BMI View: The immediate outlook for electricity generation is poor with the country in an official state of energy emergency. Fighting in the east of Ukraine has halted coal production in many mines and has blocked transport lines to power stations. On the upside, BMI understands Ukraine has managed to make payments for gas in March and May 2015 and the negotiations for a long-term solution, mediated by the EU , are ongoing. Although Ukraine is increasing its generation of nuclear energy, we still forecast a decline in generation to 15 2 . 9 TWh in 2015, down from 173.8TWh in 2013.
Longer term, both production and consumption will rise as the economy starts to recover and processes of integration with the EU bring about a partial liberalisation of the power sector and investment from abroad. This will create opportunities for investment in Ukraine's power sector. However, multiple barriers stand in the way of developing the sector, including corruption, vested interests and the fractious political environment, meaning that electricity production will fall far short of Ukraine's potential.
Key Trends And Developments
*The short-term outlook for Ukraine's coal-fired power sector is poor due to the ongoing conflict in Ukraine's main coal-producing regions in the east of the country. Around two-thirds of Ukraine's mines have ceased activity, forcing Ukraine to import coal to cover its needs.
* Gazprom received USD15mn as prepayment for March 2015 gas supplies. Ukraine made an upfront payment of USD30mn to Gazprom on May 13 to secure gas imports for the month, according to Naftogaz Ukrayiny. Naftogaz has wired a total of USD180mn for Russian gas supplies since the start of Q215, including the latest payment of USD30mn. Ukraine also managed to negotiate a discount on the natural gas supply until the end of Q215. However, a long-term agreement is yet to be reached. European Commission (EC) Vice-President Maros Sefcovic intends to close talks with Ukraine and Russia by Q315 to ensure the security of gas supply for next winter and beyond.
*As a result of these pressures, the national energy company Ukrenergo has imposed rolling blackouts and suspended exports to Belarus and Russian-occupied Crimea. Ukraine has also started to import electricity from Russia, but this is vulnerable to political conditions, specifically Russia's demand that Ukraine continues supplying electricity to the rebel-held Donbass region.
*In line with an agreement with the IMF, prices increased by 40% in March 2015 and will continue rising until 2017. This follows a sharp increase in wholesale prices in 2014 (from UAH730 to UAH830 per MWh) due to problems in domestic generation.
*Consumption is falling as swathes of south-eastern Ukraine are left without electricity following damage to power lines and stations. As of February 2015, around 175,000 residents were without electricity, in places such as Luhansk, Donetsk and Debaltseve. Instability has also compromised the steel industry, the single main consumer of electricity, exacerbating an existing dip in global demand for steel, which has already been lowering production.
Ukraine and the EU are continuing to work on the implementation of a trade deal that will bring Ukraine more closely under the ambit of Brussels and could accelerate a liberalisation of the power sector, including deregulation, privatisation and the introduction of a market-based pricing system.