The National Commission for Energy and Utilities Market Regulation (NKREKP) has approved a draft resolution on a new transmission tariff for the National Energy Company Ukrenergo for 2025. Ukrainian Energy has investigated whether the state regulator's policy can improve the financial condition of the system operator, which is in a state of technical default.

The NKREK tariff for Ukrenergo approved on November 13 is UAH 665.26 per MWh. This is 25.8% more than in the current year. But the regulator rejected the much stronger request of the NEK, which provided for an increase of almost 50% - UAH 783.71 per MWh. The adoption of the tariff has not yet been completed, it is now awaiting final adoption, and certain changes are possible before that. However, we can already draw conclusions about the context in which tariff discussions are taking place in the Ukrainian energy sector.

Tens of billions for “green”

“The tariff proposals from the National Commission for the Regulation of Energy and Power Generation and Energy of Ukraine have included some rather unusual things. For example, the amount that Ukrenergo can allocate to purchasing electricity to cover technological losses in the network has been specified. This may lead to the company running out of money at some point. At the same time, there are more funds for repaying debts to “green” generation in the Ukrenergo tariff. This is positive, at least because the operator’s debt to RES producers will stop growing, although it will not be fully repaid,” said Denys Sakva, an analyst at the investment company DragonCapital, in a comment for Ukrainian Energy.

The Ukrenergo transmission tariff, which the company considers “chronically unprofitable,” is a key source of financing for another tariff - the “green” tariff, i.e. a state-guaranteed reward that has turned the development of RES into a very attractive business.

But over time, the consequences of financial contradictions in regulating the industry began to manifest themselves more and more. First, debts under the Ukrenergo transmission tariff grew. Second, the situation in the RES segment worsened, where a significant increase in the installed capacity of wind and solar power plants, reinforced by the competition of lobbyists of various interest groups in applying leverage to the process of administering payments under the "green" tariff, led to billions of debts in the market and caused a crisis. In particular, in early October, NPC Ukrenergo owed more than UAH 30 billion to the state enterprise "Guaranteed Buyer", which buys "green" megawatts from producers and is one of the intermediaries in balancing the financial interests of the market. Recently, the State Electricity Company reported that the level of payment for the “green” tariff in 2024 reached 60%, and the monetary reward to owners of renewable generation since the beginning of the year is UAH 42.5 billion.

Temporary difficulties, permanent debts

An echo of the debt crisis in the renewable energy market was the latest story with the “technical default” of Ukrenergo, which gained considerable publicity, but is not a unique business practice. Last week, the system operator announced that from November 9 it “stops making payments on debt obligations under green sustainable development bonds”.

This “temporary technical solution” will be in effect “until the restructuring is completed”. It concerns securities worth $825 million, issued in 2021 under a state guarantee to repay debts to “green” generation.

Denis Sakva recalled how the situation developed: "In 2022, Ukrenergo asked foreign investors to postpone the payment of interest on this debt for two years. The deadline came on November 8. But the company refused to repay one coupon for $28 million and asked investors for a deferral." According to normal practice, Denis Sakva noted, Ukrenergo should have added the interest accrued over two years ($151 million) to the principal debt of $825 million, excluding the paid coupon ($28 million). This is exactly how, for example, another state-owned company, Naftogaz of Ukraine, acted in 2022: it increased the bond's nominal value, paid one coupon and began negotiations with investors about restructuring. For a year, while the process of settling relations with creditors was underway, the company was in default. Ukrenergo decided to go the other way: to negotiate with the holders of its Eurobonds without paying interest.

The interlocutor of Ukrainska Energetyka also indicated that the electricity transmission system operator was in ordinary, not technical, default, because the company's top management refused to make timely coupon payments, and did not resort to less significant violations such as deficiencies in reporting, continuing to pay debts.

"The company... provided assurances about the operational and financial stability of the company. Ukrenergo continues to fulfill its obligations and operational functions stipulated by national legislation and the Charter. In particular, regarding the current tasks of NPC Ukrenergo - preparing for winter, restoring, arranging protection and strengthening the stability of the unified power system of Ukraine under martial law," the NPC explained.

Risks and Opportunities

The process of resolving this situation risks being simple. This is evidenced by the contradictions in the messages that the parties are opening to the market. In particular, the holders of Eurobonds disavowed Ukrenergo's claims about communication with them. "The group of creditors of Ukrenergo with maturity in 2028 stated that the suspension of payments on the bonds was made "without any prior interaction with the bondholders," - the international agency Bloomberg reported. (link?)

Other circumstances are also putting pressure on the course of events. The last two years, when the holders of "green" bonds did not receive any payments from Ukrenergo, the company paid interest on loans from other international financial institutions and state banks. Next year, NEK plans to do the same. "Investors will not agree to this, because it is obvious that the company treats creditors differently. It finds the funds to pay coupons with one, ignores the demands of others, and also wants to achieve a reduction in interest rates for a significant period. Bondholders will perceive this as a rather harsh restructuring,” predicts Denis Sakva.

On the other hand, the tariff policy of the National Commission for the Regulation of Energy and Power Generation of Ukraine does not contribute to the financial stability of the transmission operator. “Our task for next year is to come out with a break-even tariff, with the opportunity for the company to fully meet its tasks in the electricity market,” said the head of Ukrenergo Oleksiy Brecht in an interview with Interfax. But the regulator, as recent decisions have shown, was unable to satisfy NEK’s desire to increase the tariff and cut it in half.

Extreme scenario

Unresolved problems with creditors create a situation in which the possibilities for Ukrenergo to attract financing will be increasingly limited. Currently, during the war, the company has no access to capital on international markets, so it continues to receive support only from institutional investors such as the European Bank for Reconstruction and Development. The bank has already invested $75 million in the issue of state-guaranteed Ukrenergo bonds, which are aimed at repaying debts at the “green” tariff. Last month, before NEK declared a technical default, the EBRD approved another grant for the company of EUR10 million “to cover critical operating costs and support liquidity.”

“I don’t think the EBRD is thrilled with how the situation has developed. This makes it difficult to continue supporting the company,” says Denis Sakva.

There is another scenario – an extreme one, capable of bringing even more significant troubles not only to Ukrenergo, but also to the energy stability of the country. It will arise if the company offers investors such unattractive debt restructuring conditions that they will reject new agreements. In such a development of events, creditors will be able to get to Ukrenergo’s foreign accounts, where funds from the sale of access to the interstate crossing are located. “But I think that in the near future Ukrenergo will still be able to avoid such a scenario,” says Denys Sakva.

Debts and business

Former head of Ukrenergo Volodymyr Kudrytskyi, during whose term the company was loaned from the EBRD to settle obligations under the “green” tariff, draws attention to the fact that a sustainable solution to the company’s debt problem is possible “if everyone [market participants] work to fulfill their obligations.” “You can’t fill the gaps in regulation with loan and grant money from partners forever,” he believes.

However, there is also an opinion on the market that such a situation can develop indefinitely, because it allows the involved players to earn considerable money. The same EBRD not only lends to Ukrenergo so that the company pays off its debts in the renewable energy market, but also actively invests in the construction of “green” generation in Ukraine, despite the crisis with settlements. In particular, in June of this year, the bank decided to create a joint venture with the GOLDBECK SOLAR group of companies to implement solar energy projects over the next five years. “This agreement is the first private project for the construction of renewable energy generating capacities with the participation of a foreign investor, financed by the EBRD in Ukraine since February 2022,” the report notes.

NJSC Naftogaz of Ukraine, for its part, is preparing to start construction of two wind farms in Odessa and Mykolaiv regions next year with funds from the EBRD.

“Borrowing to repay debts… A vicious circle. “Debt manipulation is a favorite game in our country,” is how expert Viktor Vidzigovsky describes the situation in the Ukrainian energy sector.

In particular, transactions with debt securities are one of the business areas of Rothschild&Co. Its financiers have repeatedly helped Ukraine maintain financial stability by solving problems with government bonds or restructuring loans of NJSC Naftogaz of Ukraine. In its corporate reporting, Rothschild&Co also mentions the Ministry of Finance of Ukraine in the list of its regular clients in the context of joint projects - the International Monetary Fund credit program and the restructuring of debts to the Paris Club.

Author: Svitlana Dolinchuk, specially for "Ukrainian Energy"

Tags:Ukrenergo