Ukraine energy minister suggests changing coal pricing approach

Energy Minister of Ukraine Ihor Nasalyk offered on July 13 to use coal prices in Poland as a benchmark for Ukrainian coal, Interfax-Ukraine reported. “We will take as a basis the Polish formula. The same hard steam coal is here. There is no transportation leg here”, Nasalyk said.

Recall in March 2016, Ukraine’s utility sector regulator approved a new methodology of pricing of electricity generated by coal-fired thermal power plants (TPPs). This methodology stipulates a formula for determining coal costs for TPPs that consists of the API2 Index (steam coal price in Amsterdam/Rotterdam/Antwerp) and shipment costs of coal from Rotterdam to Ukraine. Such methodology was grounded on the assumption that Ukraine will have to import a lot of coal. Meanwhile, such assumption is ill-grounded. About 60% of the coal that is planned to be burned this year (hard steam coal) is fully available in Ukraine. At the same time, a deficit may arise at any time for anthracite coal (40% of expected coal demand in 2016), which is mined in Ukraine only on the occupied territory. These two types of coal are burning at the different TPPs and are not mutually substitutable.

Alexander Paraschiy: From Nasalyk’s statement, it’s hard to understand what is the status of his idea on coal pricing methodology. The energy minister, by law, has no power to influence the decisions of the electricity sector regulator, which approved the “API2 + delivery” formula for Ukrainian coal. However, it’s apparent that political pressure on the regulator is increasing, making it more likely that it will have to amend its coal pricing methodology, which is being urged by the government.

In theory, a revision of coal pricing methodology (which will not account for coal delivery costs from Western Europe) will affect negatively DTEK Energy (DTEKUA), Ukraine’s leading coal producer. At the same time, we do not expect the possible revision will lead to decreasing coal prices in Ukraine. When the “API2 + delivery” formula was designed, the API2 Index was close to USD 44/t. But, in our view, the Ukrainian regulator was seeking a formula that would have secured a price of about USD 60/t – this is why the formula contains the delivery leg. As of today, the coal price in Rotterdam is USD 58/t, which looks like a satisfactory level for DTEK, even if the transportation leg is ignored in the formula.