August 5: Russian War Against Ukraine: Energy Dimension Summary of the Week (August 1-5)

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Summary of the Week (August 1-5)

? As of August 4, 765 settlements (app. 618,500 consumers) were left without electricity supply due to damage caused by hostilities. Over 237,400 consumers were left with no gas supply.

? Due to the intensification of hostilities and almost complete absence of electricity and gas supply, mandatory evacuation from the Donetsk region has started. According to the government's expectations, this winter, the Donetsk region settlements will have no district heating.

? As of August 1, according to calculations made by KSE Institute, direct losses due to the destruction of energy facilities amount to 108.3 billion USD, including 1.8 billion USD due to destruction of infrastructure and energy facilities, destruction of housing, and utility services caused another damage of 1.3 billion USD. The total amount needed to restore all destroyed assets is 185 billion USD, including 3.5 billion USD needed for the restoration of energy facilities and 1.7 billion USD for housing and utility services.

? According to Fitch, as of August 1, about 5% of the electricity transmission infrastructure of Ukrenergo was damaged by hostilities, and 15% of assets, based on the length of power lines and the number of substations, are located in the occupied territory. According to the Ministry for Reintegration updated approach, 321 local communities are currently located in the area of hostilities or are under occupation or encirclement, most of them in the Donetsk (66), Kharkiv (56), and Zaporizhia (55) regions.

? For over three weeks, the Nikopol district in the Dnipropetrovsk region has been under constant Russian army fire, which is "sheltered" by the Zaporizhzhia NPP, from where the civilians and infrastructure were struck. As of August 2, Russian forces fired more than 1,100 rockets into the city and nearby. US secretary of state Anthony Blinken confirmed that Russian forces used the ZNPP site as a military base for shelling Ukrainian facilities. In his opinion, the occupiers are aware that the Ukrainian side cannot and will not fire back, as this threatens to accidentally damage nuclear reactors or a highly radioactive waste repository.

? A high level of threats remains in nuclear and radiation safety. The IAEA Director General, Raphael Grossi, stated that the Zaporizhzhia NPP was entirely out of control of the Agency and appealed to Russia and Ukraine with a request to immediately allow IAEA experts to visit the facility for the verification of nuclear material, conducting an in-place assessment, and stabilization of the situation to avoid a nuclear accident. Grossi reported that all principles of nuclear safety have been violated at the occupied ZNPP, the supply chain of equipment and spare parts has been interrupted, and the situation is becoming increasingly dangerous.

? Ukraine's power system worked stably and remained in surplus. Electricity was exported to Moldova, Poland, Romania, and Slovakia at a total level of app. 660 MW. Favorable conditions in the EU markets and significant competition led to high prices of access to cross-border transmission capacity to Romania and Slovakia, which, however, tended to decrease. At the same time, there was a relatively high concentration of allocation, dominated by two companies ("DTEK Zahidenergo" and "ERU Trading").

? Due to the growth of physical exports to Romania and Slovakia from 100 to 250 MW, the total income of "Ukrenergo" from the capacity allocation auctions increased by app. twofold and amounted to 350 million UAH. Also, Ukrenergo was actively working with ENTSO-E to speed up joining the Inter-Transmission System Operator Compensation (ITC) mechanism, which allows exporters to avoid payment of transmission tariffs for exporting electricity.

? The operation of the day-ahead electricity market (DAM) was characterized by a slight increase in the weighted average price, which fluctuated within the range of 2,724.35-3,010.35 UAH/MWh. At the same time, the Base DAM price indices in the Eastern European countries exceeded similar Ukraine’s price index by 2.1-6.1 times, providing favorable conditions for electricity exports. The total daily sales volume at DAM fluctuated in a small range of 36.300-37.700 MWh.

? Gas Transmission System Operator of Ukraine (GTSOU) reported on fulfilling the prerequisites for transporting gas through the Trans-Balkan Corridor to the entry point of Ukraine’s gas transmission system. In particular, since August 1, GTSOU has increased gas metering capability at the Grebenyki connection point between Ukraine and Moldova from 3.96 to 6.12 million cubic meters per day. This provides additional opportunities for gas supplies from LNG terminals in Greece and Turkey and for potential supplies from Azerbaijan.

? The Government and the Verkhovna Rada adopted a package of decisions that "freeze" tariffs during the following heating period. The draft laws No 7427, 7428-2, and 7429 were adopted, which prohibit the increase of tariffs for gas distribution; production, transportation, and heat supply, and hot water supply. Government decisions were also adopted on the extension of preferential gas prices for hot water suppliers within the public service obligation (PSO) scheme. Also, the government approved the allocation of UAH 286 million from the state budget reserve fund for the restoration of heat supply in Kremenchuk, Okhtyrka, and Chernihiv cities, as well as attributing expenses for preparation for the following heating season to high-priority one.

? As part of preparation for the heating season, the government held consultations with the heads of 15 Regional Military Administration regarding the readiness of district heating facilities. According to the Ministry of Energy, more than 12 bcm of gas were accumulated in the storages, and 1.83 million tons of coal have been accumulated at TPPs and CHPs warehouses (target - 2.5 million tons). According to the Ministry of Communities and Territories Development, as of August 1, the actual readiness of facilities for the heating season is 56-58% (target - 60%), and some regions have been instructed to speed up.

? After the technical default of Naftogaz, the government intensified state aid for the company. The government fixed the market value of Naftogaz at 300.4 billion UAH, and the authorized capital was increased by 646.2 million UAH via the transfer of shares of 6 cogeneration plants, recently transferred to the company’s ownership. The Minister of the Cabinet of Ministers Oleh Nemchinov reported the company holds active consultations on U.S. gas supplies under the Ukraine Democracy Defense Lend-Lease Act of 2022. In addition, Naftogaz sent the holders of Eurobonds a second request for approval of payments deferral for two years - this time, not only of Eurobonds with repayment in 2022, as in the previous request, but also of Eurobonds-2024 and Eurobonds-2026. Meanwhile, the Verkhovna Rada has registered a draft report of the Temporary Investigative Commission on the facts of possible corrupt actions of Naftogaz (reg. No. 7613), which claims that the company in 2018-2021 made expenditures at its own discretion and did not ensure proper accrual and payment of dividends to the state budget.

? In the field of nuclear safety, the government is strengthening its own control, weakening the relevant regulator. The Cabinet of Ministers transferred to the Ministry of Energy the functions of implementing public policy in the field of nuclear energy use and radiation safety, physical protection of nuclear installations, nuclear materials, radioactive waste, and other sources of ionizing radiation at the facilities of Energoatom.

? The Government has altered the procedure for holding "green" auctions, approved the auctions’ schedule for the next year, and established indicative quotas for the following four years. The possibility of setting the maximum capacity of the RES facility and regional quotas has been provided and the issue of the bank guarantee was also clarified. The National Energy and Utilities Regulatory Commission changed the network codes to stimulate the development of the biomethane market (requirements for the molar part of oxygen in natural gas were reduced to simplify the access of biogas to gas transmission and distribution systems), and a number of license conditions for energy storage activity.