During the five months of the war, Ukraine has lost a significant part of its industrial and agricultural potential – destroyed physical assets, broken supply chains, and the loss of human capital. The domestic energy industry also suffered quite significant losses. But, unlike other industries, it has a high chance of rapid recovery. It is energy that has a chance to become the locomotive of the economic development of Ukraine in the coming decade.Mind Intelligence analyzes how the new circumstances will affect the market and the Ukrainian political and business landscapes.
It is already possible to predict that after the end of the war the financial support and investments of the West will be directed, first of all, to the restoration of the energy industry. This is completely in line with the EU's established strategy, the priority of which is always an investment in infrastructure, agriculture, and FEC. Even now, without waiting for the end of hostilities, the European Union is ready to actively help Ukraine, in particular financially, in its integration into the European electricity market.
The goal of the EU is to ensure affordable electricity prices for its economy. Instead, the Ukrainian authorities are motivated to obtain foreign currency through energy exports, which can be used to finance a wide range of expenditures, including election-oriented ones.
Imposition of special obligations on exporters of electrical energy – that is, maintaining tariffs at an under-market level – is a temporary solution, which will be canceled after the end of the war. At the same time, revenues from auctions for the distribution of the crossing will be maximal if a high level of competition remains. It’s worth remembering that in some trade transactions exporters had to give 80-85% of the income received from the export of electricity to Ukrenergo.
The situation will radically change for the worse for the state if DTEK is able to reduce competition. Currently, its competitors are state corporations (Energoatom and Ukrhydroenergo) and the rapidly growing sector of independent traders. Some traders are connected to political elites, so it will be very difficult to squeeze them out of the market. But the volume of operations conducted by them is insignificant, so they will not generate significant losses for key players.
The situation is more difficult with state corporations – Energoatom and Ukrhydroenergo will not give up income for private companies to increase their fortunes. In this part, the risk is borne by the idea of creating a single state trader that will take care of the export of electricity produced by state corporations.
Formation of powerful state conglomerates
The war led to weakening of the influence of the oligarchs – their resources are running out, while the state can count on the help of international partners to rebuild its own assets. The reduction of the oligarchs’ role will be facilitated by limited financial resources, as well as the active position of Ukrainian society, which does not tolerate such an economic model. In addition, the status of a candidate in the EU is not only a significant help in adapting to European values, rules, and standards, but also a very strict control by European structures on the state of affairs in Ukraine.
With the weakening of the oligarchs, powerful state corporations will take the first place in the economy and politics, because even in wartime they accumulate large financial resources.
Before the start of the war, President Volodymyr Zelensky was looking for an opportunity to influence the prices of the most electorally significant items – fuel, gas, and electricity. Not being able to influence them by administrative methods, he became a supporter of the idea of powerful state corporations, which will be guided not by the priority of maximizing income, as every normal commercial structure should do, regardless of the form of ownership, – but primarily by the task of stabilizing prices for the above-mentioned items.
As a result of this "green light", today we see a significant strengthening of state institutions. Control over certain government bodies provides more influence than the wealth of oligarchs. Thus, a new generation of individuals with great ambitions gathers not in the private sector, but around public authorities and powerful state corporations. Such persons will try to create not their own SCM, but their own "gazprom".
Given that the most profitable branch of the economy in the coming years will be the FEC, this is where the largest state conglomerates will emerge. These will include Naftogaz of Ukraine, Energoatom, Ukrenergo and, possibly, the Energy Company of Ukraine.
Structural transformation of PEK
The loss of control over Donbas and part of the southern territories due to the war significantly changed the structure of the Ukrainian energy industry. In fact, three powerful thermal power plants and several local thermal power plants fell into the "grey" zone. Due to the lack of control over parts of the Luhansk and Donetsk oblasts, there is no access to sources of thermal coal, which is considered the highest quality and cheapest raw material.
In the case of loss of control over the entire territory of Donbas, and in particular, over the Pokrovske mine, which is declared by the aggressor as his priority, the coal energy industry of Ukraine will suffer a critical blow.
The restoration of coal power to the pre-war level will be neither possible nor economically justified. Ukraine's membership in the EU also plays its role, because the Union does not tolerate investments in the development of this segment.
Alternative energy should replace the coal segment. On the contrary, this direction, which was the most dynamic before the war, has suffered the most and has degraded.
Last year, RES power plants produced about 13% of the total amount of electricity in the country. Now the production of "green" electricity has almost halved. In addition, it is almost impossible to accurately assess the losses and what part of the "green" energy assets remained under the control of Ukraine. Some power plants are located in the occupied territory, but they are still listed as part of the United Energy System of Ukraine.
The largest RES power plants are located in Donbas and in the southern regions, where control has been temporarily lost. It is known that some of the power plants were physically destroyed, some were dismantled and taken away (this applies to both the occupied territories and those controlled by Ukraine), some investors disconnected the power plants from the grid due to technical, economic, or security reasons.
In addition, the system of state support has collapsed. Due to the lack of funds, the authorities significantly limited payments under the "green" tariff – in March, the Ministry of Energy set limits – from 15% of the calculated tariff for solar power plants to 60% for producers of electricity from biomass. At the end of June, the limits were slightly increased, but in the future, these are minimum payouts at the level of 20% of what the producers expected.
After the end of the war, Ukraine will have, at best, 40-45% of alternative energy capacities compared to pre-war, and no new projects will be implemented for at least five years.
The motor fuel market will also undergo significant changes. Import will almost completely dominate the domestic Ukrainian market.
The European Union, where Ukraine is moving, intends to abandon the use of internal combustion engines in the most important segments of the automobile industry. This is a clear perspective of 10-15 years. So in the EU, to which our country should already belong by that time, there will be a surplus of oil refining production capacity. In such circumstances, the construction of new refineries does not make sense.
The domestic fuel and energy complex is entering the stage of active and forced transformation of almost all its components. Things will not be the same, but Ukraine can win in the near future by getting an updated, civilized and competitive energy industry.
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