Growing pro-Russian influence at Ukrainian NPPs
Despite its tremendous potential, Energoatom cannot fulfil itself in the dynamically changing political and economic environment of Ukraine. The Company’s pro-Western orientation in its further development is called in doubt, while prospects of eventual access to the electricity market remain next to none. Energoatom has emerged as the focal point of a struggle for influence between lobby groups marked by undisguised shadow of Russia.
This is what Pavel Kost, a member of the Expert Council to the Army Research, Conversion and Disarmament Center reports in his analytical article for the Polish outlet Energetyka24.
The cornerstone of Ukraine’s energy sector
The state-owned company Energoatom (hereinafter "Energoatom", "EA") is an operator of four Ukrainian NPPs (Khmelnytskyi, Rivne, South-Ukraine NPPs and the Europe’s largest Zaporizhzhya NPP), which operate 15 power units to the total installed capacity of 13,8 GW. This power generating potential makes Ukraine the 8th in the world. Energoatom also operates Tashlyk Hydro Pumped Storage Power Plant and Oleksandrivka Hydro Power Plant, which are the facilities de-facto belonging to the power generating complex of South-Ukraine NPP. Energoatom incorporates 13 subdivisions – enterprises, manufacturing works and production centers, a separate structure for equipment procurement and a Representative Office in Brussels.
Energoatom supplies about 55% of the total electricity consumption in the country, with such percentage occasionally going up to 70% in winter-fall periods. In terms of "nuclear vs total electricity production" correlation Ukraine ranks third in the world. These statistics leave no doubt that the nuclear power sector and Energoatom are the cornerstone of Ukraine’s energy security. That said, it's worth taking a closer look at the processes unfolding on the Company’s inside and outside the Company, especially after the change of government in Ukraine in 2019.
Continued pro-Western orientation or "sabotage in disguise"?
One of the undisputable achievements credited to the previous Ukrainian government and Energoatom’s management led by Yuriy Nedashkovskyi was sensibly reduced dependence of Ukraine’s nuclear power on the Russian Federation. The first manifestation of such reduction was the start of construction of the Central Spent Nuclear Fuel Storage Facility. The Project is being implemented in cooperation with the U.S. company Holtec International licensed by the U.S. Nuclear Regulatory Commission. Once completed, the facility will allow to fully refuse Russia’s services on SNF storage, which today cost Ukraine some USD 200 million annually.
The new Ukrainian government and EA proceeded with the construction, however, the process was marred by allegations of sabotaging the project. In late December 2020, the construction of the first start-up complex for spent nuclear fuel storage in the Chornobyl Exclusion Zone was completed, and "construction of other 14 complexes" was announced to be "completed within 40 years on as-needed basis". At the same time, the acting president of Energoatom Petro Kotin stated that starting 2021 Ukraine would terminate any transportations of spent nuclear fuel to Russia.
However, the completed construction does not imply that the complex was ever commissioned. According to the recent reports, the facility commissioning date, which has been moved multiple times, is designated for July 2021, which shall be conditional on completion of a 43-km rail track connecting the facility to the national railway network. Further, the facility must be connected to the power plant, and such connection should have taken place as far as in November 2020, yet never happened. According to Energoatom, these two seemingly non-consequential obstacles remain the last barriers to the long-awaited CSFSF commissioning.
The second major contributor to the reinforcement of Ukraine’s nuclear sector independence, is diversification of fresh nuclear fuel supply. In 2014-2018 Ukraine’s dependence for Russian nuclear fuel of TVEL design (incorporated in Rosatom) was reduced from 100% down to 50%, with the team of the then-President of Energoatom Yuriy Nedashkovskyi declaring that the ultimate goal of such diversification would be 60% of the supply coming from the U.S. Westinghouse vs 40% from TVEL.
As of February 2021, 6 out of the 15 nuclear power units of Ukrainian NPPs were operated using the U.S. fuel. The new EA management annunciated the start of Westinghouse fuel operation at the 7th power unit in 2021. Besides, at the end of September 2020 Energoatom signed an agreement with Westinghouse for the supply of nuclear fuel to Rivne NPP for VVER-440 reactors, which type has never been operated using nuclear fuel other than of Russian design. The deliveries will be possible starting 2024 after a detailed verification. The agreement makes provisions for reload batches to be fabricated at Energoatom’s facility, Atomenergomash works, and for the parties to cooperate in the manufacture of fuel inspection equipment to be used at VVER-440 and VVER-1000 reactor types. If these plans go into effect, this will be the first time the Westinghouse VVER-440 fuel will be operated in reactors in Europe.
Another constituent of EA’s pro-Western orientation is integration of Ukraine’s Unified Power System (grid) into ENTSO-E, which was initiated by the previous government. In 2020, Ukrainian nuclear power plants successfully participated in grid stability tests against potential low-frequency oscillations, with preliminary results being satisfactory. This means that the synchronization process continues.
What does raise doubt though is the Company management’s activity and their contradictory statements. In his interview to the information agency "Interfax-Ukraine" in July 2020, one of EA’s Vice presidents Herman Haluschenko questioned the feasibility of terms for completion of synchronization with ENTSO-E set for 2023. At the same time, just three months later Haluschenko himself reported that Ukraine would be ready for full synchronous operation with ENTSO-E as early as in 2022, which is a year sooner than initially scheduled (and expected). This kind of contradictory statements are "heating up" expert and journalist circles, who rather see it as a sign of EA’s management unwillingness to eventually synchronize with ENTSO-E.
There came further proofs to fuel the fire. Last year was the first time in many years when Energoatom missed the deadlines to complete outages of nuclear power units, which caused domestic electricity deficit. One of solutions to compensate for such deficit was the renewal of import of energy carriers from Belarus and Russia, including from Ostrovets NPP, which indeed stirs up controversies in the present-day geopolitical context. It is thus not impossible that this "coincidence" was wittingly staged to excuse "forced" renewal of electricity import from Belarus and Russia. Finally, in October 2020 Haluschenko announced that Energoatom would enter the markets of Lithuania, Latvia and Estonia, which now and again raised much surprise with the expert circles, since this idea, which is not in conflict with the reality, caused additional obstacles to the earlier planned synchronization of the Ukrainian grid with ENTSO-E.
Another aspect worth paying attention to in the context of the Company’s geopolitical direction is a report by EA’s press service of December 18, 2020 on signing a contract with Shearman & Sterling global law firm for filing claims with international legal institutions against the RF. The subject of the claims are Energoatom’s lost assets in the Crimea. The preliminary estimated value of the damages claimed is about USD 100 million, such damages largely relating to the loss of EA’s windmills in Donuzlav. However, the prospects of having proceedings initiated remain vague.
In this way, we have a series of absolutely opposite messages. On the one hand, Energoatom pursues projects intended to reinforce the pro-Western orientation, on the other – in doing so it acts with undisguised reluctance and extensive delays supported by messages of its intent to slow down the pro-Western progression. The Energy Programs Director of the Razumkov Center in Kyiv believes that despite declamatory statements of diversification made by EA’s management, their policy is essentially "sabotage in disguise" of diversification projects. Termination of funding of the Company’s Representative Office in Brussels in July 2020 seems to be a symbolic proof of these words.
Hostages of the "market"
Energoatom’s development is inextricably linked to the progress in the establishment of the electricity market. The electricity market model commissioned in July 2019 had a bulk of inherent drawbacks and weaknesses, which are still there. In the new model, EA’s role is that of a subsidiary: according to the PSO scheme, is supplies electricity to households at prices on average three times below the market price. The volume of nuclear electricity marketed in this manner constitutes 50% (of EA’s electricity), with the remaining scope being traded by the Company in the market, which is heavily regulated anyway, thus not allowing for the full use of benefits inherent in the nuclear generation. Moreover, the bids in the market are poorly arranged, and payments come with delays, which causes EA to be in the red and its indebtedness to grow. This has significant impact on Energoatom’s financial condition.
The results of the three quarters of 2020 showed EA’s net loss in the amount of UAH 5,3 billion, although the Company closed 2019 with UAH 3,8, billion "in the black". As of January, the amounts owed to EA went above UAH 24 billion (equivalent of almost USD 1 billion). The issue is further aggravated by Energoatom’s lack of experience in commercial dealings, since it has always operated under archaic conditions of a pseudo market. Fall 2020 saw the fourth change of leadership in EA’s trading subdivision "Energoatom-Trading". "Energoatom-Trading" has effected a serious of suspicious deals in the market related to sales of significant volumes of electricity at an understated price to companies tied to oligarchs Kolomoyskyi and Akhmetov. This is the reason why in February 2021 the National Anticorruption Bureau of Ukraine conducted searches in the offices of the subdivision.
Should this condition persist, it will emerge as a burden in the long-term perspective and call into doubt Energoatom’s development plans. Yet, it must be stressed that the key to the Company’s financial troubles lies in the organization of the market as such rather than in the Company, which is essentially an inert hostage of political and lobby decisions "at higher levels".
Institutional chaos
The alarming processes of the recent two years were triggered by attempted changes of the status of EA and of other agencies in the nuclear power sector. In fall 2019, the then-Minister of Energy Oleksiy Orzhel brought the State Nuclear Regulatory Inspectorate of Ukraine under control of his ministry. This move posed a conflict of interests, since EA also fell under the same ministry’s governance. Furthermore, this was a violation of two international conventions and could have led to IAEA imposing a penalty on Ukraine and to reputational damage. After a wave of criticism, the decision was promptly revoked.
In September 2020 President Volodymyr Zelenskyi signed a Decree, with one of the paragraphs provisioning for expedited reorganization of EA into a joint-stock company and its handover from the Ministry of Energy to the Cabinet of Ministers of Ukraine (CMU). End of January 2021, the government fulfilled the abovementioned Decree, which infringes the provisions of the Law "On the Use of Nuclear Power and Radiation Safety" and legal acts pertaining to separation of electricity production from the Regulatory body for nuclear and radiation safety. After this move, both the electricity producer (Energoatom) and the Regulator for radiation safety were subordinated to one and the same body, the CMU.
This also violates provisions of the law, prescribing that the nuclear power generation shall be governed by the Ministry. Finally, such changes violate provisions of the Nuclear Safety Convention and of the Guarantee Agreement between Ukraine, Euratom and the EBRD to the total value of EUR 600 million. All funds envisaged by the Guarantee Agreement have already been made available to Ukraine, but the recent moves can cause the lenders to claim early loan repayment or even loan withdrawal. However, the major issue here is that this kind of re-subordination blurs the boundaries of responsibility for EA governance, since the CMU is a collegial body. It also calls in question the validity of the decision since the CMU, unlike the Ministry, does not have any professional cadre knowledgeable in the subject.
In its turn, the other President’s expectation (definitely correct) articulated in the Decree – expedited corporatization of Energoatom – remains on paper. Early November 2020, the Ministry announced that the conditions for the establishment of Energoatom’s Supervisory Board had been created. In July the Ministry approved Energoatom’s Charter and the Regulation for the establishment of the Supervisory Board, and declared its preparedness to invite applications for the membership on the Supervisory Board. But this step faced resistance on the side of EA management who believe that the Company must be first reorganized into a joint-stock company according to the Special Law, and only then comes the establishment of the Supervisory Board. These wrangles clearly communicate that the long-awaited corporatization of the Company is the background for a struggle for influence over the Company, with one of the motives being actual unwillingness to corporatize.
Movement with no strategy
Although the Ministry approved the "Strategic development plan of Energoatom for 2020-2024" in December 2019, the document does not provide answers to key questions. The issue is primarily about the place of NPPs in the Ukrainian power sector. The problem is that the current revision of Ukraine’s Energy Strategy does not contain any parameters that would answer the question about the role of the nuclear power sector. It gains even greater importance in the context of mandatory and stepwise maintenance of nuclear power units (in the period from 2030 to 2040). Ukraine will have to terminate operations of 12 nuclear power units, and in the period 2041-2055 – of the remaining three power units due to expiration of the operational service life.
Recent months have seen increased number of discussions over the future of Ukraine’s nuclear generation, however the initiative does not come from the Ministry of Energy, but from the President of Ukraine. In September 2020, the Presidential Decree obligated the Cabinet of Ministers to propose to Verkhovna Rada a draft legislation on construction of two nuclear power units at Khmelnytskyi NPP. EA’s management welcomed the President’s position more than enthusiastically. H. Haluschenko claimed that completion of Khmelnystkyi NPP power units should be the number one project on the national scale, and the "power bridge" project with Poland was described as "almost completed as at the end of 2019". He also mentioned there was a need to initiate construction of one power unit at Rivne NPP. EA invited a series of consultations on participation in the construction project at Khmelnytskyi NPP with Škoda JS, Czech Republic, where 100% of equity belong to "Unified Machine Building Works" group, incorporated in "Gazprom". Public explanations offered by EA that "the Czech company is using Russian technologies" do not stand up to criticism. In the light of Ukraine-Russia relations, this should raise doubt. It also remains unknown, what the funding sources for the construction will be, with the most optimistic estimates prompting the project cost at approximately UAH 73 billion.
The next paragraph of the Decree annunciates the start of elaboration of the long-term development strategy for the nuclear power sector, which will become an integral part of Ukraine’s Energy Strategy. The approach is absolutely correct, however, no details are provided on possible dates of the strategy release. Moreover, in the very same Decree the President contradicts himself when publishes the decisions on construction of Khmelnytskyi NPP power units.
Another fruit of concerns for the nuclear generation on the side of the presidential circles is the Presidential Decree of January 29, 2021 on compliance with the decision of the National Security and Defense Council of Ukraine "On actions designed to neutralize threats in the sphere of nuclear power and industry". The topics touched upon in the document are numerous, ranging from procedures regulating protection of nuclear power facilities by the National Guard and use of drones, including "delivery on Ukraine’s commitments to the EU and Euratom" and uranium mining, up to settlement of the debt accumulated in the electricity market. At the same time, the document does not suggest any specific steps in the mentioned spheres. Two issues included in the NSDCU decision deserve closer scrutiny.
The first one is related to ensuring load-following of generation facilities in the unified power system after commissioning of renewables, which aggravate the problem of system balancing. This is a sweeping problem pertaining to the whole UPS, having negative implications today and expected to persist in the medium and long terms. According to the Director of the Science and Technology Center "Psyche" Gennadiy Ryabtsev, in the context of its integration plans with ENTSO-E, Ukraine must dramatically boost its load-following capacity (by minimum of 2 GW) and storage capacity (by GW) by 2023. Construction of new nuclear power units, as referenced above, will only aggravate these problems.
This also makes us focus on another aspect. The Previous EA leadership signed a memorandum with the U.S. Holtec company making provisions for deployment of the SMR-160 small modular reactor technology in Ukraine, as well as for long-term establishment of the manufacturing hub for this technology in Ukraine. While being a solution to the problem of capacity deficit expected at the end of operational life (of large power reactors), small modular reactors will go further to be the major component in making up for the expected deficit of load-following capacity. This technology solution will also be environmentally clean, which is not unimportant in the light of requirements to Ukraine. However, after the dismissal of Yuriy Nedashkovskyi the issue was completely removed from EA’s agenda. Nor was it included in the abovementioned NSDCU decision.
The second issue addressed in the decision and deserving our attention is related to the mentioned spent nuclear fuel storage facility. The document sets out "exhaustive measures", which de-facto points to that the completion of the spent nuclear fuel storage facility, as declared by P.Koting in December 2020, was a largely premature statement.
The quality of the published documents and the very fact, that their initiator is the President, speaks for the lack of a clear strategy for the development of the nuclear power sector. There is also an opinion, that such shift of the center of gravity in the decision making over to the President is a result of under-carpet lobby activity of the head of the state.
"It’s all about the people"
End of November 2019 the government decided for the dismissal of Energoatom President Yuriy Nedashkovskyi, a man of unquestioned credibility among Ukraine’s nuclear power engineering circles. The then-Minister of Energy Oleksiy Orzhel justified this move by accusing Y.Nedashkovskyi of "inefficient management and poor economics in public procurement activities". The allegations were absurd in that, as Orzhel himself said, the details would be published "after the internal audit was completed, since it was still underway". The results of the audit were never released, and Orzhel was stripped of his ministerial portfolio in March. But Energoatom welcomed fresh faces.
The new leader of Energoatom (in the status of the Acting president) Petro Kotin, who took the reins of power in March 2020, does not seem to draw any objections – for many years he’s been relatable to the largest nuclear power plant in Ukraine in the town of Energoadar, but his inner circle is very dubious. Kotin’s Advisor is Oleh Boyarintsev, a people’s deputy of Sumy regional council, for many years linked to the ultimately pro-Russian politician Andriy Derkach (widely known as "Orthodox KGB man"). In September 2020, the U.S. Treasury included Derkach on the Sanctions List for his attempted meddling in the US election.
The names of Kotin’s deputies also raised a wave of criticism. Jakob Hartmut is a German citizen, for many years linked to Russian companies, a holder of minor equity stakes in several offshore Russian power companies. The second Vice president Herman Haluschenko is a former Lawyer of Derkach.
Management reshuffles in EA found a broad response in the West. End of July 2020 the British parliament discussed a report of the Intelligence and Security Committee on activities of the Russian intelligence services in Europe. All abovementioned officials of Energoatom are figures in the report. According to the authors, all decisions made by EA are heavily influenced by Derkach, who is supported by the Head of the Office of the President of Ukraine Andriy Yermak, and Advisor to Volodymyr Zelenskyi Serhiy Shefir. All this should raise concerns over the evidently changed development vector of the Company, which in recent years has been painstakingly moving westwards.
Conclusions
After the change of power in Ukraine in 2019 Energoatom continued, in general, on its course towards the break of relations with the Russian Federation, although the diversification pace slowed down noticeably. The evident signs of reluctance and delays in implementing activities aimed to reinforce the independence of the national nuclear power sector prompt it could actually be nothing but "sabotage in disguise" by the current Company management.
Energoatom remains a hostage of the deformation caused by the launch of the electricity market in 2019, which significantly affects the Company’s financial condition. Formally, Energoatom has started its market activity, yet such activity covers merely a half of the electricity produced, while the remaining portion continues to be supplied under the archaic PSO model. The start of market activities revealed weaknesses and drawbacks of the electricity market, as well as EA’s inability to operate in the new environment. Another concern is the increased number of accusations against Energoatom’s current management of mingling in non-transparent market operations.
In recent year and a half, the institutional chaos around EA has deepened. The struggle for formal and informal influence on Energoatom prompts a conclusion that the elite "at the top" is not yet ripe to make the best of the Company’s tremendous potential.
Another problem is the lack of a long-term vision of nuclear power sector development. The statements pertaining to such development, as set forth in the updated Energy Strategy of Ukraine for the period until 2035, are surely correct. But premature actions of the presidential camp and EA, before the Strategy was updated, cause skepticism.
Leadership appointments and other personnel-related decisions made by EA starting fall 2019 speak volumes for the fact that we are dealing with the revival and strengthening of the ultimately pro-Russian influence of Andrey Derkach and his circles, which unfolds at acquiescence of the President himself and his close allies. A valuable counter weight helping to balance the consequences of these processes is dynamically growing scrutiny towards Energoatom on the side of the civil society and the international community.
By Pavel Kost, Energetyka24
