Transcript СОДЕРЖАНИЕ ПРЕЗЕНТАЦИИ

THE ROLE OF THE PRIVATE
SECTOR IN REFORMING THE
UKRAINIAN POWER MARKET
March 2008
Vitaly Butenko
Chief Strategy Officer
DTEK - THE LARGEST PRIVATELY OWNED COMPANY IN
THE UKRAINIAN POWER SECTOR
The first and only private vertically
integrated power utility company in Ukraine
COAL
PRODUCTION
Coal production in Ukraine –
75.5 Mt*
DTEK’s market share
20.9 %
 Pavlogradugol
 Komsomolets Donbassa mine
* for the year 2007
** excluding export
GENERATION
Electricity generation by TPPs
in Ukraine – 73.5 TWh*
DTEK’s market share
27.1 %
 Vostokenergo
POWER DISTRIBUTION
Electricity output from WEM**
– 161.3 TWh*
DTEK’s market share
7.6 %
 Service-Invest
 PES Energougol
Source: DTEK, Energobusiness
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OPERATING STRUCTURE
DTEK
COAL
COAL MINING
GENERATION
Vostokenergo, LLC
(3 TPPs)
Komsomolets Donbassa, OJSC
(1 mine)
DISTRIBUTION
OTHER
PES-Energougol, OJSC
Sotsis, LLC
Service-Invest, LLC
Service Enterprise, LLC
Pavlogradugol, OJSC
Ecoenergoresurs, LLC
(10 mines)
COAL ENRICHMENT
(5 plants)
Revenue structure for 2007 (in US $’MM)
COAL
GENERATION
DISTRIBUTION
OTHER
Source: DTEK
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COMPANY HISTORY
2007
DTEK receives its first credit ratings from Moody’s (B2) and Fitch (B+). Both ratings are one
notch below Ukraine’s sovereign rating. At the end of 2007 the Company buys two coal
enrichment plants: Oktyabrskaya CEP and Dobropolskaya CEP.
2006
2005
2004
2002
In 2006, DTEK acquires PES-Energougol OJSC, a company supplying power to 25.5 thousand consumers, with over
1 000 km of overhead transmission lines and 380 step-down sub-stations.
DTEK Corporation is officially registered on July 6, 2005.
As a result of DTEK’s incorporation, a single center of responsibility for financial and production performance is set up in the
format of a corporation, unified management processes are introduced, and the vertical integration of the Donbass Fuel-Energy
Company’s enterprises is completed.
In 2004, SCM publicly announces plans to establish DTEK as Ukraine’s first private vertically integrated company in the power sector.
DTEK acquires State Holding Company Pavlogradugol OJSC comprised of 10 mines and 2 coal enrichment plants in the Western Donbass
region.
A group of 15 enterprises ranging from coal production and enrichment to electricity supply is combined together as Donbass Fuel-Energy
Company (DTEK). The core of the DTEK Group is formed by three key companies: power generating company Vostokenergo, power
supplying company Service-Invest (total length of electric networks is over 2 000 km), and coal mine Komsomolets Donbassa. Coal
processing is conducted at DTEK by the coal enrichment plant – Mospinskoye Coal Enrichment Plant Ltd. Tekhrempostavka Ltd., which is
also a structural unit of DTEK, deals with the upgrade and reconstruction of power equipment.
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LARGEST PRIVATE PLAYER IN GENERATION …
Revenue (US $’MM)
Output (TWh)
$1,640
87.3
$892
#2
Energoatom
18.1
15.3
13.9
13.7
DTEK
Dniproenergo
Centerenergo
Zapadenergo
9.4
Ukrgidro- Donbassenergo
energo
Energoatom
State-owned
DTEK
Private
$126
DTEK
$61
Energo- Ukrgidro- Dniproatom
energo
energo
$716
$679
$291
#1
$24
$758
6.1
Net profit (US $’MM)
$75
#2
$13
$10
$5
Centerenergo
Zapadenergo
Donbassenergo
DTEK
Dniproenergo
Zapadenergo
Centerenergo
$147
Donbass- Ukrgidroenergo
energo
 DTEK is the second largest generator of
electrical power in Ukraine after State
Nuclear Power Generation Company
(Energoatom) based on the production
volumes in 2007.
 DTEK is the #1 thermal power producer
in Ukraine.
 Revenues from power generation for
2007 reached $892MM, the second
highest revenue among the power
generating companies in Ukraine.
 DTEK firmly holds #1 position in Net
Profit among other power generation
companies of Ukraine with a record
$126MM of Net Profit booked in 2007.
Source: DTEK, Energobusiness, Company’s reports
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… & DISTRIBUTION MARKET IN UKRAINE
Revenue (US $’MM)
Purchases (TWh)
$1,400
28.8
#3
#4
11.4
11.3
Dnepr- Donetsk- Zaporojeoblenergo oblenergo oblenergo
9.2
DTEK
$569
4.7
4.0
Kharkovoblenergo
Crymenergo
Lvovoblenergo
Dnepr- Zaporojeoblenergo oblenergo
#1
State-owned
DTEK
Private
$16
DTEK
$4
$3
Dnepr- Zaporoje- Kharkovoblenergo oblenergo oblenergo
$2
Crymenergo
$470
$283
5.8
Net profit (US $’MM)
$6
$505
$2
LvovDonetskoblenergo oblenergo
$(59)
DTEK
Donetsk- Kharkovoblenergo oblenergo
$212
$190
Crymenergo
Lvovoblenergo
 In distribution, DTEK is in the top 5
Ukrainian distribution companies with a
total 9.2 TWh of power transmitted in
2007.
 DTEK holds #3 position in Revenues and
#1 position in Net Profit based on the
results of its distribution business in
2007.
Source: DTEK, Energobusiness, Company’s reports
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GENERATION
UKRAINIAN POWER MARKET STRUCTURE (2007)
TYPE OF POWER PLANT
OWNERSHIP STRUCTURE
(by output to WEM*)
(by output to WEM*)
Other
11.3TWh
9.6TWh
6%
6%
Hydro
Hidro
State
155.3TWh
89%
Nuclear
87.3TWh
50%
Thermal
67.1TWh
38%
Private
20.0TWh
11%
DISTRIBUTION
CONSUMPTION STRUCTURE
OWNERSHIP STRUCTURE
(by purchases from WEM*)
Export
9.2TWh
6%
Household &
non-industrial
51.3TWh
33%
State
102.5TWh
60%
Industry
83.6TWh
53%
Private
68.2TWh
40%
Agriculture &
transport
13.4TWh
8%
* Wholesale electricity market
Source: DTEK, Energobusiness,
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POWER MARKET IN UKRAINE: TODAY
Generators:
competitive tariff
(TPP)
Generators: fixed
tariff (NPP, HPP,
CHPP)


Simple market structure

Simplified system for setting tariffs

Ease of control over price fluctuations

Centralized function of system load
planning reduces the risk of system
overload or failure.
Market operator / WEM
(Energorynok)

System and high-voltage
networks operator (Ukrenergo)
Distributors
(“oblenergo” –
network owners)
Independent
suppliers
Ukrainian
consumers
Export operator
(Ukrinterenergo)
Export
PROS
CONS

Lack of incentive to invest

Frequent administrative interference

Cross subsidies

No support for ensuring adequate
investor returns in distribution
companies (“oblenergos”)

Operational efficiencies are not
rewarded

No hedging or risk protection for nonpayment

No market for auxiliary services

State control over imports, exports and
transit.
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GOVERNMENT INITIATIVES FOR MARKET REFORM - A
TWISTED ROAD
FREE MARKET
Concept of WEM development
approved by the Cabinet of
Ministers – the declared gradual
transition to a bi-lateral contract
model has not materialized. To
date, further analysis and planning
is required to ensure successful
implementation.
2002
NAK ECU is created to manage
state owned stakes in generation
and distribution companies.
A return to government controlled
vertically integrated utility.
1996
2004
POOL system is created –
vertically integrated utility is broken
up into separate parts:
- generation
- WEM
- transmission
- distribution.
TOTAL CONTROL
EBRD project: “Ukraine: Tariff reform
for
transmission
and
distribution
networks”
work
groups
meet
occasionally.
2007 - 2008
2003 - 2007
World Bank Project – implementation of
WEM development concept (2003-2005 /
2007).
Attempt to “resuscitate” the concept for WEM
development making.
t
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EUROPE: POWER MARKET MODELS OVERVIEW
 More than 70% of European countries
have adopted a market model which is
based on bi-lateral contracts between
power producers and consumers.
 Less than 30% of European countries
are still using a Pool Model.
 Trend continues toward more efficient
bi-lateral contract based market
models.
State-owned
regulated vertically
integrated
monopolies
Pool markets
without bi-lateral
contracts with
physical delivery
Regulated markets
Pool markets with
bi-lateral contracts
with physical
delivery
Level of liberalization
Bi-lateral contracts
without Power
Exchange
Bi-lateral contracts
with Power
Exchange
Free market
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EUROPE: DISTRIBUTION REGULATION
 More than 80% of Europe's national
markets are using various types of
incentive regulation.
 The most widely used are “Revenue
Cap” and “Rate of Return”.
 Despite the variety of methods used,
the key basic principals that form the
basis for such regulatory environments
are:
 To guarantee return on capital
 Opportunity to receive additional
rent via operating efficiencies.
Revenue Cap
Price Cap
Rate of Return
Cost +
Incentive regulation
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SUPPLY / DEMAND CURVES ARE CROSSING
Capacity surplus – “buyers” market
 Ukrainian power generation market has traditionally
been regarded as having surplus capacity.
 One-buyer pool system allowed to minimize the
price of energy for the end consumer by mixing the
cheap energy from HPP and NPP with the more
expensive supply from TPP.
 Surplus capacity provides little incentive or sense of
urgency for the state to pursue a more aggressive
tariff policy for power generation expansion and
proper maintenance cost recovery, instead opting
to keep tariffs at the minimum level sufficient to
cover operating costs.
Capacity deficit – “producers” market
Needs in reconstruction & new capacities (GW)
30
27
25
5
20
 Estimated capex required to meet the growing
demand for generation capacity ranges from $15Bn
to $20Bn* over the next seven years.
5
10
4
 State is incapable of meeting the capital
requirements needed to sustain the supply level.
3
5
0
 Existing model does not stimulate any serious
investment in the sector.
5
15
3
2
2009
2010
2011
2012
 Capacity surplus will run out in 2009, after which
point the risk of peak loads exceeding available
working capacity in the system will increase
substantially.
2013
2014
2015
TOTAL
ИТОГО
2009- 2015
 Private capital is the answer but will be impossible
to attract without substantial structural changes to
the regulatory environment and existing market
model.
* Source: DTEK / DTEK estimate
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12
TIME BOMB EFFECT?
TODAY
Price
Time
 The “Detonating mixture” …
 State control of generation
 Price control via administrative methods
(operating cost + minimum capex)
 Unstable and constantly changing political
environment leading to more populist
policies and decisions
… will lead to uncontrolled capacity deficit for the
entire power sector, sharp “emergency” increases
in tariffs and increased threat of energy
dependence.
TOMORROW
Price
Time
 Tariff setting mechanisms based on the
supply/demand equation and the introduction of
a competitive environment in generation will lead
to a sustainable increase in capital inflows into
the sector. Increased efficiency and reliability of
power supply in the long term.
 State will continue to control the level of
competitive pressure on tariffs as well as
influence the market by using NPP and HPP
reserves.
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13
DISTRIBUTION VS REGULATORS: DIVERGENCE OF INTERESTS
INCENTIVE BASED TARRIFFS (tomorrow)
COST + (now)



Investor puts pressure on management to cut costs in order
to increase capitalization.
State provides incentives for the owner to improve efficiency
while maintaining adequate level of reliability and security.
State monitors the reliability and stability of networks on an
on-going basis while the company focuses on long-term
efficiency, guaranteed by the regulatory environment.
Management
Investments in
reliability/quality
Regulator
Operating costs
Minimum
allowable
reliability level
Capitalization

Investments in
reliability/quality

“Cost +” provides no incentive to keep costs down and
network reliability issues are typically addressed via tariff
increases.
The state has no effective means to oppose tariff increases
without jeopardizing the reliability of the network.
Assets are obsolete. Reinvestment is difficult due to the
uncertainty of “tomorrow’s tariffs”.
Operating costs

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BALANCE OF INTERESTS: THE KEY TO POWER SECTOR
DEVELOPMENT
PRIVATE SECTOR INTERESTS
CONSUMER INTERESTS
 Required return on capital
 Lower tariffs
 Long-term value growth
 Reliable and high quality power supply
 Investments and property rights protection
 Reserve capacity for business growth
 Consistent and transparent rules
 Predictable tariff performance
ROLE OF STATE REGULATORY INSTITUTIONS
 Antimonopoly control
 Lower cost stimulating
environment
 Provide for open market driven
competitive tariff setting
mechanism
 Control of quality and reliability
of supply
 Allow for investment component
to be included in transmission
rates
 Environmental protection
 Prevent cross subsidies
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PRIVATE CAPITAL – IMPETUS FOR PROGRESSIVE CHANGE IN UKRAINE’S
POWER MARKET
Private Investors will come to the Sector if there is…
•
•
•
transparent and meaningful privatization
clear and consistent rules of the game
protection against unfair administrative interference
INVESTMENT
Private Investors will bring to the Sector…
•
•
•
•
operational experience
cost reduction
increased production volumes
auxiliary services
PRIVATIZATION
AND
ENERGY MARKET
LIBERALIZATION
State and consumers will benefit from…
•
•
•
increased capital investments
strengthened energy security
improved quality and reliability of power supply
INCREASED
PRODUCTION
COST REDUCTION
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