The new electricity market has changed a lot in the work of energy companies, but it has also affected consumers, especially large ones. One of them is electrometallurgy, in particular the Ukrainian industrial company Interpipe. The Interpipe is an active participant in discussions of improvements for the electricity market and has repeatedly criticized decisions of the National Energy and Utilities Regulation Commission (NEURC) and the authorities for raising night price caps, banning imports, distributing the financial burden of "green" generation development on consumers through transmission tariffs, and for other improper decisions.
In an interview with ExPro, Denis Morozov, Director of Finance and Economics of the Interpipe, also spoke about the feasibility of the concept of "green" metallurgy, the impact of electricity prices on steel production, his company's exports, and other issues.
What has changed since the launch of the new electricity market on July 1, 2019, what is the general impression for a large consumer?
The first thing we felt was the rise in prices. The price increased by 25%, and immediately reached its price cap. But for the price caps introduced at the last minute (the initial concept of the market was without price caps at all), it would not be clear at all what the price could be.
Honestly, the electricity market in Ukraine today is not a market in its classical sense, because the big players, let's call them monopolists, determine the policy themselves. It is from their behavior and their role that the price of electricity is formed. Of course, they are all interested in the maximum price, so they play this game.
In the first month of the newly introduced electricity market, or even longer, we just saw that the price increased by 25%. There was such an interesting collision: de facto electricity tariff did not increase, but the cost item, such as the transmission tariff, increased. When you count altogether, the growth was of 20%-25%. But the press appealed to broad public, stating that the electricity tariff had not changed.
Due to such a misunderstanding, or rather manipulation of facts, it played its role for a while, until the NEURC and the government understood that, and began to take some measures.
Sometime in October 2019, when electricity imports were opened, the price more or less went down, and became even lower the price caps. Before that, for 2 months in a row, the price remained at the level of price caps. Later, the price began to go down. This decline correlated with the price of energy resources. In winter, the electricity tariff became more or less in line with the price level in the European Union, but then, starting March 2020, prices resumed its growth, when the authorities began to apply various measures aimed at slashing the tariff.
As a result, today [as of September 2020 - Ed.], one sees the price higher than in European countries, our competitors. We have compared electricity tariffs with different competitors, and to be honest, our price is higher today. Therefore, it seems the electricity market in Ukraine seems to exist, but not as a full-fledged market in the sense that it should be. Regardless of the decline in energy prices in the world, there is an increase in electricity prices in Ukraine.
Currently, there are no imports from Belarus and Russia to the Integrated Power System of Ukraine. Do you think there should be imports for one be able to buy electricity from other countries?
We have never imported, we buy on the market, but the presence of electricity imports, although meager, however, shows the price at which electricity is sold today in the countries around Ukraine, and it is changing the market. Import, as an additional competitor, gives a certain signal to the Ukrainian market, so the price is reduced to a competitive tariff adjusting to the ones of other countries, that's all.
Current electricity imports into Ukraine is actually a meager percentage of 1%-2% maximum, we are not talking about 5%-10%. Take the fact that the price of electricity imports was lower than the Ukrainian one, what does it say? That around Ukraine the price for electricity is lower. And, these are our competitors, the same Russians, Belarusians, Poles, Baltic countries. How can we compete with them in world markets?
Is your company buying electricity in all market segments? Or, just in the market of bilateral contracts, or in day ahead, or the intraday market, or the balancing market?
Yes, we are shopping around for electricity in all of them. Why? First, for us it is impossible to accurately plan consumption up to MW or kW, there are various nuances, such as scheduled and unscheduled repairs, accidents, and so on. All this altogether forms a broad picture of our consumption changes. Therefore, it is impossible to perfectly project our electricity consumption and by just lean volumes of electricity in the market of bilateral contracts.
Secondly, in bilateral contracts electricity market at we are usually given a schedule that resembles a "brick" (a daily schedule with an even consumption for every hour), i.e. an even consumption at night and in the morning at the same level. Well, a production does not work the way. Yes, we try to work more at night, because at night the electricity price is lower, while during daytime we try to work and consume electricity for less. But, the "brick" is impossible to consume to the full, so we will always buy in other segments of electricity market, balancing our hours of extra electricity consumption.
What is the share of day-ahead electricity in the Interpipe’s consumption?
For our electricity consumption by about 25%-30% comes from bilateral contracts electricity market, everything else we take from the day ahead market. That means that you have a large share in your electricity consumption from the day-ahead market. Aren't you worried that the day-ahead is so unstable? I don't see day-ahead market to rise and then to fall. Let's be honest, in the short term it is growing.
I mean, say, today the price is one, tomorrow by UAH 20 higher, a day after tomorrow goes lower again… This is the same market as the oil market and other commodities. It is not so important for us, we operate with an average value over a period. For us, electricity price fluctuations are not fundamental, we will not, roughly speaking, wait for a day with a low price, then necessary electricity volume, and resume our production, and then turn it off… We have a continuous production process, we are interested in the average price, we take it as a criterion. And, this average price is rising, albeit its occasional drops, the trend is that prices for electricity go up.
At the same time, as prices for energy commodities fall... Natural gas has fallen in price, oil has the same trend, nevertheless, electricity remained expensive in Ukraine.
How does the company view that Energoatom has started selling more of its electricity under bilateral contracts at auctions on the Ukrainian Energy Exchange?
Overall, this is a very positive step. But there are a number of factors that, unfortunately, distort the main idea of auctions, which are to provide industrial consumers with access to direct purchases of electricity. Let's talk about each type of auction separately. Let's take the special auctions.
The volumes of electricity put up for sale at special auctions today cannot meet the needs of all large industrial consumers. According to our estimates, it is necessary to increase Energoatom’s sales at special auctions from 5% to 15%. In addition, the special auctions have a number of restrictions. First, you can't resell excess electricity you overbought at the special auctions. If there was an unplanned shutdown at the plant , and the plant did not use the purchased volumes - this is our direct losses. Secondly, the total amount of electricity purchased by a buyer at the special auctions may not exceed 90% of its consumption for the same period of the previous year.
That is, if this year our production has decreased due to the COVID-19 slowdown, then if it grows next year, we will not be able to apply for a larger volume of electricity at the special auction next year.
Why, for example, not raise the percentage from 90% to 120%? Can you buy electricity on the Ukrainian Energy Exchange? Can you buy electricity there?
In fact, not at all. They nominate on Ukrainian Energy Exchange (UEEX) only large lots, which can be bought only by very large traders. The last auction clearly demonstrated that. We applied, as did other market participants. But, our applications were not even considered. The Energoatom enlarged the lot , and sold the entire volume to one buyer at the price of UAH 1120 UAH/MW, despite the fact that there were bids with prices up to 1300 UAH/MW.
If the Energoatom has sold ten lots at a higher price, it would have earned additional UAH 100 million. Who benefits from this auction? Certainly, nether the state, nor industrial consumers.
What needs to be changed in the terms of procedure of the auction to make the mechanism work?
It is necessary to allow to buy not the whole volume put up for sale, but let it be split into smaller lots not exceeding 10 MW. The auction must be conducted by means of price reduction with a certain step.
Are you interested in schedules of the Ukrhydroenergo, its peaks loads, and other products?
Yes, we also buy from them under bilateral contracts. In general, I believe that everyone should enter the markets of bilateral contracts, this is normal.
The UEEX has recently introduced block nominations, for the convenience of large consumers, so that various loads can be purchased for certain hours. For example, the Energoatom sells nighttime schedules in this way.
You are right, but we have a non-standard schedule of production process, according to which we have not yet been able to buy. There is either a flat schedule or nighttime schedule hours offered so far only. Other options are unknown to me yet. If another trading tool appears, we will consider it.
Is electricity cheaper at night than during the day hours?
Yes, it was always cheaper for nighttime hours.
Today, some daytime schedules are cheaper than the nighttime ones. This is a complete upend
But in the last market everything was overregulated, the price was known both for nighttime hours and the daytime ones. Today we should try to form a nighttime package to make it cheaper.
If we bought electricity in the bilateral contracts electricity market, its price is on a par with what we bought in the day-ahead electricity market , but recently the NEURC significantly increased nighttime electricity price caps [on July 29, 2020, the NEURC raised the nighttime electricity price cap for day-ahead and intraday electricity markets of the Integrated Power System of Ukraine by 28.1%, up to 1228.9 UAH/MWh - Ed.]. As a result, Today, some daytime schedules are cheaper than the nighttime ones. This is a complete upend.
It turns out we were pushed to work during the day? We worked at night to balance the system when there is little consumption and excess energy. Now it is sometimes more profitable for us to work during the day, so this decision of the NEURC simply distorted the system.
When the NEURC decided to increase the nighttime price cap, this was justified by the reduction of electricity consumption, but today we see figures - consumption returned to 2019. But, contrary to common sense, the NEURC extended period of the increased price cap.
How do you think about price caps in general? At what level should they be for nighttime and daytime hours?
I believe that the fair price today should be within 1.10 UAH/kWh -1.20 UAH/kWh [weighted average price for RDN in the UES of Ukraine - Ed.]. Currently, we have 1.5 UAH/kWh. Therefore, my opinion is that price caps for nighttime hours were fair to be raised, while price caps for daytime hours should be at the level of 1.7 UAH/kWh -1.8 UAH/kWh. This is my understanding.
In other words, it is 2 048 UAH/kWh for now?
No, if all daytime hours are priced at 2.048 UAH/kWh, and all nighttime hours are at 0.9 UAH/kWh, it turns out that the average value is 1.5 UAH/kWh. I repeat, prices for electricity all over the world are lower today than in Ukraine.
Do you mean they are cheaper on commodity exchanges? Is it cheaper for end-users (including taxes, transmission services, distribution services, etc.)?
It is obviously cheaper on commodity exchanges. There are public quotes on commodity exchanges, what we learned about from communication with our competitors, partners. We understand the price in Europe for industry, say, in Germany, France, Belgium, etc. So, some European plants buy electricity three times cheaper than in our country today, other buy electricity twice cheaper, or others by 30% less. But, there is no one like us anywhere. When we tell our partners about our prices, they say, "Well, guys, your price is higher than possible, your price is inadequately high for the industry."
Unfortunately, today our competitors, for example, the French company Vallourec, have a lower price. But, in France there is another model of generation… Nevertheless, over there the electricity tariff for the industry is much lower, than for the residential consumers. There, industries are supported, and in a crisis, no one is raising tariffs. They have special mechanisms for the industry to buy electricity generated by NPP directly and at a competitive price, that covers costs and generates profitability for nuclear power generation.
One shouldn’t distribute the burden of "green"generation on everyone in times of crisis - this will ruin the industry!
We still have such a feature in the market as payments under "green" tariffs (according to the Ministry of Energy, in 2020 this will be over 52 billion UAH), which is not the case in France.
Should those payments be collected from all consumers? How do you see the balance between “green” generation payments and the price of electricity for large consumers?
It’s hard to say, because I don't see the whole model. In my opinion, the "green" tariff in Ukraine is the highest in the world, and this is confirmed by various benchmarks, showing several times higher rates – by 2 to 3 times higher.
I understand that there is an energy balance, problems with payback, there are borrowed funds. But one sees a paradox: in a situation when consumption is declining due to reduced production, yet the burden of the "green" tariff increases even more. For example, consumption fell by 30%, the tariff increased by the same 30%. The more production falls, the more the tariff increases, then it happens again, and again, this is an endless trend. Why, should we stop our production now? There must be some reasonable mechanisms, because it is wrong to fund the "green" generation by all. One needs to work out other instruments, loan programs, etc. One shouldn’t distribute the burden of "green" generation on everyone in times of crisis - this will ruin the industry!
You don’t think it’s right to include payments for "green" generation in the electricity transmission tariff, do you?
Yes, I am all against spreading this “green” funding mathematically on all electricity consumers, because the electricity consumption has fallen. Therefore, other mechanisms are needed, so that in future, when the economy recovers, and there is more consumption, the “green” payment load will be less on 1 kWh. And, then, perhaps, it can be introduced. But, now, when that consumption has fallen, why does one ought to do it?
As of recent, there was a regulation on "green" electrometallurgy adopted. Does Interpipe falls under criteria of the regulation? Are you using it now?
No, because you have to go through many procedures. The criteria are not very simple: it mustbe shown that the company's CO2 emissions do not exceed 250 kg per 1 ton of steel. At the same time, as an ordinary open-hearth and blast furnace produces 2 tons of CO2 emissions per 1 ton of steel. It is not easy for us t prove that our company has only 250 kg.
Is it a very low figure for metallurgy?
Of course, this is 8 times less than a blast furnace production! And if you take the EU, which has set itself the goal of reducing emissions by almost 70% by 2050 (i.e. from the current 700 tons of CO2 per 1 ton of steel - to 250 tons of CO2 per 1 ton of steel), then only plants that produce steel by electric arc production falls under European requirements (because we have emissions below 250 tons of CO2 per 1 ton of steel), all other productions - almost won’t pass. In Europe, there is a simple mechanism: those who have a lot of CO2 emissions pay the "green" tariff. That is, the money paid for emissions is sent to “green” generations, and those who do not have significant CO2 emissions, do not pay. Thus, the modernization of steel production is stimulated. In Europe, companies are considering: whether to pay them for CO2 emissions, or to invest and modernize production facilities. We have in advance invested into our plant, which now has minimal CO2 emissions. We closed the open air, invested into environmental projects, which led to a 2.5-fold reduction in emissions. Is it completely illogical that we should pay the “green” tariff on an equal footing with others? Why won’t we be recognized as "green"?
Ukrenergo has announced its intention to raise the tariff for electricity transmission by 2.7 times. Interpipe can avoid having to pay this higher rate…
I want to say one thing: it's all one big manipulation and a mislead. First, only 40% of all Interpipe electricity consumption is accounted for by our Interpipe Steel Electric Steel Plant. It is this plant that will claim the preferential tariff. All other plants that produce steel pipes and railway wheels (Interpipe NTZ, Interpipe NMTZ and Interpipe Nico Tube) pay Ukrenergo for the transmission of electricity at full rate, like other companies in Ukraine.
Second, even Interpipe Steel now also pays the full rate, rather than a reduced one. That is, from November 1, 2020, the entire Interpipe Group (as well as other electricity consumers in Ukraine) will receive a 3-fold increase of Ukrenergo's transmission service tariffs. Everything else is large-scale manipulations and outright lies in the media.
Representatives of “green” generations would not favor your opinion?
In general, I am surprised to hear from the owners of “green” energy, which have a profitability of about 400%, and a ROI of 4-5 years, bash on electricity consumers, who pay off all that privilege of “green” generators. We have invested more than US$ 1 billion into a new plant with a profitability of 10-15%, with a payback period of more than 15 years.
At the current price of electricity, it would be more profitable for us to work on dirty open-hearths
Are you making progress in obtaining the status of "green" metallurgy?
Yes, but it's not easy, there are strict criteria that must be met. I believe that Ukraine today needs to deal with CO2 emissions, because this is a global trend. I can tell you a paradox: at the current price of electricity, it would be more profitable for us to work on open-hearths, which emit significant amounts of CO2 into the air. It would have been cheaper. That's the tariff we have today! Well, should we resume and run open-hearths again?
Do you have only electric arc melting today?
We have one electric arc furnace, but it is very fast. One melting process takes about 45 minutes, so it can do many operations a day. We can smelt 1.32 million tons of steel a year, but due to declining consumption in the world, we smelt about 700 thousand tons a year. When the plant uses electricity to smelt steel, not any carbon dioxide is emitted. In traditional production, fuel oil and gas are burned, respectively, a lot of carbon dioxide is emitted. Now Europe is trying to switch to hydrogen, because its combustion produces steam. They are trying to replace coal and gas with hydrogen, but for Ukraine this is still a rather expensive option.
How are electricity purchases in the balancing market going? The Energoatom is forced to enter the balancing market with its unsold volumes, which would seem a significant source of cheap electricity?
This is not quite true. The balancing market is mathematics, we do not buy in it. In this market, Ukrenergo calculates imbalances, and ascribes "plus" to one, "minus" to another. If the consumer claims more electricity than he consumes, he pays for it in full at the contracted rate, and he is refunded for positive imbalance at a rate lower by 45%, so a consumer lose both ways. If the consumer did not declare, but consumed, he pays for electricity with an extra penalty add-up. For Interpipe, balancing market is not profitable, we lose both times.
If you get into a balancing market…
Unfortunately, everything happens. Planning does not always allow you to adequately show the whole future. Production process may not always be smooth- there a failure happens, raw materials are not timely delivered, there are always some unexpected things… Currently, we forecast consumption with a deviation of 8%-10% per day, and when we started working under the new market, we used to have the deviation at 20% - 30%.
What is the share of electricity in the cost of steel production?
It depends on the cost of steel in the market. The electricity component was both 30% and 20%, in this range or so. This percentage depends on the cost of scrap metal, the cost of processing, and other variables. It used to be less than 20%, i.e. when metal was expensive, it was 18%.
The price of electricity has affected our exports
How has the price situation in the Ukrainian electricity market affected the company's exports?
Today there is a trade war in the world. Almost whereto we supply our products, duties have been introduced, which greatly reduce our profitability. In addition, there comes logistics, because the pipes need to be delivered, and there comes also the price of electricity, so our profitability is greatly reduced. If we had a lower electricity price, we would be more competitive. Therefore, yes, the price of electricity affects our exports.
In the context of anti-dumping investigations and trade wars, has the price of electricity worsened the situation?
It reinforces the negative effect. Our low incomes have become even lower. It was a strong blow for us.
What would be your suggestions as a consumer for further market reform? Is it possible that the percentage of free sales by Energoatom and Ukrhydroenergo will increase?
That's right, they need to be released to the free market. In addition, I believe that price caps should be dynamic, they should be pegged to the cost of energy. There should be a formula that links price caps to the cost of coal, gas, and oil. To have some correlation: when the price changes significantly for energy, then price caps must change too. Such an approach will not allow monopolists, despite lower energy prices, to keep high electricity prices. This would prevent a situation where the price of coal has fallen and electricity has not.
Should price caps be kept, or should they be rather removed over a time?
We do not have a healthy electricity market, we have a monopoly market today. If you remove the price caps, the price will be any. Who will prevent you from raising the price?
Well, can’t the Antitrust investigations do that?
Sure, you're right, but it takes time. The Antimonopoly Committee will investigate for a year or two. And, what would we do during all that time? Would suspend or continue our operations?
Would you tell us a little about the situation in the world market of metal products? Apparently, there is a downturn there due to a coronavirus pandemic?
Everywhere is different, but a crisis is a crisis everywhere. Drilling volumes are falling significantly in the U.S. market, so pipe consumption is declining. The same is happening in Ukraine and the CIS, but it is conversely in the Middle East. In the latter region, it is now possible to increase even some sales due to newly emerged niches. In Europe, the situation is more or less stable, there is even a small increase, as some European plants have stopped due to coronavirus, and we have an opportunity to sell a little more, and somehow compensate our losses. If we take the industry as a whole, it is truly a significant decrease.
How do you see the connection of the Ukrainian energy system to the European one (ENTSO-E)? Do you support this step?
Yes, of course. It's the same as imports. We are all for imports, because a small share of imports plays a stabilizing role, and restricts monopoly.
Today, state-owned generating companies, in particular Ukrhydroenergo, declare their need to enter into direct contracts without auctions on the Ukrainian Energy Exchange. Do you welcome such a step?
I would have them liberated, I think this is the right step. Let state-owned companies sell as much as possible in the free market, let it be the most liberal, and I would not make any price restrictions. If Energoatom can sell more with normal profitability, why should one set a lower price limit for them [the lower edge of the average selling price during the month in the market, as stipulated in the Resolution of the Cabinet of Ministers - Ed.]?
That was done, lest Energoatom would sell his electricity to someone for cheap...
Well, why shouldn’t to someone? There are market mechanisms such as a commodity exchange, others, that will not let the price be inadequate. What is the problem today? The Energoatom's production load is the lowest in, I would say, in the entire history of Ukraine. Were the Energoatom given a right to sell freely, it would sell more, produce more electricity, gain more profit. But for the minimum price limit set for the Energoatom, perhaps, it would have been able to sell more volumes.
You buy a lot of electricity in the day-ahead market. The supply in this market segment is largely formed due to the NUERC obligating generating companies to sell a share of their electricity volumes in this segment…
Yes, that was a right NEURC’s decision. Were it not for such obligations, there would be a conspiracy of suppliers, with volumes streaming into the balancing market. Then, we would have only worked in a balancing market.
Do you not support the NUERC to lift these obligations set for electricity generators?
We are fundamentally against such a decision. Otherwise, there will dwindle, if not cease, offers on the energy commodity exchange.
That is, one should not expect that the offers on day-ahead electricity be formed naturally, without decisions of the NEURC?
If we had 100 power generators supplying electricity, then there would have been a market. But this number is not 100, we can count power generators on fingers of one hand.
Do you think that day-ahead quotes retain the function of a price indicator at the backdrop of significant drop in volumes traded?
Sure, they serve as an indicator, because 90% of contracts, that are not concluded in the day-ahead market, are still pegged to day-ahead prices. In contracts one commonly writes: “the price of day-ahead + 2%.” Therefore, pricing in the Ukrainian electricity market focuses on day-ahead quotations.
Dmytro Sydorov, Vitaliy KornienkoAuthor: ExPro