Triple Threat? Russia Halts Coal Exports To Ukraine, Cancels Power Auction Amid Gas Crisis

For months, critics have accused Russia of withholding additional natural-gas shipments to Europe via Ukraine in order to pressure Brussels to fast-track its new Baltic Sea export pipeline, Nord Stream 2.

Once it receives final approvals, the pipeline to Germany will enable Russia to reroute gas exports to Europe around Ukraine, depriving the cash-strapped country of billions of dollars a year in transit fees.

In the meantime, the energy crunch in Europe has helped drive natural-gas prices to record highs, denting energy-intensive economies like that of Ukraine, which imports one-third of its gas needs.

Now Russia’s energy fight with Ukraine appears to be spilling over into the coal and electricity sectors, potentially setting Kyiv up for an energy crisis this winter, particularly if it’s a cold one.

Russia announced on October 29 that it would temporarily halt shipments of anthracite, a cleaner coal used for heating, to Ukraine starting on November 1. Russia’s Economy Ministry said the coal was needed for domestic consumption even as Moscow ramps up exports of the commodity to other countries in Europe as well as Asia.

The suspension of coal deliveries comes as Ukraine’s own stockpiles are already low heading into winter, depleted by greater-than-expected demand during the hot summer and slightly lower domestic production than usual.

Relations between Moscow and Kyiv have been deeply antagonistic since Russia seized the Crimean Peninsula in March 2014 and backed separatists whose war against government forces in the coal-rich Donbas region in eastern Ukraine has killed more than 13,000 people since that April.

But Russia remains the largest exporter of thermal coal to Ukraine, accounting for two-thirds of imports by volume, and imports from Russia have accounted for one-third of Ukraine’s coal consumption this year.

Ukraine has increased imports of coal from Russia since the Moscow-backed fighters seized control of swaths of the Donbas in 2014. The territory they hold includes dozens of the region’s coal mines, many of which produce the cleaner anthracite grade that fuels several of Ukraine’s power plants.

In other words, some of the thermal coal Ukraine buys from Russia is likely produced in Ukraine.

Prices And Pressure

With its largest foreign supplier now out of the picture, Ukraine is scrambling to buy more coal from the United States, Kazakhstan, Poland, and South Africa. It won’t be cheap, and it will pile more pressure on Ukraine’s struggling economy.

Coal prices have skyrocketed as power plants around the world turn to the dirty energy source amid record prices for natural gas. China, the world’s second-largest economy, has tripled its thermal coal imports from Russia this year due to the global energy crunch.

At the start of November, coal reserves at Ukrainian thermal power plants stood at 578,000 tons, just one-fifth of the government’s plan for 2.9 million tons, according to data from the Energy Ministry and national statistics service. That has raised some concern inside the country about a potential crisis.

Amid the coal shortage, meanwhile, Ukraine announced in October that it would end a ban on imports of electricity from Russia and northern neighbor Belarus, now Moscow’s close ally, to help balance its power system. However, Russia canceled a power auction that had been scheduled for October 21 while Belarus has delayed its most recent auction.

As part of its geopolitical shift westward, Ukraine is due to complete the synchronization of its power system with the European electricity grid in 2023. But for now, it’s still connected to the Russian and Belarusian grids, a legacy of the Soviet Union that gives Moscow and Minsk potential leverage.

Under President Vladimir Putin, Russia has sought to keep Ukraine in its orbit, opposing closer integration with the European Union and particularly NATO. Analysts and Kremlin critics say Russia has used its massive energy resources as a lever of influence over Kyiv.

Ilya Ponomaryov, a former Russian lawmaker and staunch Putin critic who is now an executive for a Kyiv-based energy and mining firm, asserts that Moscow’s suspension of coal shipments and the power auction cancelation are not a coincidence, but an attempt to drive tariffs higher.

“Somebody in Moscow believes that Ukraine will run into serious energy-supply difficulties throughout the winter season. Obviously, Russia wants additional leverage to press on Ukraine’s government,” Ponomaryov told RFE/RL.

Energy tariffs are a very sensitive political issue in Ukraine, where a large portion of the population struggles to make ends meet. Ukrainian presidents regulate electricity prices for households — sometimes below cost — in hopes of preserving or boosting their popularity.

Policy Problems?

Ukrainian government regulation of its power industry partially prepared the groundwork for the current energy crunch, analysts say.

President Volodymyr Zelenskiy’s ratings have fallen sharply since his landslide election in April 2019, and his government has maintained heavy-handed regulation of the power market despite the introduction of Western-backed reforms for the wholesale sector in July 2019, months after he took office. That has only mired the industry in greater debt.

Olena Pavlenko, president of DiXi Group, a Kyiv-based think tank specializing in energy research, told RFE/RL that the administration’s price caps on the wholesale market were “too low” for thermal power producers, crimping their ability to buy coal.

Coal-fired power plants are high-cost producers of electricity compared with nuclear and hydroelectric plants, and thus are more sensitive to price caps.

DTEK, a vertically integrated energy company that dominates the power sector and is owned by Ukraine’s richest man, tycoon Rinat Akhmetov, cut output and coal production during the summer, citing the low prices.

State-owned coal mines also cut production.

Centrenergo, which buys a significant portion of its coal from state-owned mines, quickly depleted its reserves during the summer and did not generate enough cash to rebuild them.

Centrenergo, which accounts for 14 percent of Ukraine’s installed electric power capacity, is currently operating only three of its 23 energy blocs, with the rest offline due to a combination of maintenance work and low coal reserves.

The company’s coal reserves currently in storage are about 1/10th of the state’s plan.

However, Centrenergo’s management said it would be ready for winter. The company has ordered more coal after receiving financial help from other state-owned companies.

Analysts say mismanagement at Centrenergo, which has been mired in scandal over the years, is also to blame for its current problems.

But the coal shortage doesn’t just lie at the feet of companies. Pavlenko says it also appears the government and energy regulators did not properly prepare for the heating season. “The main task of the government and regulator is to find prices that would allow [thermal energy producers] to reserve some money to buy coal,” she said.

Zelenskiy’s administration recently raised the price cap on the wholesale market, prompting DTEK to begin ramping up coal output.

Crisis, What Crisis?

Nonetheless, the government has looked to place blame in the other direction, with National Security and Defense Council Secretary Oleksiy Danilov raising the question of possible “sabotage” of the state’s energy-security plans by “oligarchic circles.”

As a result, the government plans to carry out surprise inspections of power companies in the coming weeks.

Ukraine’s Energy Ministry sought to calm nerves about a possible winter crisis, telling RFE/RL that following the power price increase, thermal power companies had enough money to buy coal.

The ministry also said that Energoatom, the state-owned nuclear power operator, was ready to ramp up production to meet any shortage. Nuclear power currently accounts for half of Ukraine’s electricity production.

The ministry said Energoatom was ready to operate 14 of its 15 nuclear reactors this winter, a record high. Only 10 operated last winter. The ministry said that Energoatom could run all 15 blocks this winter if needed after it carried out extensive maintenance work.

Check Also

Sadr Throws Iraqi Politics into Turmoil

The decision by Shia cleric Moqtada al-Sadr to withdraw his large bloc from parliament clouds …