Электроэнергетика

On December 25, 2008, the electricity generation company Dniproenergo [DNEN UZ, BUY] launched its unit #10, with a 282 MW capacity, at the Kryvyy Rih Fossil-Fuelled Power Plant FFPP). The tenth power unit was constructed in 1973 and later put on hold in 1996. During the period since, Dniproenergo has spent UAH 135 mln (USD 17.5 mln at the NBU’s current USD/UAH 7.7 rate) on its repairs. The Kryvyi Rih FFPP operates ten power units with a total capacity of 2.82 GW.

Dniproenergo owns three FFPPs: Zaporizhska, Krivorizhska and Pridneprovska. DNEN’s installed capacity of 8185 MW represents 16% of the total generating capacity of Ukraine. Dniproenergo holds a 22.57% share in the total power output among FFPPs and 9.98% of the total electricity generation of Ukraine.

Our view: Most of DNEN’s FFPPs are comprised of power units with an approximate 300 MW generating capacity. DNEN’s long term strategy foresees repairs to and the modernization of existing power units; therefore we may expect a shut-down for repairs of another of DNEN’s power units as soon as the tenth power unit reaches its planned load.

On Friday, Ukraine's Parliament passed the law “On preventing the international financial crisis from hindering the construction sector in Ukraine”, which amends a series of laws. A total of 410 deputies out of the 450, supported the draft law #3354 with their vote. They also amended the law to allocate 0.5% of GDP from the 2009 state budget for the construction of so-called social housing.

Notably, the law also amends the law on electricity, according to which the National Electricity Regulatory Commission (NERC) is empowered to draw up and approve license conditions for electricity generation, transmission and supplies, as well as rules on technical conditions’ agreements during connection to power transmission lines and heating systems.

Our view: Amendments to the law on electricity will enable NERC to proceed with the ongoing reform of the electricity sector. In particular, NERC will be empowered to develop regulations determining the framework of the new electricity market with bilateral contracts.

The National Electricity Regulatory Commission of Ukraine has set key parameters for electricity distribution companies in 2009. In particular, targets of 2009 investment (CapEx) programs for each oblenergo were defined and the tariffs for transmission and supply were set. In total, electricity distributors that are traded on the PFTS will invest up to UAH 1.9 bln in 2009, approximately 70-80% of which will be allocated to the construction and repair of gridlines.

The highest 2009 CapEx are planned for Donetskoblenergo [DOON UZ, U/R] at UAH 247mln, Dniprooblenergo [DNON UZ, U/R] at UAH 256mln, Odesaoblenergo [ODEN UZ, U/R] at UAH 174mln; Kharkivoblenergo [HAON UZ, U/R], while Zaporizhzhyaoblenergo [ZAON UZ, U/R] will invest over UAH 130mln in 2009. It should be noted that the best CapEx programs were approved for Donetskoblenergo [DOON UZ, U/R], Odessaoblenergo [ODEN UZ, U/R] and Zakarpattyaoblenergo [ZOEN UZ, U/R], each of which plans to invest UAH 5590, UAH 4020 and UAH 4860, respectively, per kilometer of the grid.

Also, NERC established new tariffs for electricity transmission and supply provided by oblenergos. As the official NERC’s release states, NERC was guided by the President’s decree "On additional measures against the financial crisis in Ukraine". As a result, transmission tariffs, which provide the major part of oblenergos revenues, were cut sharply for most of the oblenergos. The worse decline in tariffs was made for Zakarpatoblenergo [ZOEN UZ, U/R] , Prykarpataoblenergo [PREN UZ, U/R] and Chernivtsioblenergo [CHEN UZ, U/R] . Tariffs rose materially only for Dniprooblenergo [DNEN UZ, U/R] and Zaporizhzhyaoblenergo.

Our view: NERC’s tariff action was taken in order to fund the budget expenses through the cost of electricity distributors. The tariff decrease, coupled with the fall in electricity consumption and the growing risk of non-payments, will inevitably lead to the worsening of the financial performance of Ukrainian electricity distributing companies in 2009. As a result, the planned CapEx programs may not be fulfilled in the next year.

Ukrainian President Viktor Yuschenko issued a decree, which bans the privatization of four electricity generation companies – Centrenergo [CEEN UZ, BUY], Dniproenergo [DNEN UZ, BUY], Donbasenergo [DOEN UZ, BUY] and Zakhidenergo [ZAEN UZ, BUY] – as well as turbine manufacturer Turboatom [TATM UZ, HOLD] and the Kryvyy Rih Mining and Dressing Plant of Oxidized Ores. He also challenged in the Constitutional Court the decision of the Ukrainian Government on the privatization of the above-mentioned companies.

In addition, the President claimed that the government exceeded its powers by including the following companies in the privatization list for 2009: "Kyiv Scientific and Production Complex n.a. Petrovskiy", the Feodosia "Morye" Shipbuilding Company, the Mukachevo "Tochprybor" Plant, and the Kherson "Pallada” State Plant, which provide services to the Ukrainian military, as well as manufacturing and repairing weaponry and military equipment. Yuschenko also suspended the Ukrainian Government's decision to sell the “Science and Research Institute for Nuclear and Energy Pump Engineering”, which, like "Turboatom, provide products for the nuclear and thermal energy industry.

Our view: It’s all about politics. However, the privatization of big state-owned enterprises could be the source of funds for the budget in this time of significant economic downturn and global financial crisis. An open struggle between President Yuschenko and Prime Minister Yulia Tymoshenko makes the chances of privatization more and more uncertain.

Ukrainian deputies extended the ban on bankruptcies in the energy sector until January 1, 2011. The Law on Amendments to the Law of Ukraine "On measures aimed at ensuring the stable functioning of the fuel and energy complex” was supported by 381 of 450 people's deputies in Parliament on Tuesday.

Our view: The extension of the ban on bankruptcies in the energy sector would, most importantly, serve a protective function, especially for the electricity generation companies and the national gas corporation ‘Naftogaz’. In the early 2000s, common attempts to take over GenCos and oblenergos by artificially inflating their debts led to a legal ban on bankruptcies in the energy sector. The ban used to be extended every consecutive year, just as it is now.

In the current economic slump, the risk of non-payments by consumers and the risk of artificial debt increases, as well as the related credit risks born by energy companies traditionally increases; therefore, the extension of the ban is surely a positive and timely measure. Electricity distribution companies, in this respect, are at lower risk as they traditionally owe the state and have already restructured (or are to restructure shortly) their outstanding debts to the energy company of Ukraine and the wholesale electricity market operator ‘Energorynok’.

However, generating companies may face problems with covering their dues to private coal suppliers, and the law is good for them. Notably, two thermal power generators – Dniproenergo [DNEN UZ, BUY] and Donbasenergo [DOEN UZ, BUY] – will attract UAH 100 mln and UAH 30 mln, respectively, in one-year loans from the state savings bank ‘Oschadbank’ to cover their expenses.

In January-November 2008, electricity consumption in Ukraine rose by 0.8% YoY (to 169 thsd GWh), while in 10M08 it grew by 1.1% YoY. Monthly electricity consumption in Ukraine continued falling and, in November 2008, decreased by 16% (to 14.4 thsd GWh).

The industrial sector of Ukraine, in January-November 2008, reduced energy consumption by 4.5% and metallurgy dropped 6.4%, while households increased electricity consumption by 9.9%.

The share of manufacturing in total electricity consumption decreased from 55.8% in January-November 2007 to 52.8% in January-November 2008, while the share of households’ consumption increased from 19.4% to 21.1%.

Regarding monthly figures, in November 2008 the Ukrainian industrial sector reduced electricity consumption by 34.8% compared to November 2007, with consumption by metallurgy and chemical sectors falling the most – by 54% and 32% respectively. Households increased electricity consumption by 10% in November 2008 compared to November 2007.

Our view: Worsening dynamics in electricity consumption goes hand in hand with the general macroeconomic slump in Ukraine. The shortage of electricity consumption in Ukraine is likely to continue until the end of the economic recession. As figures show, the household sector is more stable in terms of electricity consumption, while the industrial sector is currently the key issue for electricity producers and distributors.

Moreover, growth in electricity consumption, coupled with comparatively low electricity tariffs for the population in Ukraine, make electricity companies located in non-industrialised regions of Ukraine a better long-term investment option. However, the payment discipline by households may also worsen. This is a traditional issue for households in Ukraine.

The National Electricity Regulatory Commission of Ukraine (NERC) will not revise electricity tariffs for all consumer groups until April 2009, said Commission Head Valery Kalchenko. The President and the Ukrainian Government issued relevant decisions establishing a moratorium on electricity tariff increases for all consumers, according to Kalchenko. The moratorium applies both to retail tariffs, and planned wholesale electricity prices. Meanwhile, yesterday NERC decreased electricity tariffs for nuclear power generators by 5.5% to UAH 135 per MWh.

Our view: The NERC’s intention to freeze tariffs contradicts NERC’s own intentions to conduct a UAH 15 bln investment program in the electricity sector in 2009. As we noted earlier, we have doubts about the 100% realization of the above-mentioned program.

The tariff action taken by the Ukrainian authorities is rather political. The decision also does not resolve the issue of cross-subsidizing tariff policy when industrial consumers pay low electricity fees for households and public utilities. The shortage of electricity consumption due to the economic crisis may have a bad impact on the financials of electricity companies.

In our view, in the situation of severe budget issues and economic slump, unlike 2007-2008, this time the Ukrainian Government may really privatize some of the electricity companies. Yesterday, a list of four generators – Centrenergo [CEEN, BUY] Dniproenergo [DNEN UZ, BUY], Donbasenergo [DOEN UZ, BUY] and Zakhidenergo [ZAEN UZ, BUY] – were approved for privatization in 2009 by the government, along with six distribution companies. They are Prikarpatoblenergo [PREN UZ, U/R], Odessaoblenergo [ODEN UZ, U/R], Poltavaoblenergo [POON UZ, U/R], Sumyoblenergo [SOEN UZ, U/R], Lvivoblenergo [LVON UZ, U/R],and Chernigovoblenergo [CHEON UZ, U/R].

According to the state wholesale electricity operator “Energorynok”, from November 10 through November 16, 2008, electricity consumption in Ukraine slumped 13.2% YoY, from 24.6 GW per week for this period in November 2007 to 21.4 GW per week in November 2008.

The worst performers were the Dnipropetrovsk (-39.6% YoY) and Zaporizhzhia (-27.9% YoY) Regions, with huge ferroalloy and aluminum producers stopping their output. The industrialized Donetsk and Lugansk Regions lost 16.4% YoY and 15.5% YoY, respectively, in terms of electricity consumption. The Cherkasy Region took fifth place, declining -15.3% YoY, and the Poltava Region lost 11.9% in electricity consumption YoY in the second week of November.

The agrarian South and West Ukrainian regions were less hurt by the drop in electricity consumption while Chernivtsi even gained 13.9% of electricity consumption YoY.

Our view:The figures are convincing. As the economic crisis continues to develop, electricity consumption will continue to fall and electricity companies will be showing weaker financials. But every cloud has a silver lining. Hopefully this crisis will push Ukrainian authorities to speed up the needed reforms in the electricity sector.

Difficulties in financing the needed investment into the Ukrainian electricity sector and the high level of depreciation of its assets are the key reasons behind Fitch’s negative outlook on the sector. Anton Kravchenko, Fitch’s electricity specialist, made a corresponding statement at a recent conference in Kyiv. He remarked that low electricity tariffs and state ownership of almost all the electricity generators, along with Ukrainian budget issues and the global economic crisis, signify that currently the situation in Ukrainian electricity sector is unlikely to change for the better.

Our view: We support Fitch’s view on the Ukrainian electricity sector with the only exception being that even in the worst-case scenario of zero investment into the Ukrainian electricity sector, the low utilization level of Ukrainian thermal and hydro generators and the drop in electricity consumption due to the economic slump would add to the resilience of the sector in the mid-term. Although the 2009 investment program into the electricity sector, worth UAH 15 bln, was announced by the Energy Ministry last week, its full implementation without rather heavy financing from abroad through vast privatization is unfeasible.

The National Electricity Regulation Commission (NERC) retained its regulated electricity tariff for clients other than the general public at November’s level, which is UAH 436 (USD 65) per MW and UAH 585 (USD 87) per MW for large and small consumers respectively.

However, since December 2007, the electricity tariff for this category of consumers grew 45% and 42% for large and small consumers respectively. Electricity tariffs for the general population have remained unchanged since 2006 and are currently set at UAH 203 (USD 30) per MW.

Our view: We completely disagree with the NERC’s practice of cross-subsidizing the population at the expense of industrial electricity consumers. In the forthcoming year, we expect a sharp increase in electricity tariffs for the general population and also the initiation of bilateral electricity contracts, which will diversify the electricity tariffs and move them to fair levels. According to our expectations, starting from the second quarter of 2009 and through to the end of the year, 10-15% of the generated electricity might be sold through bilateral contracts.