Reform of the Coal Industry is Once Again on the Path of Subsidizing

For years, the public sector of coal mining in Ukraine has been experiencing a crisis, which is intensifying every year. There is a clear tendency to reduce the volume of production, increase the cost of extracted coal, which in turn leads to unprofitable state-owned mines, which accumulate debts for years. In recent years, the share of state-owned enterprises in coal production has decreased significantly and is not considerable to the market (only 9.8% for 8 months of 2020, according to the Ministry of Energy).

The Concept of Reforming and Developing the Coal Industry until 2020, which was adopted in 2017, was the last attempt to restructure the industry. The concept provided for the identification and liquidation of non-profit mines, the creation of a single national company to consolidate profitable state-owned mines, and a gradual increase in production to 10 million tons.

However, the reform under this plan ended with the creation of SE National Coal Company, to which no mine has passed. Instead, budget funds allocated for the re-equipment of mines were mainly channeled to repay arrears of wages and electricity consumption.

Given the new challenges and realities of the market, in early October 2020, the Ministry of Energy presented a new draft Concept of Reforming the Coal Industry. The document itself has not been made public yet, the public has been told about plans to divide the mines into three categories:

• mines to be integrated with PJSC Tsentrenergo – obviously, these are enterprises that are potentially profitable in the model of vertical integration;
• dual-purpose mines, the sale of which is not limited exclusively to thermal generation – it is the production of coking coal for the needs of domestic metallurgy;
• mines, which should not be further maintained at the expense of the state budget – they will be privatized as integral property complexes that can be used for the purposes other than coal mining.

It was also decided to create a vertically integrated company, which will include PJSC Tsentrenergo and profitable state-owned mines – with the argument of reducing the cost of production and optimizing management. Tsentrenergo will be joined by the most efficient mines, which will be able to produce up to 4.2 million tons of coal per year. The companies are planned to be audited by the end of the year, in order to transfer the ownership of them to the new company in early 2021.

At the same time, the agreements between DTEK and the Government to terminate the lease of Dobropilliavuhillia mines and to merge them with Tsenterenergo leave more questions than answers. After all, according to DTEK, this year at Dobropilliavuhillia enterprises, there are frequent downtimes as a result of the lack of demand for coal. According to the latest available financial report (for 2018), the company’s loss amounted to UAH 447 million.

Another question is whether so many coal products are needed for TPPs that are part of Tsentrenergo? According to the company’s reports, by mid-2020, coal-fired electricity generation was more expensive than gas-fired generation, making it less competitive in the market. If Tsentrenergo switches to Dobropilliavuhillia’s resource (4 million tons per year), how to ensure sales for other state-owned mines – in particular those that will be part of a vertically integrated company? Prospects for the sale of assets to metallurgists or their privatization still look rather uncertain – in recent years, the state has failed to privatize Krasnolymanska mine, which was minimally unprofitable.

Under the new concept, the Government will continue to subsidize the industry, artificially guaranteeing demand for its products. The draft state budget for 2021 provides for almost UAH 3.125 billion for the restructuring of the coal industry and more than UAH 1 billion for the liquidation of unpromising mines. As practice shows, the restructuring item mostly finances current expenses – repayment of current debts, often increasing expenditures through the liquidation item. In addition to these expenditures, the Ministry of Energy proposes another UAH 2 billion for the modernization of mines, which aims to develop production at a lower cost, and UAH 1.4 billion for the repayment of unified social contribution debts.

Thus, statements of intent to move in unison with the European Green Deal have not yet been reflected in real politics. Instead of investing in mine closures and the transformation of coal regions, the Government is once again focusing financial resources on maintaining toxic (literally and figuratively) assets.

DiXi Group Research Director Roman Nitsovych
DiXi Group External Analyst Serhii Yevtushok