A decade of stellar growth turned a small regional company into a near monopoly on Ukraine’s electricity market. Though the company rejects claims that it is abusing its clout, experts warn the nation is paying the price for DTEK’s stranglehold on the energy sector – a situation that will become increasingly clear as plans to liberalize the market move forward.
Created as a part of richest Ukrainian billionaire
Rinat Akhmetov’s Systems Capital Management in 2002, Donetsk Fuel and Energy
Company (DTEK) clawed its way to one of the nation’s top three companies by
2012.
DTEK’s impressive growth is mainly by acquisitions,
notably privatizations under the presidency of Akhmetov’s long-time ally Viktor
Yanukovych. Since his arrival to power DTEK bought majority stakes in six power
generating companies and increased its net sales more than fivefold to a
whopping Hr 82.5 billion ($9.7 billion).
The company
currently accounts for almost half of the nation’s coal output and has
reportedly pressured
suppliers to reduce prices – a move experts warn is the first sign of an
industry giant flexing its muscles.
DTEK officials refused to comment for this story.
The energy firm’s tale starts in the east Ukrainian
coal industry. By 2009, DTEK became a vertically integrated holding – with ten
mines, five coal enrichment plants and six thermal power plants covering a full
energy production cycle, from production to distribution.
According to DTEK’s annual report, in 2009 it
controlled a quarter of both the thermal power generation market and the coal
mining sector.
Yanukovych’s 2010 presidential victory kick-started a
period of rapid growth for DTEK. In 2011, the company got 49-year concessions
for two big coal mining companies, Rovenkyantratsyt and Sverdlovantratsyt, and
agreed to rent another one, Dobropillyavugillya, for the same period.
Followed expansion into power generation and
distribution, as well as exports with the purchase of a 45 percent stake in
Zakhidenergo in late 2011, raising DTEK’s ownership in the monopolist energy
exporter to over 70 percent.
In 2010-2012 DTEK further increased its stakes in five
power generation and distribution companies: Kyivenergo (71 percent),
Donetskoblenergo (70 percent), Dniproenergo (72.9 percent), Dniprooblenergo (51
percent), Krymenergo (57 percent). As a result, the company’s capacity for
electricity generation grew by 56 percent.
According to the State Property Fund of Ukraine, DTEK
managed to buy these companies virtually without competition, and with a
minimal increase over the original bidding price. For example, a 25 percent
stake in Dniproenergo’s was sold for Hr 1.2 billion, or just Hr 6 million over
the opening price.
In a 2012 interview with the Kyiv Post, DTEK general
director Maxim Timchenko said this was a fair market price, given the absence
of rival buyers and limited prospects for profitability.
But others believe prices for at least
some of the assets were artificially lowered before the privatization. Ex-advisor of the head of the State
Property Fund Volodymyr Lartsev described the scheme used to buy Kyivenergo.
Before the sale, net profits fell drastically,
decreasing 27-fold in nine months of 2011 year-on-year. These results were used
to set the base price for privatization. Lartsev says the dip was no
coincidence, since DTEK owned a minority stake in Kyivenergo and controlled its
management.
Waiting for liberalization
DTEK officials claim excessive state regulation is holding investment
back, depressing prices. Speaking at an energy
conference in Vienna on March 19, Timchenko argued only liberalizing Ukraine’s energy market could
unlock profits and growth. With over 40 percent of generation capacity over 40 years old, he said, it is no
surprise the country is far below its potential.
“I want to see a new law on energy
liberalization, this will change the whole landscape,” Timchenko said.
He may soon get what he wants. A bill on the
functioning of the energy market was registered in June 2012 by former Party of
Regions lawmaker Igor Glushchenko that would allow energy producers and consumers
to sign bilateral contracts setting their own prices.
The law also foresees the creation of a special
investment fund supporting alternative energy, to which producers would
transfer a part of their earnings. But contributions would only be mandatory for
nuclear and hydro power stations – for thermal plants it would be voluntary.
But they could top the list to receive
investments from the joint fund, believes Yuriy Korolchuk, an expert from the Institute of the
Energy Strategies.
“DTEK and Akhmetov, for them it is the most
profitable. Actually, the author of this bill is Akhmetov’s man,” he added.
Glushchenko, who filed a bill, previously worked as a director of Shidenergo –
one of DTEK’s first companies.
The law will also favor large players and hurt
competition, adds energy expert Serhiy Dyachenko.
“As a result of its implementation control of
the market can be de facto established by some structures that, in fact,
control the majority of generating capacity,” he explained.
According to Dyachenko, the scheme of bilateral
contracts allows big industrial holdings to buy energy from their own power
stations. This leads to a conflict of interest, with tax minimization as the
driving force behind any deals, he said.
Furthermore, some warn liberalization could hit
private consumers who have no choice but to rely on regional energy companies,
many of which owned by DTEK.
“DTEK would have significant market power in the electricity sector. Hence, it would be able to increase prices for consumers drastically,” says Georg Zachmann, a research fellow at Bruegel, a leading Brussels-based think tank.
This, however, could be a double-edged sword, as social discontent for higher prices could land at DTEK’s door.
“This powerful position also entails a risk for DTEK. It is likely to end up as a scape-goat for every price-increase in the system, even if it would only try to recover its cost. Without sufficient equal-sized competitors it is impossible to determine a ‘fair’ price,” Zachmann said.
Consolidation all around
Meanwhile, the company continues to expand into new
segments and consolidate its dominant position.
Having first entered the alternative energy segment in
2008, with the creation of Wind Power, DTEK made vast strides into this new
arena in October 2012 with the launch of Botievo wind farm in Zaporizhia region
with a capacity of 60 MW. By end-2013, its capacity is set to increase to 200
MW, becoming the biggest wind plant in the Eastern Europe.
DTEK plans to boost wind plant capacity to 1,200 MW,
far beyond the sector’s current total capcity of 302 MW, according to the
Ukrainian Wind Energy Association.
The move makes perfect sense from a business angle.
Under Ukrainian law producers of green energy get high rates for their
electricity. For example, the rate for wind farms is six times higher than for
nuclear plants.
DTEK is also in a advantageous position to meet local
content requirements, which foreign investors say unfairly keep competitors out
of the market.
The company also has its eyes on gas production, with
a March 2012 purchase of a 25 percent stake in the nation’s biggest private gas
company Naftogazvydobuvannya. It was previously owned by Party of Regions
lawmakers Nestor Shufrych and Mykola Rudkovsky.
At the same time, Vanco Prykerchenska, a company
affiliated with DTEK, announced that it plans to start exploring deep-water oil
and gas deposits of the Black Sea. Few details are known, but the Financial
Times reported recently that Vanco Prykerchenska is negotiating with foreign
companies to find a partner in a joint gas production.
Yet the rapid expansion and tightening grip on key
sectors has experts ringing the anti-monopoly alarm bells. This winter, DTEK
stopped buying coal from state mines in violation of agreements. When it
resumed purchases, prices had fallen by half.
DTEK argued it produced enough coal of its own. But
Korolchuk from the Institute of the Energy Strategies warned DTEK’s monopoly
status gives it too much control over the market, with the power to pick which
stations are shut off, no matter what the state has to say.
The Antimonopoly Committee of Ukraine, however, has no
concerns.
“I don’t think (monopolization) happens. Every
regional power generation company works in its region, but not in the whole
Ukraine,” the committee’s deputy head Rafael Kuzmin told Ekonomichna Pravda
website.
Kyiv Post staff writer Kateryna Kapliuk can be reached
at [email protected]. Kyiv Post editor Jakub Parusinski
can be reached at [email protected].
