DTEK can expect to make an extra $100 million next year, analysts say, thanks to a legislative change that gives President Petro Poroshenko full control over Ukraine’s National Energy Regulatory Commission (NERC) for the next three months.
The spike in profits will come thanks to one item on the regulator’s agenda: A maximum 25 percent increase in the tariff for thermal power generators, of which more than 70 percent belongs to the Rinat Akhmetov-owned conglomerate DTEK.
The NERC hasn’t made any decisions since Nov. 13 after one of its four remaining commissioners began to call in sick, preventing the body from reaching a quorum.
But last night’s change – which came after a 233-10 vote – will suspend the need for an independent selection commission for three months, allowing Poroshenko to appoint members to the council directly, once he signs the law.
“This situation made operational and strategic decisions, which the commission had worked on in good faith for the past four months, impossible,” the regulator said in a statement to the Kyiv Post, before the legislative change was voted on.
The move will allow a number of western-funded green energy projects to move forward, while also unleashing tens of millions of dollars in profits for Rinat Akhmetov’s energy conglomerate.
The NERC’s inability to obtain a quorum on any decision had blocked 183 megawatts in renewable energy projects from going forward, totaling more than $150 million in investment.
Solving a problem you created
The NERC has a maximum of seven commissioners. But according to Oleksandr Paraschiy, an analyst at Concorde Capital, the agency has been hemorrhaging personnel since Poroshenko failed to nominate his portion of members to a nominating committee.
“It was the fault of the president, who delayed appointing people to the nomination committee,” Paraschiy argued.
No full nominating committee has meant no replacements for commissioners whose terms have expired.
In November, a commissioner named Borys Tsyganenko, who worked with a company affiliated with oligarch Kostyantyn Grygoryshyn before joining the NERC, began to call in sick, preventing the agency from setting any tariffs.
Then on Nov. 28, Tsyganenko was fired, while the terms of two other commissioners expired.
With four commissioners needed to reach a quorum, the agency was left with only three, rendering it dead in the water.
The Rada’s late Dec. 7 move to allow Poroshenko to directly appoint commissioners will end the crisis, but also give him direct political control over Ukrainian energy policy for the next three months.
Dragon Capital, the Goldman Sachs-funded investor, summed up the trade-off succinctly.
“The new law provided a temporary solution, albeit at the expense of the commission’s independence,” wrote energy sector analyst Dennis Sakva in a research note. “The three-month tenure for temporary commissioners is roughly the time needed for the commission’s nominating body to select new permanent members through an open competition, as required by the underlying law.”
Scheming
The decision will pay short-term dividends to the business community while adding to anxiety around the larger political situation.
The 35 renewable energy power plants whose progress has been frozen by the lack of a quorum will likely receive their green tariffs to begin production, in a win for the Ukrainian economy.
The move will also likely mean $100 million more for DTEK, Paraschiy said.
As long as the NERC board approves the wholesale thermal electricity tariff hike before Dec. 21, the power producer will begin to sell its energy at up to 25 percent higher rates.
“This increase in the wholesale price in electricity should have been approved in late November,” said Paraschiy. “It was based on the Rotterdam+ regulation, and according to that regulation the commission must approve the new price and publish it no later than 10 days before the start of 2018, so they have a deadline.”
A DTEK spokesman said that the company receiving a benefit from the proposed increase “does not correspond to reality.”
“DTEK has always advocated for and continues to advocate for the independence of the regulator, which must meet European standards,” said spokesman Maksim Asaulyak.
If the NERC had been unable to obtain its quorum for the 75 days until new commissioners could be nominated, Ukrainian power plants would be unable to charge any tariff for their electricity, potentially causing the country’s energy system to collapse.
And though Poroshenko will retain control over the commissioners for three months according to the legislation, many expect that he will use similar brinksmanship to retain control of the NERC.
“It’s very likely that the work of this nomination committee will be blocked for some reason and then in three months the parliament will have to prolong this special law,” said Paraschiy. “It’s beneficial for Poroshenko to keep full control over the regulator.”
Serhiy Leshchenko, a member of parliament from Poroshenko’s party who remains critical of the president, said, “I don’t think this is going to be temporary.”
“It’s the key issue for controlling the energy market,” he added.
