SBU warns of threats posed by July power market launch

The Security Service of Ukraine (SBU) directed a letter
to Parliamentary Speaker Andriy Parubiy listing the threats to national
security posed by the planned launch of a new electricity market in July, the
epravda.com.ua news site reported on May 29. The letter was signed by Ivan
Bakanov, the acting SBU head, who was appointed last week to the position
of first deputy SBU head by his close friend,
President Volodymyr Zelenskiy.

In the letter, the SBU warned the sector is not ready
for the launch of the new market, as many regulatory issues haven’t been
addressed and some of the hardware and software infrastructure is not ready for
securing the market’s stable operation under the new rules. For these reasons,
the SBU sees a high risk of crisis in the electricity sector and a threat of
“significant damage to the interests of the state and society”. The SBU head
asked Parubiy to account for such threats when the parliament will consider
amendments to the law on electricity market. Prime Minister Volodymyr Groysman
was also informed of the letter, the Interfax-Ukraine news agency reported.

Recall, the new market should start functioning in
July 2019, according to the current law. Under its conditions, power producers
will be allowed to sell their electricity by bilateral contracts with
consumers, based on the day-ahead market, an intraday market and a balancing
market. This new market model should replace the existing one, in which power
producers are selling their electricity to a single buyer based on
predetermined prices. During the last week, representatives of the EU and EBRD called for postponement of the
launch of the new market and designing a detailed plan for the recovery of
existing inefficiencies.

To make the postponement effective, the Ukrainian
parliament has to amend the law by changing the date of the new market’s
launch. On May 28, the parliamentary committee on fuel and energy failed to
gather and approve draft amendments to the law, which is necessary before
parliament can vote. Among the options under consideration were a three- and
six-month postponement.

Alexander Paraschiy: As we expected, Rinat Akhmetov,
whose DTEK Energy (DTEKUA) is a key beneficiary of the new market’s launch,
will do all his best to lobby against postponement of the new market. The
parliamentary committee’s failure seems to be a consequence of Akhmetov’s
lobbying. However, given the intensified pressure against a timely launch of
the new market, it is still likely that parliament will vote to postpone it,
even if the energy committee won’t pass a draft bill.

As we highlighted before, the new market’s launch
would benefit DTEK Energy, whose power plants’ average achieved price for
electricity won’t be regulated any more and will likely increase considerably.
The delay of the new market would mean not only a postponement of DTEK’s
electricity price upgrade, but also create the risk that prices will fall for
DTEK, provided the new power brokers are able to cancel the Rotterdam Plus
approach in calculating such a price.

Our base-case scenario is that the launch of the
new market will be postponed – as parliament will have two session weeks in
June to approve the amendments – but the Rotterdam Plus approach will be
preserved. Under a negative scenario, the Rotterdam Plus approach could be
replaced with some new method that will decrease DTEK Energy’s power prices
until the new market’s launch (in 3-18 months). At the same time, we see that
even the worst case scenario won’t undermine DTEK Energy’s ability to generate
enough cash flow for the smooth servicing of all its debt obligations. That
said, we remain bullish on DTEKUA Eurobonds.