Ukraine introduces austerity measures in the electricity sector

The Cabinet of Ministers of Ukraine adopted a resolution on Feb. 15 to implement “interim emergency activities on electricity market” for one month, the Cabinet website reported. The measures were prompted by a blockade of anthracite coal deliveries from the occupied territories of Donbas earlier this week. The measures are directed to decrease the load on thermal power plants burning anthracite, and to prepare for rotating blackouts in certain regions if an electrical power generation capacity deficit emerges.

The blockade of railway connections with occupied Donbas started in late January and has intensified this week. A full blockade would mean a cut in the supply of anthracite, which is not mined in the government-controlled part of Ukraine, to some Ukrainian power plants. Out of 12 thermal power plants operating in Ukraine outside the occupied area, six were designed to burn anthracite. These anthracite-burning thermal power plants produced 12% of all electricity in Ukraine last year.

The government has also issued a series of messages criticizing the blockade of the railway connections with occupied Donbas. It may lead to “serious economic and social problems for Ukraine,” the government website states. Not only are coal mines located on the temporarily occupied territories, “but also metallurgical companies that pay lot of taxes to the state budget.” Stoppages at metallurgical plants “will lead to a decrease of proceeds from exports and will threaten the stability of the Ukrainian currency”.

Alexander Paraschiy: It looks indeed that five of six anthracite-burning power plants stopped receiving their fuel over the last two days. Their stockpiles decreased by 42 kt in Feb. 12 – Feb. 14, which nearly corresponds to the amount of coal they have consumed in two days. Based on what DTEK reported (see another news from today), only Luhanska Power Plant is receiving anthracite from the occupied territories. The situation in the energy system is risky, but not critical. Stockpiles of anthracite at the power plants are enough to operate in economy mode for about 30 days.

If the government finds no solution in the coming weeks and the blockade intensifies, this will have a negative effect on DTEK (DTEKUA) and Metinvest (METINV). These two names from the Ukrainian fixed income universe are especially exposed to price risk these days, we believe.

Thus far, the government is not implementing active measures to unblock the railway connections with occupied Donbas, and is only issuing declarations that this will lead to undesirable consequences for the country.