Ukraine to boost coal cost estimates 10% in determining 2019 power rates

Ukraine’s power sector regulator will hold a Dec. 14
meeting to set its 2019 wholesale electricity price forecast, according to its
website. The price will be based on the price forecasts of all key power producers,
including nuclear and coal-fired thermal power plants (TPPs). For TPPs, the
regulator said it plans to increase its price forecast by 10% in order to cover
the corresponding estimated increase in coal costs, draft documents suggest. In
particular, the regulator estimates that 12M trailing coal price in Rotterdam
(API2 index) is 11.7% higher than a year ago (USD 92.8/t) and coal delivery
costs from Rotterdam to Ukrainian ports is 6.3% higher (USD 20.5/t), which
result in total costs of coal for TPPs of USD 113.2/t (without delivery costs
by railway), or 10.7% higher yoy.

In local currency terms, the covered coal costs will
be UAH 3150/t (up 10.2% yoy). Non-fuel costs to be covered by the TPPs’ power rate
are projected to increase in line with the producer price index (10.1% yoy).
All this should result in more than a 10% increase of the electricity price
forecast to be produced by Ukrainian TPPs in 2019.

The wholesale electricity price forecast is the
state’s basis for setting retail electricity prices for industrial consumers.
In March 2016, the power sector regulator developed a methodology for setting
the wholesale price forecast for one year, which includes a generous price for
thermal power plants (which covers coal costs as if all the coal is delivered
from Rotterdam, the so-called “Rotterdam plus” approach). The current
methodology for setting power price forecasts may be cancelled in mid-2019,
when Ukraine is scheduled to complete electricity market reform and switch from
tough market regulations to full liberalization. At the same time, it is very
likely that the reform will be postponed by at least half a year.

Ukrainian TPPs will consume 25.2 mmt of coal, of which
only 13% will be delivered from abroad, according to Energy Ministry’s 2019
forecast. According to the same forecast, DTEK Energy’s power plants (which
will produce 74% of all electricity produced by Ukrainian TPPs) will consume
19.4 mmt of coal, 12% of which will be imported.

Alexander Paraschiy: If the new price for TPPs will be approved (which is highly likely),
that will benefit DTEK Energy (DTEKUA) by allowing it to slightly expand its
margin in its core Coal & Power segment next year. Our neutral view on
DTEKUA Eurobonds remains in place.