Ukraine’s DTEK CEO speaks about energy system, consequences and goals of Russian strikes
Since October 10, Russia has been massively attacking the energy infrastructure of Ukraine. A special emphasis is put on disabling heat generation. In an interview with “Economichna Pravda,” DTEK CEO Maksim Timchenko talked about how much damage missile attacks and kamikaze drones have caused to the energy industry and DTEK, in particular, what is the safety margin of the country's energy industry and what consumers should expect in the event of continued attacks on energy facilities.
SITUATION IN THE ENERGY SYSTEM, CONSEQUENCES AND GOAL OF RUSSIAN STRIKES
Looking at the entire energy system of Ukraine, how much capacity was there before the October 10 strikes in the country, and how much is left now?
– It is important to understand the difference between the capacity that is left and the capacity that is still available. These strikes are not aimed at generating facilities, so that we cannot produce electricity, but at connection systems tied to the Ukrainian energy system. They hit open switchgears, transformers, switches, so that a station that can produce electricity cannot be connected to the unified power system. That is, the key targets are Ukrenergo transformer high-voltage substations and power distribution equipment at thermal power plants.
What is the tactics behind this? Since Soviet times, we have built unified energy systems so that if one of the generation flows fails at some part of the system, another one picks it up. That is, everything is looped and we work in a single system. In Soviet times, a power system scheme was built, where everything is set up for similar events that are happening today.
I think the russian military is consulted by their power engineers and they explain how to cause maximum harm to the energy system.
When Ukrenergo's 750 kilowatt nodal substations, which connect the regions where the generation facilities are located get hit, then a surplus is obtained in one region, and a deficit in another. They hit these substations. This is exactly what happened on Monday and Tuesday. Yesterday morning (July 13 - EP) they struck to prevent supply of electricity to Kyiv.
I myself went around the places of damage on October 10, and near one of the thermal power plants, I saw the damage done to a nearby business center by a missile strike. On the left bank of the Dnieper River, the missile stroke a civil building, not the power plant. There is a feeling that they hit precisely on generating capacities.
- Precisely. There is a station, an engine room with turbines, a generator where electricity is produced. Distribution facilities are open nearby. You must have seen them - transformers, many lines, a large building.
That is, they hit not generation facility, not the station where electricity is produced, but power output facility - open switchgears.
So in the case of TPP-5 and TPP-6, this is what happened? Are the substations destroyed?
- Yes. The open switchgears were broken. They hit the infrastructure that allows, as I told you, to produce power.
What is the long-term goal of these strikes?
– It’s crystal clear. The russian army, which was much talked about before, does not exist as a professional army, there are massive defeats on the front line. With this in mind, they strike at the rear in order to create maximum problems both for the civilian population, undermining morale, and militarily in terms of equipment supply. Without electricity, everything stops.
For example, when they hit the Dnepropetrovsk region, where our mines are located, they hit the substation. Mines stop working without electricity, we don't produce coal, and we don't have anything to run thermal power plants. They destroy the infrastructure so that the rear could not function normally and, accordingly, provide the front line.
Coming back to the original question, how many megawatts or as a percentage of the total number of capacities have been taken down?
– From the point of view of generation, we capacities that are destroyed and those that are occupied. The biggest deprivation of capacity is the seizure of the Zaporozhye Nuclear Power Plant. Today, 6 thousand megawatts are not available. This is the most difficult situation.
Speaking of our thermal power plants: we have lost control over the Uglegorsk station, and the Lugansk, and the Zaporizhzhya thermal power plant, which is next to the Zaporizhzhya nuclear power plant. Three thermal power plants and one nuclear power plant are located on the temporarily occupied territories and cannot produce electricity for the country. This is firstly.
Secondly, regarding the power output, the Ladyzhinskaya station in the Vinnitsa region, which was also hit this week, cannot operate today. We are working to put it back into operation. The rest of the thermal power plants are operating.
It is about 10 thousand megawatts.
- Yes. 6 thousand - Zaporozhye NPP, Uglegorsk and Zaporozhye - 1200 each. All together up to 10,000 megawatts out of 50,000 megawatts. In general, the country runs on about 52 thousand megawatts.
When a minister or ministry says that 30% of the power industry is out of operation, can you say that this is misinformation?
- I certainly don't want to challenge the Minister's statement. Here it can be percieved in different ways. “Out of operation” in terms of the fact that we have lost connection systems - it is correct. That is, if we do not have connections with generating stations, as I said, then we have lost 30% of the capacity when it comes to the process of energy delivery to the consumer.
Why were the rolling blackouts implemented? Because the power that was produced, could not be delivered to the grids. In this regard, he was probably right. From the point of view of the availability of capacities in working condition, I outlined the picture for you.
How much is irretrievably lost? That is, they are broken so that the station needs to be restored from scratch.
- There is a thermal power plant, we need to check this information, in Sumy or in Chernihiv, which was badly damaged at the beginning of the war. But thermal power plants are of utmost importance only in the region where they are located in terms of heat and hot water, but not critical in terms of the energy system of Ukraine.
Let’s take a look at the numbers. We now have a load of 11,000 megawatts. That is, with a total performance of 50,000 megawatts, even subtracting 10,000, we have 40,000 megawatts. With the needs of the power system of 11 thousand megawatts.
Is this peak or average?
- It's average. At peak, it can increase by another 2,000 megawatts. There are enough own capacities in Ukraine. Energy export stopped because we need to save coal, gas, and the capacities that we have. That’s why we are not ready to export electricity on a stable basis.
There is enough own capacity within Ukraine to get through the winter and for normal operation. The problem is the hits and damage done to the infrastructure that allows this power to be provided.
Has the protection of generation facilities increased after what happened this week?
– I can’t say that special forces were sent to guard the station. No. Over the past days, we once again conducted an audit of critical facilities, and once again told the military what we consider important to protect the object. We hope decisions will be made.
Will the group be engaged in the restoration of stations until the moment when the protection is not strong enough? Does it make sense?
- It does. I am sure of this. We need to parallel these processes. We can't just look at the situation and not try to do our best to make this capacity available. We have a key problem and this is what I talked about yesterday with international stakeholders. That is equipment. Autotransformer production takes 6-9 months. We do not have these 6-9 months. We don't even have one month.
The biggest issue now is autotransformers. We need to actively look for used equipment at coal-fired thermal power plants in Europe that we can remove and transport here. You can add some temporary schemes, but they cannot work on a permanent basis.
I understand that you are not a military specialist, but still I will ask: are you considering a scenario when all these strikes were just a kind of warm-up? They can also launch 80 missiles twice, and three times. Is there any plan "B" or "C", what to do in this case?
- The military should have “Plan B”. We can do basic things to protect equipment. We have the so-called "Bastion" program. At all our power plants, we build protective structures, conditionally, concrete blocks, which enclose the transformers from impact and fragments. But if it's a direct hit, as I showed you in the photo, no blocks will help.
We usually know when the missiles are heading our way and the employees manage to hide in the bomb shelter. We can only protect our infrastructure as much as possible, protect people and respond quickly after the hit.
A technical question, but an important one. If our russian "friends" smash the capacities, and not the output of capacities, then the energy system will be without thermal generation. Is nuclear generation capable of operating under such circumstances?
– Firstly, we have Ukrhydroenergo. Hydroelectric power plays an important balancing role. Secondly, along the lines that exported electricity to the EU, imports can also be carried out. Accordingly, this can also play a role in power balancing.
We are not stopping our battery storage installation project. I spoke about this - we still plan to bring and install 20 megawatts of storage capacity. This battery storage will also play an important role in balancing. It may not be such a large volume, but in this situation it is important.
Therefore, I believe that we cannot have some kind of Armageddon, a situation where everything will be broken, and we will end up having a total blackout. I don't believe in this scenario. Although I did not believe in a war with russia. Everything is possible but based on how we have performed and how the system has performed in terms of sustainability, I have confidence that we will cope with these challenges. Again, in conjunction with the military.
I rely heavily on Ukrainian Air Defense Forces. Still, even with such a massive attack, more than 50% of the missiles have been shot down. These are certain lessons for us and for the military, how to deal with such situations.
There is an opinion that the nuclear power generation infrastructure will also be destroyed and thus thousands of megawatts will be "extinguished". Do I understand correctly that if such a scenario is implemented, then we have the technical capabilities and agreements with Europe to take electricity from them?
- Yes. Firstly, my personal comment: these russians, perhaps, still have enough brains with their conditionally high-precision weapons not to hit nuclear power plants, because you can miss and hit the block. I hope that they will not destroy the infrastructure of nuclear power plants. But nothing can be a certainty with this madness.
Yes, there are technical possibilities, there are agreements, there are financial issues, and they are still being discussed in terms of paying for electricity. You know, in our country it costs 4-5 times cheaper than in Europe, and the delivery will, of course, be at the level of European prices.
The other day we saw a message from the Head of DTEK Dnipro Electric Grids. He was looking for generators. Do people need to buy electric generators?
I don't want to inspire any false calm. We live in the times of highest uncertainty. And, frankly, if it is possible to buy a generator, then it is better to buy. If we take a sober look at the situation that is happening now, it is better to have reserve capacities.
Let’s talk about liberated territories. In the liberated Izyum, there is no electricity and, accordingly, no water. I don't know if DTEK provides services to consumers there, but when will electricity appear there?
- This is Kharkiv region. We don't work there, it's "Kharkivoblenergo" ( Beneficiary, Vadim Novinsky, Rinat Akhmetov's partner in the metallurgical business. - EP). Although we told all our colleagues that we are ready to provide assistance with equipment, spare parts, and crews. They can feel free turning to us for assistance.
The military granted us access to Liman two days ago. There we will restore the power supply of the Donetsk region. In the Kharkiv region, we are ready to help if there is a request for this.
DTEK'S LOSSES, RELATIONS WITH CREDITORS AND AKHMETOV'S REACTION TO DESTRUCTIONS
How does a man, named Maxim Timchenko feel when the business that he was building for 20 years is now being destroyed? Destroyed both in the literal and figurative sense of the word.
– My internal stability was formed in 2014. Unfortunately, I have already experienced times when everything was being destroyed - the Zuevskaya thermal power plant, coal industry enterprises. We had the largest and most efficient mine - Komsomolets Donbassa - the first asset of DTEK, which we were proud of, invested in, and where we managed to increase production to a record 4.5 million tons.
The same thing happened with Rovenki Anthracite and Krymnergo.
All of this is gone now. This piece of our life has been cut off. And that happened in Donetsk, our hometown, where it all began.
And what have we done? We have built 800 megawatts of wind and solar stations. We launched new businesses, retail, trading. We have increased our portfolios in Odessaoblenergo and Kyivoblenergo.
Today we have so much inner anger accumulated inside and a strong desire to do the maximum in order to preserve what we have. Now I am convinced that in reply to the destruction or seizure of our enterprises will build something new, even better than before.
Of course, I treat the destruction with pain, as well as all the employees of the company. But there is an internal resistance, stability, which does not allow us to give up. Even in these circumstances we, for example, are looking at building a wind farm. Despite the fact that all of our wind generation remaines in the occupied territory.
I think this is such a Ukrainian feature: you put more pressure on us - we will resist more, and we will do more.
This might sound like a cynical question but to what extend is your previous answer connected to the fact that you have obligations to creditors. If you stop developing, the creditors will probably ask questions.
– If we are talking about a Western-style company, then the manager has responsibility to all stakeholders: shareholders, investors, creditors, employees, and so on. Today, my priority is responsibility to employees and to the country in which we are a company with critical infrastructure. This is an absolute priority.
I cannot put responsibility to the energy system and employees on the same level as responsibility to creditors. Whether someone likes it or not.
This is a business in which there must be stable connections, financing, and in which one cannot live only for today. And if you have lost the trust of creditors or investors, then it is no longer possible to talk about future development.
The most difficult times, I believe, came in 2014. We have always treated creditors correctly, explained to them, and did not use the circumstances to avoid paying or writing off debts, including today.
Today, none of the creditors or investors can voice claims to the company. Moreover, creditors are grateful to the company for that fact that being in such difficult conditions, we service the debt, do not claim default, do not write off debts and do not enter into restructuring. DTEK fully fulfills contractual obligations to creditors.
How far away is DTEK from default?
– We have talked about this 6 or 7 months ago. And I repeat today - we do not plan to declare default.
Regardless of the destructions?
Every time they ask me what will happen next, I say - at the moment the situation is like this. At the moment, even after this week, we believe there is no reason to default. We have debt repayment and large payments in 2024-2027. Today we are talking about the availability of financial resources to pay interest. That is, we do not plan to declare a default.
Are there aggressive creditors who may initiate a refund process after this week?
- The vast majority are sympathetic. As long as we service the debt and fulfill contractual obligations, there is no reason for creditors to claim debt repayment or behave in any unsatisfactory manner towards the company. Today we - both the company and Ukraine - are in a situation where we need help from creditors, not some kind of demands and aggressive actions against us.
How much has DTEK paid off its debts since the beginning of the war?
– Debt servicing is structured as follows. We reserve payments for bank debts and bonds for 6-12 months in advance. That is, we must keep money on the accounts of Western banks, which, if there are no receipts from Ukraine, will allow us to service the debt.
We have received permission from creditors not to replenish these reserve accounts and, accordingly, all payments that have been made this year have been made from reserve accounts. I need to check the order of the numbers, but if we talk about the whole group, then they paid out in the region of 80 million dollars.
No new loans?
-Did you have a meeting with Rinat Akhmetov after the hits this week?
A phone call?
- Of course, there was a phone call.
What does he have to say about it all, except for the obvious things?
- He is fully aware of the damage done to the company, what we are doing, what needs to be done, how quickly. In principle, the same questions: about employees, how quickly we can return the equipment to working condition, how this has affected the volume of coal and gas production and the operation of our power plants. The general questions about the people and the technical condition of our business.
As a businessman, he probably asks questions about money, and, accordingly, you probably needed to answer something in numbers. How do you evaluate the damage in terms of money?
We counted - about 400 million hryvnias for these three days (10-11, 13 Zhovtnya - EP).
Is it pure mechanics? That is, without taking into account the lost profit from the sale of electricity.
– This is purely replacement costs or a necessary cost to restore the equipment.
Do you agree with the statement that this war will last for years? If so, then maybe you will change the group's strategy in terms of at least diversifying your businesses to other countries of the European continent?
- Yesterday I had a job interview - we still hire people to work for important positions in the company. And I got asked a question. The candidate says: I watched your corporate strategy 2030 (New Strategy DTEK 2030), what has changed in it? My answer was: fundamentally nothing has changed from it.
The priority for the development of green generation remains. It was very important for me to hear the president's position that it is necessary to create a "green hub" in Ukraine to supply electricity to Europe and help Europe get away from overdependence on russian energy resources.
We have all the possibilities for this: grids access, favourable topography, wind, sun, and experience. Accordingly, as we said that we would build green generation as a priority, we are not giving up on this.
In the same strategy, we talked about our international development. At the same time, the first plans for our investments abroad were laid down. And, in accordance with this strategy, we continue to do so. That is, today we are implementing projects for the construction of wind and solar stations. As part of these projects, we want to develop an entire ecosystem of solar and wind power plants, including those with energy storage systems.
RELATIONS WITH THE AUTHORITIES, ELECTRICITY TARIFFS AND RISKS FOR THE COAL INDUSTRY
Do you have direct ties with the president?
- Not. I personally don't.
Are there any stumbling blocks in solving any important issues when there is not direct communication with the first person in power?
- I would be disingenuous if I said no. There are such issues. I don't think that the president has the opportunity to have direct communications with business, including DTEK, so this is not the source of the problems.
Perhaps the source of the problems is a certain degree of distrust in business, even during the war. Although I believe that our group and our shareholder did their best to help the military, civilians, and the country in general.
We may have different views with the regulator. For obvious reasons. I never hid it. But we are a licensee, we have a platform, we express our arguments, we prove them. The right and, most importantly, the responsibility to make a decision remains with the regulator. And we will obey any decision. Although there are already decisions with which we do not agree, or draft decisions with which we also do not agree.
Can you give an example of the most painful issue that, in your opinion, is not being solved?
– The market price for industrial consumers is 3-4 times lower than in the EU. It is very important that there is no misunderstanding here. There is a population for which the regulated tariff does not change, and the state has announced that the tariff will not change for the population.
Industry, especially exporters, sell in those markets where electricity is 3-4 times more expensive than in Ukraine. Well, there is no need to lead to a situation like in Hungary, where the price is 300-400 euros per megawatt/hour, but also not to remain in the situation of 73 euros per megawatt/hour, like in Ukraine. There must be some sort of fair approach here.
What tariff do you consider to be fair today?
– Our calculations show that, by definition, this tariff cannot be lower than 100 euros per megawatt/hour. With those inflationary costs, it is better to speak not even in euros, because we depend on the exchange rate. We believe that the tariff in Ukraine today should be no less than 4.5 hryvnia, 4.5-5 hryvnia per kilowatt hour instead of today's 3.20.
So you come with this to the National Commission, which carries out state regulation in the fields of energy and utilities (NKREKU) with this and their answer is: "now is not the time"?
- Not. The NKREKU announced next week an increase of the so-called "price caps" (the maximum allowable cost of electricity. - EP) with limits of 3 hryvnia at night and 6 hryvnia during the day. On average, this will give a tariff of about 4.20-4.30 hryvnia per kilowatt / hour. We agree with this approach.
However, now discussions begin that when new "price caps" are established, a part, all or not all, I don't know, should be withdrawn from thermal generation. That is, thermal generation, which is the last one on the market as the most expensive technology of coal generation all over the world.
Therefore, the market is formed at the price of thermal generation as the most expensive in terms of its technology. And at the same time, the state says - and we will withdraw some of the money from you. In my opinion, this is generally an economic nonsense.
That is, there will supposedly be an increase, but the state will take all this money. These are the wrong decisions. We talk about it openly.
Or payment for "green" generation, for example. At the beginning of the war, 15-16% was paid, now the payment is at the level of 60%, if there are resources for this. We also say that these are not the best signs to be sent to the investors.
So, you come to the NKREKU and say: we want a tariff of at least 100 euros. What answer are you getting?
We justify economically. The answer we get is the ffollowing: we will consider, come to public hearings.
Looks like plain excuses
I don’t see it that way. I believe that our materials are being looked at, arguments are being heard, our analytics are carefully studied. It’s not plain turning back on us.
Is 100 euros a cost price or with a certain profit?
- 100 euros is "zero" profit. Let’s take a look at how the price of thermal generation formed? The starting point is coal. Today the price of coal on the market is 4200 hryvnias per ton. It's 100 dollars. In hubs the price is 270-300 dollars.
I do not claim the issue that our coal price is 2.5 times lower. But at least the price of 100 dollars can be covered by the tariff? To cover this price in the tariff, it should be, as I told you, somewhere around 4.30-4.50. But this is just to cover the price of coal. And we need some resources for recovery.
Losses of thermal generation over the first 8 months of this year are 24 billion hryvnia. These are figures calculated by NKREKU. Due to the fact that the tariff does not cover the cost. And of course, there are no resources to import some kind of coal.
There are norms where it is written that: generation should work at least to cover its costs. Using this item, you can go to court and claim damages. Would you do it? Later on perhaps?
- Going to court is not the best way to communicate with the state.
We will see how the situation will unfold next week. If nothing changes or the tariff is increased, but the entire effect of this increase is taken away through the PSO (Public Service Obligation), then, of course, we will come and tell you.
What is our argument? The coal industry today, without false modesty, is fully supported by DTEK on our coal mining. I have spoken about this many times: we have invested billions of dollars to ensure that we have coal in our country. This year we will have to survive through the winter on nuclear and coal generation.
Moreover, taking into account the situation with the Zaporozhye NPP, we believe that it is necessary to import coal and think about import contracts now. To maintain today's pace of coal production, you need to invest. The cost of equipment today in Europe has tripled.
We cannot fully cover equipment or spare parts with our resources. They must be bought. We provide all these calculations. Accordingly, either you somehow think in your own way and think that this is enough for you, without listening us. But then it will affect the volume of coal production.
“Dobropolyeugol” mine was a good litmus test. It was returned to the state. We sincerely thought that the state would build vertical integration with Centrenergo. As a result, the volume of Dobropolyeugol's production before the war has reduced threefold compared to the volumes DTEK had produced.
This is an indicator of how the state and private business manage. Therefore, private business probably deserves to have its arguments heard.
Coming back to our story, if the increase is accepted, but the effect of the increase is removed, it will reflect negatively on the volume of coal production. That's that. Is it right when we use our coal at a price of $100 to buy abroad at $270? We'll see next week.
You say "will be withdrawn." What does is meant?
- I am talking about PSO. This means that, conditionally, the regulator says: the tariff of 3.40 hryvnia is enough for you. And when the "price caps" are raised on the market, the price sets at 4.40. The hryvnia of the difference is planned to be withdrawn. Or 80% of this hryvnia, or 50%.
Where is this money going? This money is used to finance Energoatom. Because today "Energoatom" bears the burden of financing the tariff to the population of 1.68 hryvnia. And the regulator's argument is that Energoatom does not have enough money to finance the low tariff, taking into account the loss of the Zaporozhye NPP.
Our calculations show that when the "price cap" is raised to this level and the resource is saved, it is enough, and artificial withdrawal from thermal generation is incorrect, it does not make any economic sense.
Moreover, the law says: if there is a PSO, then this PSO should be financed form the state budget. That is, if something is confiscated from us under PSO, then the budget should compensate for this, this hryvnia, 50 kopecks or 20. Therefore, I don’t understand the logic under this decision.
You say that all coal generation is unprofitable, according to the commission's calculations. Does that mean that DTEK is unprofitable?
- Let's, for the sake of justice, talk about the coal business. When we talk about losses, we are talking about thermal generation.
What is the argument we receive? You earn income on the coal business - on Pavlogradugol. Our answer is as follows: estimated losses of UAH 20 billion for DTEK Energy, which includes both generation and coal. In these losses, 4 billion is the profit of Pavlogradugol. And another 16 billion? Such is the overall balance.
Therefore, my answer is the following: today, in terms of operating costs for the past period, Pavlogradugol is profitable, but with inflation of 25-30%. In the future, we say that there will be no such profit.
This concerns operating expenses only. To this we must also add capital investments in tunneling (drilling - EP) and the purchase of equipment that must be bought abroad and brought here.
Now, if this entire balance is added up, then the price should be 4.5-5 hryvnias.