in amount of Hr 0.40 and Hr 0.38 respectively. It constituted between 24 percent and 26 percent from the wholesale electricity price. Let’s be honest, everybody can be a successful exporter, when the state compensates between 24 percent and 26 percent of goods production cost (please do not confuse with VAT return).

As the result, for 2018 the Ukrainian economy and the Ukrainian consumers have subsidized Akhmetov’s DTEK in amount of Hr 1.3 billion. This amount was set in the price of electricity during 2018 and led to the raise of final tariffs.

The major part of this subsidizing took place in period between February and August. And only in the 4th quarter the subsidizing has diminished along with the reduction of the tariff for thermal power stations (DTEK tried lobbying a new increase of electricity prices from October, but failed, and the increase did not occur).

Electricity in Europe is cheaper than ‘Akhmetov’s electricity’

It is worth mentioning, that for the most of the last year DTEK was selling its electricity at a loss. But it allowed company to burn more of its coal and earn superprofits as a result (so-called “Rotterdam+” formula, according to which price for coal include costs of purchase in the port of Rotterdam and transportation to Ukraine, regardless of coals’ origin and quality). Thus, the vertical integration of the company made the overall margin attractive for the export business.

At the same time, DTEK was earning a much higher margin at Ukrainian monopolized market, than by export supplies to Hungary, selling the same electricity to Hungarian consumers at a lower price. But neither the Antimonopoly Committee of Ukraine, nor the National Energy Regulator (NKREKP) (both of which are appointed by the President), nor the Government responded to this situation.

Between January and August 2018, the tariff for Ukrainian coal-fired power stations, 80 percent of which are owned by Akhmetov’s DTEK, was much higher than the electricity price traded at the exchanges of our European neighbors. It means that the Ukrainian economy could have saved a lot of money by importing electricity from our neighbors rather than subsidizing Akhmetov’s business. Such competition would have reduced the overall electricity tariff in Ukraine by 10 percent or 20 percent. Only in September 2018 the situation was corrected, and thermal power stations’ tariff was either at the level of the European exchanges, or a little lower.

Andriy Gerus is an energy expert, the head of the Association of Consumers of Energy and Utility Services, and a former commissioner at the National Energy and Utilities Regulation Commission.