Polskie Górnictwo Naftowe i Gazownictwo (PGNiG) has signed a confidentiality agreement with the State Property Fund of Ukraine (SPF) on the possible participation in the privatization of Ukraine’s energy sector. PGNiG may be interested in Ukraine’s cogeneration plants – Mariusz Marszałkowski, editor at BiznesAlert.pl, writes.
On the 12 of October PGNiG CEO Janusz Kwieciński and head of the SPF Dmytro Sennychenko signed a confidentiality agreement in the presence of Poland’s and Ukraine’s presidents. The document will allow PGNiG to learn about the details on the companies that are to be privatized.
The Polish gas company will be able to thoroughly verify assets, including their financial situation. We have learned that the company could potentially take over the cogeneration sector assets in Ukraine. What are those assets? Six CHP plants are owned by the state (they are managed by SPF). All of them were included on the list of 500 business entities that are to be privatized.
Sievierodonetsk CHP plant
Dnieper thermal power plant
CHP plant in Mykolaiv
Kherson thermal power plant
Kryvyi Rih thermal power plant
Odessa thermal power plant
The above facilities run on natural gas. However, their history is not very encouraging for the prospective buyer. The CHP plant system in Ukraine has been chronically underinvested. Its energy efficiency of heat and power production is low. To be able to generate power, every power plant needs to use a portion of the energy it produces. In case of modern facilities that is a few, or a dozen percent of a power plant’s nominal capacity. However, in Ukraine’s thermal power plants this indicator exceeds 20 percent, and in older facilities it exceeds 30 percent. The inefficient management of the power plants (generating energy that does not correspond with the current demand) completes the sad picture that is Ukraine’s cogeneration sector. In result, the plants have become debtors to gas suppliers, including the state-owned Naftogaz. These companies have been sitting on the privatization list for a few years now, but so far no buyers enquired.
A system based on the so-called thermal power stations (TES) and cogeneration plants (TEC) is nominally responsible for generating over 60 percent of power in Ukraine. However, the real figure is about 40 percent, due to the facilities’ low efficiency explained above. In recent years, the debt of the six gas power plants has increased to about UAH 6 billion (USD 212 million) and goes up each year by about a billion UAH.
Dmytro Sydorov, an analyst from Expro Consulting, explained the predicament of Ukraine’s cogeneration plants in an interview with BiznesAlert.pl. “Investing in Ukraine’s conventional power plants is a huge challenge mostly for two reasons. The first one is the obsolete technical park that constitutes the plants. They have not been modernized for years, and changes in ownership, coupled with investment insecurity, have not facilitated their ability to maintain high efficiency. The second reason is the fact that the plants are unable to cover their expenses with gas providers, while their customers fail to pay their heat and electricity bills. The CHP plants are not growing their debt to Naftogaz on purpose. It is a result of quite a complicated system of energy supply where clients, both businesses and individuals, do not always pay their bills on time,” Sidorov clarified.
“However, if an investor has access to cheap gas, operating such a facility will definitely be easier. Naftogaz manages two thermal power plants, which are doing quite well today,” he added.
In mid-June Ukraine’s energy ministry suggested that the SPF put the power plants under Naftogaz’s management, since that company is their main creditor. The indebtedness of the plants negatively impacts the Ukrainian giant as well. The company needs to keep reserves because of the debt owed by the Ukrainian cogeneration plants (UAH 44 bn in total), so it is not able to pay out the previously determined dividends to the state treasury.
At the end of August, the Ukrainian anti-trust agency agreed for the CHP plants to be taken over by Naftogaz. However, at this point SPF does not want to agree to this, as it believes that the parties should wait for an investor willing to buy them and the end of the privatization procedure. The anti-trust authority pointed out that Naftogaz taking over the generation assets, may contribute to excessive concentration on the energy and heat generation market and the creation of a monopoly.
It is possible that Naftogaz may join efforts with PGNiG in the CHP sector. Such a solution could potentially be beneficial for PGNiG, as it would give the company the opportunity to enter the new market in partnership with a local investor, which is a safer option. Whereas Naftogaz would acquire the Polish know-how, as well as financial and organizational support for gas deliveries from outside of Russia at a potentially attractive price.
It’s a long way to go
The confidentiality agreement between PGNiG and SPF is the first step that will allow Poles to take a closer look at the Ukrainian market in search for attractive assets. This is why PGNiG has stressed that the contract will allow it to analyze whether entering a given sector will be in line with its interests.
The energy generation and trade sector in Ukraine is different than in the European Union. It still has one main contractor – Energorynok, a company that acts as an intermediary on the wholesale market and resells energy to regional distributors (Obloenergo), which provide it to individual and industrial clients. Such a set up generates additional entities and intermediaries that trade energy.
However, at this point it is hard to say whether PGNiG will finds any promising assets in Ukraine.
Kateryna Pryshchepa, a correspondent for the Ukrainian magazine Energobiznes, perceives PGNiG’s actions to date positively. “The Ukrainian market should be analyzed with a 10-15 year perspective in mind. We are in the initial phase of the energy market reforms, including the gas market and the energy generation market. The sooner a company decides to enter the markets, the bigger benefits will it reap in time. It should be remembered that Ukraine is a market with 40 million customers, including large industrial plants. When entering this sector, PGNiG will definitely need a lot of patience and a lot of understanding of the awaiting challenges,” the expert explained. Pryshchepa also commented on the cooperation with ERU with regard to gas extraction. “This decision shows that PGNiG wants to stay in Ukraine for a long time. Owning gas production capabilities allows it to secure its future investments, e.g. in the heating sector,” she summed up.
Poland should keep its fingers crossed for its gas tycoon to be able to find as many reasons to enter the Ukrainian energy market as possible, not only in the gas exploration and extraction sector, but also in the cogeneration industry. It is worth adding that the company has the relevant experience in managing heating assets thanks to, for instance, its Żerań and Siekierki CHP plants. The potential engagement of Poles is an opportunity to transform Ukraine’s energy sector. The Polish company entering Ukraine could provide an incentive to modernize a market dominated by private businesses with a small participation of state-owned companies. PGNiG’s possible entry should receive full political support. Without it, even the most promising perspective may not come to fruition.