REFORMS NEEDED IN UKRAINIAN POWER SECTOR TO PROMOTE INVESTMENT
U.S.-Ukraine Business Council (USUBC)
Washington, D.C., Thursday, September 30, 2010
WASHINGTON, D.C. - The Ukrainian power sector infrastructure is aging rapidly and is in urgent need of major new investments. Major reforms are needed in the Ukrainian power sector to:
(1) promote transparency,
(2) provide incentives for efficient operation and
(3) create an environment for sustainable investments.
The most important major reforms needed in the Ukrainian power sector, according to AES, a U.S. based global power company who has been operating two large electric distribution companies in Ukraine since 2001, are as follows:
(1) NEW TARIFF METHODOLOGY IMPLEMENTATION
The government of Ukraine has announced its intention to reform the tariff methodology for distribution companies (oblenergo) by the year 2013. AES, whose world headquarters is in Arlington, Virginia (www.aes.com), believes that the new tariff regime is an most urgent matter that cannot wait until 2013.
Accelerated implementation of a reformed tariff methodology would be in the best interests of Ukraine and of investors in the distribution businesses. The government could consider the implementation of a new tariff regime in stages, starting in 2011.
Current Tariff Methodology Outdated and Does Not Attract Investments
"The current tariff methodology in Ukraine does not offset all of the required business costs, and more importantly does not include all of the components necessary to attract additional investments," according to Alfiya Jumayeva, executive director of AES Ukraine, "investment in energy distribution can support the efforts of the Government towards a sustained economic recovery. The majority of the suppliers in distribution companies are Ukraine based."
On the other hand, continued underinvestment in the distribution grid could become a constraining factor for development in the period of economic recovery, preventing the satisfaction of resurgent electricity demand.
Additionally, such new tariff methodology would make the distcos being privatized much more attractive for serious investors. Potential investors will welcome and appreciate the approval of a new incentivized tariff methodology based on global best practices.
(2) ELIMINATION OF PRICE DISTORTION AND CROSS-SUBSIDIES
AES and USUBC recognizes the need of the Ukrainian government to implement social schemes to reduce the impact of price increases. These schemes should be implemented in a manner that is transparent, predictable and that reduces cost subsidy.
The electricity tariff should be directed towards charging each customer for the total cost of service, and the elimination of price distortions and cross subsidization between customer groups.
(3) PRIVATIZATION OF GENERATING CAPACITIES
Large capital investments are needed in order to ensure secure and uninterrupted performance of Ukraine’s electricity supply system under the conditions of growing consumption, and to improve the system’s efficiency.
It is necessary to update the existing generating capacities of the thermal plants and the worn-out grid of power transmission lines and distribution networks. The privatization of the generating capacities, with clearly defined investment responsibilities, can be an effective mechanism to attract sufficient investment to the sector.
"AES and the U.S.-Ukraine Business Council (USUBC) are awaiting, with interest, the privatization of generation assets in Ukraine," according to Morgan Williams, Director, Government Affairs, Washington Office, for the SigmaBleyzer Private Equity Investment Management Group, who serves president of USUBC. "It is very important for the Ukrainian government to move quickly and transparently to privatize generation assets."
ABOUT AES AND UKRAINE
AES acquired two distribution companies in Ukraine in 2001 - Kievoblenergo and Rivneenergo - which today serve approximately 1.2 million customers. Their two utilities bring electricity to homes and schools, and to critical industries including paper mills, chemical companies, flower exporters, beverage companies and the Boryspil international airport.
After the privatization and purchase of both of the electricity distribution companies AES managed to transfer them from post-Soviet debtor utilities into modern sustainable business enterprises. Both companies are now among the top tax payers in their respective regions.
The two AES Ukraine companies were the first ones to pay off the pre-privatization debts to the wholesale energy market State Enterprise “Energorynok” and they continue to pay 100% for the electricity purchased from the wholesale electricity market.
The performance effectiveness of AES Kievoblenergo and Rivneenergo is measured by the following Key Performance Indicators (КРІ) which are recognized in the world's energy industry:
(1) Safety (including public safety)
(2) Electricity supply reliability indicators for outages duration and frequency
SAIFI – system average interruption frequency index (average number of outages for one customer)
SAIDI – system average interruption index (average duration of outages for one customer)
(3) Customer service indicators
CACFI Customer Average Complaint Frequency Index (average frequency of written complains)
CRADI Customer Complaint Resolution Average Duration Index (average duration of request processing and resolution time
(4) Electricity losses
The analysis and monitoring system of these indexes is implemented and each index has had a positive improvement during the period of AES in Ukraine.
The AES companies in Ukraine are almost the only companies in the energy sphere which have introduced the new management system SAP, created a call centre and a help line.
AES's client oriented strategy is implemented with customer service systems and standards aimed to achieve customers' satisfaction which are reflected in the positive dynamics and results of the annual Customer Satisfaction Surveys. The customer satisfaction index in 2009 for AES Kyivoblenergo was 70%, and for AES Rivneenergo 75.6 %
In 2005, the AES team in Ukraine successfully secured $45 million in non-recourse, long-term financing - the largest transaction of its kind to date in the country’s energy sector - from the International Finance Corporation (IFC), the private sector financing arm of the World Bank, to continue to improve performance.
SUPPORT FOR COMMUNITIES
Kievoblenergo and Rivneenergo provides charitable assistance to numerous organizations in the communities they serve, including children’s hospitals and homes, as well as kindergartens and secondary schools. Both companies were the first power distribution companies in Ukraine to arrange regular lectures in local schools on the safe use of electricity.
AES Ukraine also has produced, in cooperation with state educational authorities, a safety magazine, “The ABCs of Electric Safety,” which has become part of the curricula in secondary schools in the two service areas in and around Kyiv and Rivne.
For additional information about the major reforms needed in the power sector to promote investment in Ukraine contact: Andrey Permyakov, External and Internal Affairs Director, AES Ukraine [Andrey.Permyakov (at) AES.com].