Electricity Sector of Ukraine and Climate Change Investment climate for environmental projects: current situation and expectations for the future 17 May 2012 Kyiv
Investments for power sector Planned Investments in power sector until 2030, Euro Actual and planned investments for TPP in 2007- bln; Euro 74 bln total TPP Retrofit 2030 € 3.1 bln; 4% Hydros New Main Grids 2025-2030 1,486 € 5.0 bln; 7% NPP Prolong. € 5.2 bln; 7% CHP Retrofit € 3.6 bln; 5% € 0.7 bln; 1% 2020-2025 1,886 NPP New Hydros Retrofit € 9.6 bln; 13% € 0.5 bln; 1% 2016-2020 1,086 TPP Flue Gases € 6.1 bln; 8% TPP New 514 2011-2015 € 14.9 bln; 20% RES New 2011 94 € 12.4 bln; 17% Distribution Grids € 12.8 bln; 17% 2010 52 2009 32 Source: Draft Energy Strategy, Base Scenario 2008 19 Some plans for investments in TPP € mln 2007 6 5.5 times growth vs. 2011 in 2011-2015 0 500 1 000 1 500 2 000 11.6 times growth vs. 2011 in 2016-2020 TPP Retrofit 20 times growth vs. 2011 in 2021 – 2025 Flue gases cleaning systems 15.8 times growth vs. 2011 in 2026 - 2030 New TPP Construction Source: NERC, Draft Energy Strategy, Base Scenario 2
Why unfavorable investment climate Some general indicators of investment climate: 2010 per capita FDI ($US): Ukraine: 159 ; Poland: 962 [UNCTAD data] Country risk assessment: Sovereign Currency Banking Political Economic Country risk risk sector risk risk structure risk risk Source: EIU data, March 2012 CCC CCC CCC B CC CCC 152 Rank in Doing Business 2012 (IFC, World Bank data), 149 Rank in 2011 Why in the power sector: Dominance of public sector Suboptimal electricity market model Electricity tariffs not covering economic cost Dependence on import gas and energy intensive economics Subsidized coal industry and lack of competitive coal market Lack of long term guarantees for investments payback Lack of systematic public policy for power system long-term development Regulatory system barriers and suboptimal taxation 3
Decreasing public sector dominance through privatization Prior to privatization Today After privatization completion NPP TPP CHP Large HPP/HPSP Public Private Public Private Public Private RES Some investment obligations for privatization Source: Energorynok tenderers: Capacity Utilization Ratio in 2011 51.9 Provision of power plants’ installed capacity at a specified level in 2011 - 2016 36.9 34.4 24.1 Reconstruction of power plants with provision of 22.2 their compliance with ENTSO-E requirements regarding regulatory capacity, moderate capacity and maneuverability range increment within 5 years after privatization Maintenance of rehabilitation level for auxiliary plant Source: MECI facilities Selection of tools to achieve these general investment objectives has been left at investor’s discretion 4
Substituting suboptimal electricity market model Wholesale Electricity Market Members Agreement Current Electricity Market Wholesale Electricity Supplier/Market Power Generating Companies Power Supplying Companies Operator) and Transmission System TPPs and some CHPs working on the basis of price bids are obliged to Power Supplying Companies – license 1 Nuclear Genco Operator sell all electricity to the wholesale electricity supplier SE «Energorynok» . holders for electricity supply at a (has legally binding obligation to sell all electricity to SE «Energorynok») regulated tariff and electricity distribution SE «Energorynok» through distribution networks (Regulated (single wholesale electricity supplier For other CHPs, NPP, thermal power plants and HPPs, the NERC Suppliers) 5 Thermal Gencos performing also functions of the Market (have legally binding obligation to sell all Operator) approves and from time to time revises « fixed » electricity tariffs using (purchase electricity from SE electricity to SE «Energorynok») «Energorynok», sell it to end customers, «cost plus» methodology (the tariff incorporates profit margin negotiated operate distribution networks, operate 1 Hydro Genco Contract for supply of the power system power plants) between the NERC and CHP operator). For RES “fixed” green tariffs are (has legally binding obligation to sell all technical management, electricity electricity to SE «Energorynok») transmission through main grids and approved. ancillary services Operators of CHPs Plants working on «fixed» tariffs are eligible for priority scheduling by the (can sell electricity to SE «Energorynok» or, if have a NERC’s license for electricity Contract for electricity transportation SE «NEC Ukrenergo» TSO for electricity generation. through distribution networks supply, to customers / suppliers through (system operator, main grids operator) bilateral contracts, at their own discretion) Plants working on price bids are scheduled after all power plants Operators of qualified co-generation working on fixed tariffs (NPP, HPP, RES and relevant CHP) and Power Supplying Companies – license installations Bilateral Power Bilateral Power holders for electricity supply at a non- (can sell electricity to SE «Energorynok» or compete for the remaining load. Sale Agreements between Purchase Agreements regulated tariff to customers / suppliers through bilateral SE «Energorynok» and between SE contracts, at their own discretion) Some power plants (e.g. CHPs, small plants (<20 MW) are eligible for electricity suppliers «Energorynok» and (buy electricity from SE «Energorynok», (excluding electricity power generating sell it to end domestic customers and for Operators of plants using RES and of selling electricity directly to non-household customers or to power producers eligible for companies export, operate power plants) direct (bypassing the (excluding electricity small plants (with capacity below 20 MW) supplying companies. wholesale supplier) producers eligible for (can sell electricity to SE «Energorynok» or selling electricity to direct (bypassing the to customers / suppliers through bilateral customers and power wholesale supplier) contracts, at their own discretion) «Day ahead» segment holds the largest share of the current electricity supplying companies) selling electricity to customers and power market. Other market segments are in the infant stage. supplying companies) Future Electricity Market Current wholesale electricity market is going to be entirely changed by transition of all electricity producers from the current «single buyer» model to direct contracts with electricity suppliers and eligible customers. The wholesale electricity supplier will be eliminated. Such new segments as a spot market, a balancing market and an ancillary services market will be established. Step-by-step transition to the new wholesale electricity market model is scheduled to be completed by 2014. The draft transitory electricity market model provides for market liberalization for TPPs holding regulated market for NPP and HPP. Approval of relevant legislation for transitory electricity market model introduction is expected in the coming months. 5 Source: NERC
Elimination of subsidized prices – potential additional investment resource Ukraine's Energy Intencity (2010) High energy intensity of Ukraine’s 0,5 economy makes it sensitive to 0,5 koe/$05p electricity prices growth adversely 0,4 affecting its competitive position 0,4 0,3 2.4 times Elimination of cross – subsidization 0,3 3.8 times 0,2 in the power sector (€2.7 bln in 0,2 2011) represent one source of funds 0,1 to satisfy increasing investment 0,1 needs of the sector 0,0 World OECD Europe EU-27 Ukraine Source: Enerdata Cross Subsidies in 2005 - 2011 Innovation projects Wholesale electricity price in 2011 ~ 5.6 €c 3,0 Chieldren camps € bln per kWh 2.7 TPP Gencos Metal works 2,5 37.1 % 2.2 Coal mines 2,0 NPP 1.7 Electric transport 16.0% 1,5 1.2 City lightning 1,0 Cross Subsidies Tariffs differentiated by 27.9% 0.5 0.6 Large Hydros time: households Households - 0,5 0.4 1.3% Investment 90% of total in Tariffs differentiated by 2011 component time: non-households CHPs 12.0% 0,0 2.1% Households Other RES CCGT 2005 2006 2007 2008 2009 2010 2011 Others TSO 0.5% 0.02% 0.4% 2.8% Source: NERC Source: NERC 6
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