Market is inflexible: why Ukraine is hard to do without Russian coal

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In the current circumstances, Ukraine could gain “coal independence” from Russia only at the cost of rolling blackouts for industry that might interrupt the economic growth

The statements of the Ukrainian officials about the possibility of a complete ban on the import of coal from Russia, in addition to the blockade of coal supplies from non-recognised territories of Donbass has caused a lot of questions: how, with great difficulty, just managed to get rid of dependence on Russian gas, and now they want to abandon Russian coal? Not cause the coal embargo restrictions just renewed growth? Let’s objectively take a look at the Ukrainian energy mix and try to assess the seriousness of the situation.

Gas sovereignty

Natural gas is relatively simple. First, Ukraine has its own production of about 20 billion cubic meters per year, which covers roughly half of the nation’s needs. Second, unlike coal gas as a fuel is universal: if a power boiler or gasified to you no matter the origin of the fuel, you just take away the gas of standardized parameters from the pipe. This created the preconditions to refocus on European imports. Ukraine has refused to import gas from Russia in 2015, missing its scope covers imports from the EU almost 90% of Slovakia, but also from Hungary and Poland.

Frankly, Ukraine could go the other way and quickly build up our own production from 20 billion to 30-35 billion cubic meters per year and become almost self-sufficient gas country, but this prevents the unwillingness of the Ukrainian authorities to reform the gas sector. Even three years after the Euromaidan in the country has the monopoly “Naftogaz” and its subsidiary companies for the extraction, although the deposits are small, poor and dispersed — their fastest selling international investors and non-discrimination of the independent gas companies would production go up. But Ukrainian officials are trying to play with the idea of “management effectiveness” of state-owned companies is privatization. In the end, the production is stagnating, and even then only due to the increase of the contribution of independent private companies developing a production from 3.3 billion cubic meters in 2014, up nearly 5 billion cubic meters in the past, while the combined production of state-owned companies fell by about the same amount. Reluctance as quickly as possible to break up and privatise gas, “to throw away” her competition is a powerful indicator of inhibition of Ukrainian reforms and the desire of officials to maintain control over cash flows.

However in gas sphere Ukraine pretty quickly severed its dependence on Russia. Another factor in energy self-sufficiency became the Ukrainian nuclear power plant: in 2013, they only slightly increased the production, but against the background of economic decline and falling energy demand, their share in electricity generation has increased from 50 to 60%, and the total percentage of the production of electricity and heat almost to half (from 36% in 2013).

Uncontested coal

But in the case of coal, it is so easy to reduce dependence on import will not work. This is a common problem of coal-fired generation: coal-fired power plants and boilers are usually designed for combustion of a specific brand of coals that are standardized even worse than crude types and different options depending on place of origin. For natural historical reasons (in Soviet times, nobody could not have imagined that Russia and Ukraine will fight and impose an embargo), the majority of Ukrainian power plants and boilers is tied to the brand of anthracite, mined in the Donbas.

The scale dependence are large. In connection with the blockade of Donbass is lost for the market of about 10 million tons of anthracite, over a third of the total consumption of Ukrainian coal power plants. The share of coal is also high at 38% in electricity and 34% of the total production of electricity and heat, although it managed to slightly decrease from 2013, when it was respectively 46% and 39%.

If Ukraine does not find alternative sources of coal supply, the inevitable large-scale rolling blackouts at least for the industry that will create serious problems for economic growth. Coal imports from Russia in the first quarter was more than 50% of the total Ukrainian imports. Replacement Donbass and Russian anthracite now trying to search in USA, South Africa, Poland and other countries, but it’s a difficult situation. The global coal market is not so flexible: in contrast to oil and gas more than 80% of the global coal output is consumed directly by the producer countries for their own needs, more than two thirds of the volume of international trade in coal supplies to the Asia-Pacific region is experiencing a shortage of its own production. Quickly locate additional supply volumes to Ukraine at a reasonable price is not easy.

By the way, exactly for this reason, producers of the unrecognized regions of Donbass will be difficult to sell their coal after refusal of Ukraine to buy it. The opportunity to resell the Donbass coal through Russia will be closed if Ukraine refuses the Russian import — even at the cost of rolling blackouts. In the end, the coal of Donbass will begin to compete with Russian exporters in the Chinese market. Who knows, maybe Ukraine, introducing the embargo is counting on such an effect.

Honestly, if the Ukrainian authorities over the years, quickly make the reforms and would open up for private investors, the gas industry, the growth of production and the consequent retrofitting of power plants and boiler-houses from coal to gas would result in a reduction in dependence on imports. As always, it all comes back to the question of political will.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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