Posted on Nov 04, 2018
The European Union provides Ukraine with comprehensive assistance in improving the reliability and operational safety of nuclear power plants (NPPs). The most striking example is a loan totalling 600 million euros, provided jointly by the European Bank for Reconstruction and Development and the European Atomic Energy Community (Euratom), for the implementation of a Comprehensive Programme to Improve the Safety of Ukrainian NPPs.
No European country has received a comparable loan from the EBRD. The operator of the Ukrainian nuclear power plants, the state-owned company Energoatom, is successfully cooperating with European institutions on several other projects. The total amount of funding provided to Energoatom in the framework of the TACIS and INSC projects initiated by the European Commission has already exceeded €200m. However, obviously the routine implementation of measures to improve the safety and efficiency of Ukrainian NPPs should normally be carried out from Energoatom’s own funds. Why is this not happening?
The company has the potential to be financially successful, because its share in the Ukrainian electricity market consistently exceeds 50% of demand, and at peak consumption reaches 70%. Also, the average cost of electricity for Ukrainian consumers is already at the level of some Eastern European countries and the market price continues to rise. In recent years, Ukraine has been making significant efforts to reform its energy market in order to bring it into line with the European model. However, the problem is that for nuclear energy in Ukraine non-market-based methods are used to calculate electricity pricing. This gives rise to the paradox that nuclear power plants receive 300% less for the electricity they produce than coal-fired power plants.
The energy sector of Ukraine has been regulated since 2016 by a national Regulatory authority, which carries out state regulation in the fields of energy and utilities. The main mission of the Regulator is to create equal conditions for all participants in the energy market of Ukraine, but it has so far failed to achieve free and fair competition.
Ukraine’s International partners, such as the IMF, have consistently advocated the liberalisation of Ukraine’s energy market and the deregulation of gas and coal prices. In 2016, the market pricing method for coal was introduced in accordance with Article 269 of the Association Agreement between the EU and Ukraine. The formula for calculating coal prices is known as Rotterdam +, and this is the formula used to calculate the tariff for selling electricity to the wholesale market for coal-fired power plants.
Initially, the Rotterdam + formula was presented as a solution to the problem of coal shortage at Ukrainian power plants. The sharp reduction in coal supplies was caused by the blockade of transport lines between Ukraine and Donbass, control of which the country lost as a result of military aggression from the Russian Federation. In the territory of Donbass not controlled by Kiev, most coal mines remained, providing coal for thermal generation. It was precisely to compensate for the supply of coal from the temporarily occupied territories by importing coal that the Rotterdam + formula was introduced.
Today, critics of this formula say: "Rotterdam +" means that for 2.5 years, the cost of electricity for Ukrainian coal in the electricity tariff is based on the theoretical delivery of coal from the Dutch port of Rotterdam. But pegging coal prices to import prices is no longer justifiable, since Ukraine today extracts many times more coal than it buys on the foreign market.
Nevertheless the cost of electricity is still calculated according to the price of coal in Rotterdam, and plus the cost of transporting it. to Ukraine. The main beneficiary of the Rotterdam + formula is the largest private energy generating and coal mining company in Ukraine - DTEK. Criticism of Rotterdam + led to the discovery last year of an investigation by the Anti-Corruption Agency of Ukraine (NABU) of an alleged collusion between DTEK and the Regulator.
The question of tariffs on the electricity market is followed closely by the Ukrainian media, not least because of the imminent presidential elections due to be held in Ukraine in March 2019. Critics argue that the preservation of the Rotterdam + formula has a negative effect on the popularity ratings of the current government. But, supporters of the formula argue the opposite, that the cancellation of the use of Rotterdam + will destabilise the electricity market in Ukraine. The same position is taken by the Ukrainian Regulator.
In the meanwhile, the nuclear energy sector in Ukraine is forced to operate in conditions of severe underfunding. Basically the Regulator is using the artificially low cost of nuclear electricity to offset any increase in electricity prices caused by the use of the Rotterdam + formula.
Since 1 October of this year the tariff for the sale of electricity from nuclear power plants set by the Regulator is 1.7 eurocents per 1 kWh, while the tariff for thermal power plants is 5.8 eurocents per 1 kWh, so there is a difference of more than 300%. In most EU countries this gap never exceeds 30%.
Earlier this year, raising the issue to the political level, the Energy Committee of the Ukrainian Parliament criticised the Regulator and demanded an explanation of the reasons why the tariff for thermal power plants is more than three times higher than the tariff for nuclear power plants.
The Ukrainian nuclear power plant operator Energoatom itself has repeatedly called for an increase in the tariff for nuclear power plants, so that it can cover its operating costs and reinvest revenues in essential capital expenditure. The company recently conducted an independent international audit of the accuracy of its estimates a shortfall of €430 million euros to meet basic maintenance obligations.
This situation cannot but disturb the EU. The Energy Strategy of Ukraine for the next 20 years clearly states that the nuclear power industry will remain the main producer of electricity. However, the authorities in Ukraine still fail to answer the fundamental question of why the price paid for nuclear electricity remains the lowest in Europe, thereby putting at risk all of the assistance from the European Union to improve the safety and reliability of Ukrainian nuclear energy production.
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