There have been many changes to the mechanism of special public obligations (PSO) in the electricity market this year. All these responsibilities of the PSO fell on the shoulders of state-owned generating companies, in particular weighing on the PJSC Ukrhydroenergo. Although the company has shown good financial results for the first 9 months of 2020, as of current, it faces a number of technical and economic challenges.
Read about the problems with the Market Management System, as well as about the payments to the company under the PSO mechanism by the SE Guaranteed Buyer and other questions in a blitz interview by ExPro with Bohdan Sukhetskyi, Deputy General Director for Commercial Affairs of the PJSC Ukrhydroenergo.
Ukrhydroenergo has recently published its financial report for the first 9 months, showing significant income against the background of losses of other state-owned companies…
Everything looks good on paper. However, it is necessary to analyze everything comprehensively with taking into account taxes, dividends, debts, belated payments. Yet, really, thanks to the systemic approach, we have a "safety cushion ".
Let's start with the fact that in the new market model, the Ukrhydroenergo operates in all segments of the electricity market. This is due to high-quality preparation for work in new conditions. Over past decades, the company has been successfully campaigning for the reconstruction and modernization of existing HPP and PSHP equipment, as well as the construction of new facilities to provide mobile power reserves in the Integrated Power System of Ukraine and balancing in the grid system.
We must not forget that the task facing the company is not only in the national power system. Cutting flood peaks, maintaining the level of reservoirs, ensuring environmental release and passage of heavy vessels.
We have to find a balance in a new market in order to ensure maximum profits. In addition, from the very beginning, our commercial specialists actively joined in providing comments and correcting errors both in the regulatory documentation and in the operation of the Electricity Market Management System of Ukraine (Market Management System, MMS).
What's wrong with the MMS system?
It may be bewildering to some, but it's just the other way round.
In short, the MMS provides automation. But its work is so inaccurate that currently the specialists of the company and the NEC Ukrenergo recalculate almost manually the amount energy and dues for imbalances, to meet all the conditions of market rules and make correct calculations. Well, only then the related acts and invoices for purchase and sale of electricity in the balancing market and the market of ancillary services are signed. This is an incredibly painstaking and time-consuming job. For example, we are still busy with cross-checking settlements with Ukrenergo since April 2020. This is a big burden on staff, and it is unfortunate that highly qualified specialists of two state-owned companies have to waste time on it. On the other hand, due to the rapid uncontrolled growth of the "green" generation, there is a violation of both the physical balance in the Integrated Power System of Ukraine and the financial balancing in the electricity market of Ukraine. As you may know, currently, there are significant debts from the Ukrenergo and the SE Guaranteed Buyer, including to state-run electricity producers, and in particular to Ukrhydroenergo.
Debts are a painful topic for everyone. What is the situation with the settlements you have?
You understand that debts are not only a negative financial indicator in the reporting - they are money-drainers, inability to pay contractors, risk of credit losses.
Now, as one may say, the "excess profits" of our company are smashed by the accumulation of debts. Almost UAH 1 billion of debt remained from the old market with SE Energorynok: the SE Guaranteed Buyer stopped at UAH 250 million, but the Ukrenergo also negatively balances at about UAH 1 billion. If we together with the Ukrenergo are in a financial dynamics, and some funds, though with delays, but come to out accounts, then with others everything looks rather hopeless. Recently, the SE Guaranteed Buyer offered us to pay off its debts to us within 5 years, and asked us to waive all fines and penalties on indebtedness accrued by them.
The President of Ukraine in his Decree № 406/2020 "On urgent measures to stabilize the situation in the energy sector and further development of nuclear energy" dated September 22, 2020, paid special attention to settlements with state-owned companies. There is also an initiative of MP Andriy Gerus, Chairman of the Parliamentary Committee on Energy, Housing and Communal Services, to make settlements with state-owned companies a priority.
We are mostly living off our sales in the market of bilateral contracts and provisions of ancillary services. In these electricity market segments payments are done timely. However, recently, during some periods, Ukrenergo has been significantly reducing the purchase of ancillary services, which at odds with the requirements of the Transmission System Code in terms of providing necessary reserves for frequency and power regulation in the grid.
Then, what should be changed in the electricity market?
In this regard, apparently, everyone diverge in opinion, yet to me, there is actually no market. Constant "ad-hocl" regulation does not bring any good, but only drives state-owned companies into deadlock. Instead of patching holes, one needs systemic and prioritizing approach. It is clear that state-owned companies have always used it as a lifebuoy ring for the whole grid system. Then why are they thinking now about everyone, but us? The unsystematic growth of the "green" generation has led to a financial distortion that must be taken over by state-owned companies? We suffer losses due to the provision of PSO, we accumulate debts, we cannot attract state guarantees for projects needed for the power system. Well, what's next?
Will we not be able to carry out reconstruction, repair equipment or pay taxes to the state budget?
Appropriate steps are urgent, namely:
• debt repayment;
• bringing prices for household consumers to economically justified level with the use of targeted assistance to vulnerable groups (at the first stage - through termination of preferential tariffs up to 100 kWh);
• adjustment of the market management system;
• introduction of strict discipline in terms of payment for purchased electricity;
• amendments to the regulatory framework for liability for imbalances;
• equal public and private electricity producers in trades of electricity;
• introduce correct pricing according to global practices in all segments of the electricity market.
What is the share of PSO you have?
It is more accurate to ask, ‘What is the fate of the companies on which PSO is imposed?’.
We have been working with the fifth model of PSO in a row since the launch of the new electricity market! It is clear that with each change of PSO one needs to adjust his investment program, financial plan, and, in general, some even short-term planning looks questionable. Now we are regulatory assigned to sell our 30% hydropower electricity to the SE Guaranteed Buyer at 1 kopeck per kilowatt. This entails underpayments coupled with significant losses in income of the company. Moreover, it is not clear what is better. The SE Guaranteed buyer postpones payments for years, and so now we can have income only on paper, and, in reality, tossing large numbers of debts due to us, trying to redress them in court anyhow.
Currently, they are elaborating a new model of financial PSO. Rater, when it will take effect and what the final version will be, once can only guess. When drawing up the financial plan for 2021, so far, we did our projections based on our assumptions on the current PSO model. We are waiting, as always, and be adapting to the circumstances as they arise. Even one misleading term or wording can dramatically change the financial condition of a company. It would be good one remove such a burden from state-owned companies and somehow distribute it evenly among all market participants.
What forecast can you give for 2021?
Everything will be the way it used to be in 2020, the activity on the electricity market will depend on two factors: the hydrometeorological situation and the impact on the functioning of all segments of the electricity market due to changes in the regulatory framework of Ukraine. We will try to hold on to this year's operational performance, and pray for watery rivers during 2021.Author: ExPro