Discounts for friends, or how Centrenergo becomes extremely unprofitable

Discounts for friends, or how Centrenergo becomes extremely unprofitable

The reformation of the Ukrainian electricity market takes place almost every week. The National Commission for State Regulation of Energy and Public Utilities (NEURC), Verkhovna Rada [Parliament-Ed.] periodically change the rules of the game. However, since the launch of the new electricity market, something has remained intact. In particular, the sale of Centrenergo's electricity to the same companies. Lo and behold, in Ukraine the price for electricity by thermal power plants can compete with the one generated by nuclear power plants.

In this article, ExPro tells how a state-owned thermal generation, after the team of Zelensky came to power (both officials and parliamentarians, in particular, the head of the parliamentary energy committee Andrei Gerus), changed coal suppliers, rigged sales of electricity to buyers close to Igor Kolomoisky’s businesses, and how the company didn't follow their commitment to sell in the day-ahead market, whilst accumulating huge losses.

Centrenergo in the new electricity market

It should be noted that the state-owned stake in PJSC Centrenergo is 78.289%, and it is managed by the State Property Fund of Ukraine. The total installed capacity of the thermal generation by the three Centrenergo's TPPs (Trypilska TPP, Vuglegirska TPP, and Zmiivska TPP) is 7,695 MW, about 15% of the total installed capacity of the entire power industry of Ukraine, and 36% of the capacity of all thermal power plants in Ukraine.

In terms of the new electricity market, which has been operating since July 1, 2019, Centrenergo, compared to other state-owned power generation plants, has not been tasked with the Public Service Obligation (PSO). The nuance regarding this company is that the latter's obligation is to sell all electricity under bilateral contracts on the energy exchange, the Ukrainian Energy Exchange (UEEX), as decided by the Cabinet of Ministers of Ukraine. However, how much to be sold under bilateral contracts, and how much in the day-ahead market, is solely vested in the company's management.

"Proper people" in the leadership

At the end of June 2019, the supervisory board of Centrenergo changed the management of the company, and Vladimir Potapenko became the acting general director. Subsequently, the new Cabinet agreed on his appointment on September 18, 2019.

From the very beginning, it was not entirely clear under whose "control" this state-owned enterprise was put. Mustn't that with the launch of the new electricity market and the advent of the new government the "old schemes" have gone? Unfortunately, not on your nelly. A little later it became clear that Centrenergo was controlled by people not alien to businessman Igor Kolomoysky.

"Not my people, but professionals and proper people, say, director Potapenko," Kolomoisky commented, shrugging off that his people control Centrenergo.

The question arises, why should he have to? Everything is pretty simple. The enterprises that comprise the Privat non-official business group, in particular, Zaporozhsky Ferroalloy Plant, Nikopol Ferroalloy Plant, Marganets MPIC, Pokrovskiy GZK, and Dniproazot, are the large-scale consumers of electricity in Ukraine. Therefore, the cheaper they buy this production input, the lower the cost of the final product will be. It is worth noting here that, unlike the owner of DTEK energy holding businessman Rinat Akhmetov, businessman Kolomoisky does not have his own large power generation. Therefore, control over Centrenergo brings many benefits.

Electricity for peanuts

All the three Centrenergo's TPPs sell in the same electricity trading zone of the Integrated Power System of Ukraine, where the above-mentioned businessman's plants are located. Since July 2019 Kolomoisky's production companies have been purchasing electricity from Centrenergo on the energy exchange. However, not only the latters. There are two other companies we have not mentioned - the traders United Energy LLC and Ukrtranslit LLC. The former supplies gas to Dniproazot, and the latter, through its head, is also linked to Kolomoisky's businesses.

To know exactly how much electricity and to which of Kolomoisky's companies did Centrenergo sell is difficult. The Centrenergo, as a state-owned company, albeit being controlled by the State Property Fund of Ukraine(SPFU), has never been open to publicity. It does not answer inquiries or query phone calls. But that is not the point. Sources in the market and the SPFU said that in the list of buyers in all tenders there emerged one or more of the above mentioned trader-companies. In most auctions Kolomoisky's companies were the winners. In particular, in the latest Centrenergo's auctions on electricity.

And now, as to the sale prices. To compare, we've taken prices and indices of the day-ahead market run by the SE Market Operator. The graphs below benchmark those prices.

It should be noted that Centerenergo's price fluctuations are quite unusual, especially when compared to the day-ahead market. Some kind of a trapeze. The question is, why there came a sagging in price? Everything is very simple, just look at the off-peak load curve. During the weekends Centrenergo sold their peak load electricity at the price of a cheap off-peak. That means, the whole day Centrenergo sold it's electricity at the lowest price. As can be seen from the graphs, this is twice less than the peak load on the the day-ahead market, and 30%-60% less the average weighted price in the day-ahead market.

Such a "mechanism", if one can call it so, became possible due to the CMU's Edict "Procedure for Conducting Electronic Auctions for the Sale of Electric Energy under Bilateral Contracts," which was approved on June 5, 2019, by the former Prime Minister Groysman's government. There were no conspiracy there, but the current Cabinet of Ministers is in no hurry to correct “useful ambiguity”. However, we are interested in one point: where is it stated that peak load cannot be sold on weekends, rather than on weekdays, and electricity can be sold all 24 hours on weekends as cheap off-peak? Thus, all weekends Centrenergo sells its electricity at cheap prices. By the way, there is no such a thing in the day-ahead market. That is why it is very beneficial for Kolomoisky’s companies to buy electricity from Centrenergo. But as a result, for a state-owned company it is the UAH 1,5 billion loss over the 9 months of 2019.

By the way, from July until November 2019, Centrenergo's electricity was demanded very much in the day-ahead market turbulent with shortages of supply for many days.

Moreover, in Ukraine, it turns out that thermal generation can overcompete the nuclear power generation. In December 2019 Centrenergo started to sell electricity to Kolomoisky's companies under bilateral contracts at 56.7 kopecks / kWh, i.e. at the price Energoatom sold its electricity within the framework of the PSO mechanism. At the same time, the cost of thermal generation was at least 100 kopecks/kWh, according to the market participants. However, even for nuclear power plants 56.7 kopecks/kWh is the undervalued price.

«Energoatom was obliged to sell 90% of the electricity within the PSO framework. This is to sell at the price, which is, in fact, lower than the cost of electricity production at the nuclear power plants, since it does not take into account either excise duties or dispatching fees. That, by the way, contradicts the requirements of the law that the sale of PSO electricity should be at an economically justified price," said Energoatom’s ex-President Yuriy Nedashkovsky.

Reaction of Zelensky's team and unfulfilled promises of company management

Noteworthy, the authorities expressed concern about the situation with the state-owned Centrenergo. On September 13, 2019, the President’s Office hosted a meeting between President Vladimir Zelensky, Prime Minister Olesiy Honcharuk, Minister of Energy and the Environment Oleksii Orzhel, Chairman of the Committee on Energy, Housing, and Utilities, Andriy Gerus with businessman Igor Kolomoisky. According to media reports, the issue of Centrenergo was discussed. The President personally insisted that the company begin to sell its electricity in the day-ahead market.

Why in the day-ahead market? The answer is very simple: rare chance for Centrenergo to find buyers there.

The meeting participants, including MP Gerus, proposed an alternative for Igor Kolomoisky - to import electricity from Russia at stable prices. With this on mind, just overnight, on September 18, 2019, the Verkhovna Rada adopted "Gerus' amendments" to allow electricity import from the Russian Federation under bilateral contracts. On October 1, 2019, United Energy LLC began to channel electricity from Russia totaling 10.68 million kWh at the end of October 2019.

After that, on October 11, 2019, Potapenko made his famous statement: "Due to the need to cover deficits in the day-ahead market, the company decided that from November 2019 it would sell 90% of its electricity in the day-ahead market. Thus, we inform our partners and contractors that not more than 10% of the November 2019 electricity will be sold by the company under bilateral contracts".

It seemed to be a victory, the state-owned company is “free”. But, in no way. Starting from the first days of November 2019, the NEC Ukrenergo was forced to apply grid restrictions on the import of electricity from the Russian Federation and Belarus. By a strange coincidence, on November 13, 2019, Centrenergo's sales on the UEEX for Kolomoisky's companies were resumed.

As a result, in November 2019 Centrenergo sold 540 million kWh under bilateral contracts, out of 798,6 million kWh produced. Thus, the company sold 67% of its electricity under bilateral contracts, and not 10%, as formerly declared.

A similar situation was in December 2019. During the first 24 days of December 2019, Centrenergo sold 585 million kWh to Kolomoisky's (and partially to Kryvbasvodokanal) companies. How much exactly Centrenergo can produce a month one can not say. But, approximately, this is 1 billion kWh - 1.2 billion kWh. Consequently, almost half were sold under bilateral contracts.

Once again, the top leadership of the state, including the Chairman of the Committee on Energy, Housing, and Utilities Andriy Gerus, were aware of the situation at Centrenergo, but kept silence.

Coal debts

The first herberger that Centrenergo began purchasing coal from companies linked to Igor Kolomoisky’s business was the coal supply agreement signed by the state-owned Centrenergo and Nafta Force LLC shortly the new President Zelensky came to power. The Nafta Force LLC coal supplier company is linked to "Privat" group.

At the end of September 2019, the Chairman of the Independent Union of Miners of Ukraine Mykhailo Volynets said that Nafta Force LLC supplied the overpriced Russian coal amid Centrenergo growing indebtedness to Ukrainian state-owned mines. In addition, a group of activists on September 20, 2019, blocked the railway cars with Russian coal at the Sosnivka railway station in the Lviv region in a protest to the expansion of trade with the aggressor country. In turn, the Chairman of the Parliamentary Committee on Energy, Housing, and Utilities Andriy Gerus called for the release of the coal supplies. According to him, Russian coal is mixed with Ukrainian coals to achieve the right ash residues.

According to the State Property Fund of Ukraine, Centrenergo has large debts to other coal suppliers. For example, Centenergo indebted UAH 362.7 million to Shakhtarsktrans LLC. Ukrdoninvest Trading LLC is suing Centrenergo to recover UAH 1.442 billion due. Also, Centrenergo did not pay UAH 92 million to the state-owned Lvivvughiliya for the supplies of coal during October-December 2019. Amid of Centrenergo's debts problems, it is worth mentioning that in January-November 2019, compared to the same period of 2018, the company increased its consumption of anthracite by 34.5%, up to 513.2 thousand tons, as well as consumed 3,8 millions tons of gas coals, or 13.1% more than during January-November 2018.

The State Property Fund of Ukraine deems Centrenergo's operations as acceptable? As mentioned above, the losses of Centrenergo over the first 9 months of 2019 were UAH 1,5 billion. In response to ExPro's query, the State Property Fund of Ukraine (SPFU) said: "According to the assessment done, the results of the financial and economic activities of Centrenergo during 2018 and the first 9 months of 2019 were deemed as satisfactory". In addition, the SPFU referred to the Centrenergo's clarifications that the losses were incurred due to the price caps established by the NEURC for the day-ahead and the intraday electricity markets on top to the debt by the State Enterprise Energorynok [offtaker in old model of the electricity market prior to July 1, 2019-Ed.].

Let us invalidate the above allegations and unveil for Centrenergo's shareholders a small secret regarding the business of their asset:

1) Energorynok indebted the entire Ukrainian power generation, and not just Centrenergo;

2) Centrenergo solely underpriced more than half of its electricity under bilateral contracts, for which price caps did not apply either.

New privatization thralled by old problems We all remember the unsuccessful tender for the privatization of the state-owned interest in Centrenergo (72.289%) at the starting price of UAH 5.9 billion, that the former government of Volodymyr Groysman tried to hold last year. The current Prime Minister Oleksiy Honcharuk said that Centrenergo privatization would be of a top governmental priority. In early December 2019, the Deputy Minister for Development of Economy, Trade and Agriculture Pavlo Kukhta admitted that "every state-owned company is parasitized by some oligarchic groups and corrupt officials". Speaking about Centrenergo, Mr. Kukhta even mentioned the names of Kononenko, Kropachev, and ... Kolomoisky. Despite possible behind-the-scenes players, the government successfully won trials against Centrenergo's creditors, preventing the bankruptcy of the enterprise, and decided to apply a new, more advanced privatization procedure. This procedure involves the engagement of advisers. The advisers could conduct the audit of Centrenergo, check its financial statements, determine the starting price of a state-owned stake in the company, and search potential investors. According to Kukhta, the State Property Fund is preparing to simplify the selection process of such advisers.

The government’s desire to apply the new privatization rules is certainly welcome. However, the history of the embezzlement of Centrenergo by the business groups close to the authorities, the appointment of "proper people" to the company's leadership, the rigged unprofitability and significant accounts payable do not add optimism, but rather fuel skepticism towards the success in a new privatization venture upon Centrenergo.

Yaroslav Samolyuk, Dmytro Sydorov