Time of Imitators, Not Reformers: How Corruption Is Destroying Ukraine's Energy Sector

Time of Imitators, Not Reformers: How Corruption Is Destroying Ukraine's Energy Sector

The Ministry of Energy and Coal Mining announced an Energy Strategy through 2050. Minister Herman Halushchenko promises to build two one-million-kilowatt nuclear power units in six years for 10 billion dollars and to increase the share of renewable energy in the balance to 30%.

The ministry is building such plans despite the war, the economic crisis, and the loss of 90% of wind and 50% of solar generation. Are these plans realistic? There are doubts. Moreover, Halushchenko’s ministry cannot manage existing assets or ensure their efficient use, even though energy security became particularly important during the war. Rumors are circulating about a possible dismissal of Halushchenko. But Ukraine needs not merely a change of minister for another equally dependent figure — the state needs a change in approaches to energy management.

How Profitable Centrenergo Was Turned into a “Black Hole”

Centrenergo is a vivid example of how blatant unprofessionalism multiplied by corruption destroys even what should be working. Under the previous government, JSC "Centrenergo", 78% of whose shares are state-owned, was a profitable enterprise. In 2017 its net profit was 1,9 billion UAH, in 2018 – 499 million UAH. But after the change of power the company sharply went into losses — in 2019 a 1,98 billion UAH “minus” was recorded. At that time the ministry was headed by Oleksiy Orzhel.

A few manipulations at the highest level and state thermal generation changed coal suppliers, began selling electricity to buyers close to Ihor Kolomoisky's business, failed to fulfill promises regarding the share of sales on the day-ahead market, and accumulated huge losses. The new authorities did everything so that Centrenergo became a cash cow. Under the new electricity market, the company was relieved of obligations under the mechanism of imposing special duties. Formally, Centrenergo was obliged to sell all electricity under bilateral contracts on the exchange, but the Cabinet chose the Ukrainian Energy Exchange for this, which became a tool for schemes on the energy market.

Vladimir Potapenko, whom Kolomoisky called "a person he understands," headed Centrenergo. Beginning in July, companies linked to Kolomoisky — Zaporizhzhia Ferroalloy Plant, Nikopol Ferroalloy Plant, Marganets Mining and Processing Plant, Pokrovsk Mining and Processing Plant, and Dniproazot — as well as traders associated with him, United Energy and Ukrtranslit, were buying from Centrenergo on the exchange. What was happening with prices at that time is visible on this chart:

It got even worse. Since December 2019 Centrenergo began selling electricity under bilateral contracts to Kolomoisky’s companies at 56,7 kop/kWh at the same price that NAEC Energoatom sold within the PSO mechanism. At the same time, the production cost of thermal generation was at that time at least 100 kop/kWh, according to market participants. That is, Centrenergo was selling electricity at almost half its cost.

In addition, Centrenergo began buying coal at high prices from Kolomoisky’s companies. On 30 July 2019 a contract was signed for coal supply between the state generating company and Nafta Fors LLC, which the media link to Kolomoisky. This LLC sold Centrenergo Russian coal at quite high prices, while the company accumulated debts to state Ukrainian mines. The situation attracted attention; activists even blocked wagons with Russian coal at the Sosnovka railway station in Lviv region.

It reached the point that Centrenergo stopped paying for the coal it bought from other suppliers. The debt to Shakhtarstrans by the end of the year reached 362,7 million UAH, to Ukrdoninvest Trading — 1,44 billion UAH, and to the state Lvivvuhillia — 92 million UAH. The latter lost working capital to pay for electricity, which caused power outages for state mines on 22–23 December. Even the state trader Derzhvuhlepostach went to court; Centrenergo owed it 339 million UAH.

The State Property Fund responded to this blatant looting of a state company by stating it was satisfied with the company’s business activities. And Minister Orzhel stated the obvious — the reason was expensive coal and cheap electricity. As they say — the curtain.

The Energy Collapse Would Have Happened Even Without the War

Later, Kolomoisky eased his grip on Centrenergo because Western partners, having moved past the initial shock, demanded taming the oligarch. But the schemes on the state company did not disappear; only their beneficiaries changed.

This past heating season was probably the hardest, and not only because of the war. Schemes in the energy market led the Ministry’s management to direct cheap coal from state mines to private consumers, while state thermal power plants faced a choice: either buy expensively from intermediaries, or burn expensive state gas. As is known, it got to the point where Naftogaz even limited fuel supplies to the state Trypilska TPP because it took gas but did not pay.

DT.UA published an investigation showing how private companies received state coal with an incredible discount of up to 50% off market price. State enterprises Ukrvuhillia and DobropilliaVuhillia-Extraction last autumn sold private buyers coal for 1900–4300 UAH/ton, while Centrenergo’s TPPs were forced to buy fuel 2–3 times more expensive.

According to ZN.UA, the SBU opened a criminal case. In early March searches took place at addresses linked to Maksym Nemchinov. Until 2021 he was deputy minister of energy, but it was reported to Volodymyr Zelensky that Nemchinov was too closely linked to Rinat Akhmetov’s coal wing, and he was simply dismissed. However, he became an advisor to Minister Halushchenko and continued to work in coal. It is worth recalling that, having been left without state coal, TPPs had no choice but to buy fuel from Akhmetov at twice the price, DT.UA wrote.

This story did not end with indictments. It was only about the redistribution of spheres of influence in state energy. According to ZN.UA, the beneficiary of the searches became the minister’s advisor Ihor Myroniuk, a man of state traitor Andriy Derkach. In fact, the current minister Halushchenko himself is a product of Energoatom, where Derkach was influential.

After the period of selling coal “on the side” ended, Vitaliy Zyuzko resigned as director of SE Ukrvuhillia, and in January his place was taken by Oleksandr Kheilo — a person lobbied by Servant of the People faction leader in the Rada, David Arakhamia. Vladimir Yehorov, a top manager for another MP with energy interests, Maksym Yefimov, took the chair of Centrenergo.

By the end of last year the Ukrainian coal market was finally dominated by Arakhamia and Yukhymov. Under their control was the entire vertical: from state mines to the coal consumer represented by Centrenergo. “The state energy sector, consisting of coal mines and thermal power plants, has finally turned into a corrupt cesspool. An entire segment of the economy responsible for Ukraine’s energy independence has been handed over to crooks,” believes Kostyantyn Ilchenko, advisor to the Center for Strategic Studies.

By the way, coal production in Ukraine was declining even before the war, and now even more so. Moreover, some mines were flooded due to power outages. Ilchenko is convinced the government keeps state mines in a half-dead state because schemers are interested in importing coal, which brings them large profits.

“Hundreds of millions of dollars, in cash, end up in the pockets of operators. There is enough for everyone: those in the Cabinet, those in the SPFU or the Ministry of Energy, and all those who approve candidates for state positions in Centrenergo. And no one cares that the state is brought to its knees. JSC Centrenergo today is dangerous for the state because it is used as an instrument of crime that causes enormous damage to the country,” Ilchenko writes.

Today the state energy sector is in a systemic crisis. And not only because of the war. As Ihor Tynnyi, co-founder of the Ukrainian Association of Renewable Energy, writes, all state energy companies recorded a record loss in 2020 — 3 billion dollars for the year. De facto, the corporate governance reform was canceled and there was a partial return to a communist centralized management system. The institution of an independent regulator — the NERC — was liquidated. It exists only for show.

Minister of Energy Halushchenko, using wartime conditions, signed a number of dubious orders. For example, he directed 2,5 billion UAH from NEC Ukrenergo to purchase coal, or rather — for the looting by new beneficiaries of corrupt schemes in the coal industry.

“They stole everything from Centrenergo and state mines during spring and summer, so it was necessary to urgently throw more taxpayers’ money there. And hello to the non-regulator NERC, which allows this play to go on successfully for so many seasons,” Tynnyi wrote.

No capital investments were made in coal and oil-and-gas-fired TPP and CHP units. To produce 1 kW of energy, Ukrainian state stations spend almost 40% more coal than their counterparts in Western Europe or even Poland, Tynnyi writes. The government refused to privatize 6 obsolete CHPs and returned them to Naftogaz’s control. Centrenergo’s debts to NAK reached an incredible 3 billion UAH.

Tynnyi wonders how Energoatom, a company-monopoly with a market share of almost 60%, can be loss-making at all: “Deliberately and intentionally. When a conscientious citizen hears that Energoatom takes loans not only to buy fuel but even to pay staff salaries.” By the way, Halushchenko moved into the minister’s chair after Energoatom’s record losses, where he had been a vice-president.

All this collapse in Ukraine’s energy sector would have happened even without the war. Instead of reforms, those close to power used state companies as feeding troughs to fill their own pockets and imported energy carriers from Russia and Belarus. And now they are plundering the energy sector even during a full-scale invasion. Instead of putting affairs in order in his area of responsibility, the minister of energy will present society with strategies through 2050.

Author: Vira Levus