Russia is winning the war on the energy destruction front

DTEK, Ukraine's top private energy company, and Ukrenergo, the state transmission company, explained the issue at an event by Ukraine Business News. Winters are shaping up as cold, dark and dangerous.

With multiple attacks this year starting in March, as well as the theft of Ukraine’s largest nuclear power plant in 2022, Russia has knocked out more than half of Ukraine’s pre-2022 electricity generating capacity.

The continual daily electricity blackouts that Ukrainians suffer today in summer, sometimes lasting for several hours at a time, may be remembered as a minor inconvenience come winter.

In the war on energy, Russia is clearly delivering knock-out punches by repeatedly bombing Ukraine’s energy infrastructure — knocking out at least half of the nation’s generation capacity, from a pre-2022 level of 55 gigawatts to now under 20GW. Ukraine, by contrast, is also attacking Russia’s energy infrastructure — particularly oil refineries — but does not have the weapons to destroy as much of the infrastructure as Russia is doing.

Both nations justify targeting the power systems because they are essential to each other’s war efforts and capacity to produce weapons. While true, everyone in both societies suffers as well — and Ukraine, the smaller combatant in its war to survive, suffers far more.

At a June 21 event organized by Ukraine Business News, the CEO of Ukrenergo, Volodymyr Kudrytskyi, and Dmytro Sakharuk, executive director of DTEK, explained the situation. They represent the two key companies in the energy sphere.

DTEK, owned by billionaire Rinat Akhmetov, generated half of Ukraine’s power — until Russian bombs knocked out 90% of its production capacity. DTEK can only restore up to 50% of “what we had before the March 22 (strikes), not more,” Sakharuk said.

Ukrenergo is the state company that operates the state power grid and distributes energy. It has also suffered heavily from Russian attacks.

Ukraine gets almost half of its electricity from its nuclear power plants, which Russia has not bombed. But the Kremlin has seized the largest nuclear power plant near Zaporyzhzhia, which is currently offline and occupied by Russian troops.

Both Krudrytskyi and Sakharuk emphasized that Ukraine needs stronger air defenses; otherwise, repairing damaged power plants is useless because Russia will simply bomb and destroy them again. More capital and stronger air defenses are needed to restore even half of the 9GW in electricity production capacity that Russia has recently destroyed in strikes this spring and summer—and much of that capital, through loans, investments, or supplies, will have to come from the West. Last winter, Ukrainian President Volodymyr Zelensky said the nation had a peak consumption of 18GW.

Kudrytskyi said Ukraine could not import enough electricity to solve the problem because the current European export capacity of the transmission lines to Ukraine is 1.7 GW, and it would take years for Europe to build more.

In the long run, Ukraine will have to restructure its energy supply system entirely, relying more on decentralized power plants and transmission systems, including greater use of renewables such as solar and wind. But to get a better future, Ukraine’s investment climate will have to improve dramatically — through improved rule of law and the lifting of currency restrictions so lenders can be reassured that their loans will be repaid. Risk insurance is inadequate. Generating 1GW of electricity costs roughly $1 billion, Sakharuk said, while current risk insurance limits are $1 million.

Some highlights of the June 21 discussion at Parkovy Congress Center:

The impossibility of predicting how extensive winter blackouts will be:

“If somebody can tell me what these (Russian) attacks will be, what units will be damaged, and to what extent, I will be able to tell you more or less exactly how many hours you will have disconnected in winter,” Kudrytskyi said.

On the greater precision of Russian attacks:

“They advanced and don't sit in the same place. They advanced the Shaheds (attack drones) from two years ago. Right now, there are two different Shaheds. They have six antennas inside. It's impossible to jam them. The X-101 or X-55 (missile) has the video guidance already. So they see where they go, and they exactly hit the transformers or substations or the turbines. They're meter to meter. It's excellent precision,” Kudrytskyi said.

Said Sakharuk: “Basically, all our five plants were attacked four or five times.”

On why decentralization is a key:

“We have to roll out new generation facilities to make sure that if Russians undertake these attacks, they cannot concentrate on 10 or 15 big power plants, but they would have to deal with hundreds,” Kudrytskyi said.

Why losing water and sewage systems is the greatest threat:

The biggest problem is the absence of not even heat. It’s the absence of sewage and water. If you sit in the flats without electricity, it's fine. You can get (it from) somewhere, bring some power, charge. But if there is no water, if your toilet doesn't work, then forget about staying in that apartment,” Sakharuk said.

On whether Akhmetov, worth $7 billion and Ukraine’s richest person, is investing enough in DTEK’s recovery:

“We invested almost a billion dollars to help Ukraine right now. Everybody is doing their job right now,” Sakharuk said. “And everybody is spending what we have to make sure we go through the winter. And we also understand that the current level of damage that we have is huge, tremendously huge. And all resources that the company has is being pulled into recovery. We need to spend $350-$400 million only to recover 50% of our capacity, considering that we don't produce right now. There is just no revenue.”

On why investment in the private sector is preferable than in the public sector:

“Money given to state-owned enterprises will not be spent. Funds will not be spent. Why? Because there is no organizational ability to spend them. No experience, knowledge, desire, or incentive to do this. And I think this is the second biggest issue or problem that we have in addition to air defense,” Sakharuk said.

On how currency restrictions are deterring private investment and loans to the private sector:

“Right now, private companies could not service our debts, for example. We are in default because we couldn't buy foreign currency for more than two and a half years to pay coupons to Eurobonds. Who will give you new money against bad money you couldn't service? Nobody, because it's against the rule of finance,” Sakharuk said. “We just need to stop creating schemes or promises that have no connection to the harsh reality because we are not competing … Once we start thinking that capital is universal, basically, and we need to compete based on the universal rules of the capital economy, capital will come.”

On why Ukraine’s profitable banks are part of the problem:

Sakharuk said Ukraine’s banks prefer to lend money to the National Bank of Ukraine, earning easy and guaranteed profits, rather than lending to the risky private sector. He said that if Ukraine’s banks won’t lend to Ukrainian businesses, international banks will not either. “Do you think that nobody knows that? Everybody knows that, right? Do we see any actions? No,” Sakharuk said.

On the need to raise consumer prices to encourage conservation and production:

“For many years, Ukraine was one of the less energy-efficient countries in the world and Europe as well. Why? There is a very simple reason: subsidized price for electricity. The 100% of consumption is split into three groups. 30% industries, 30% municipal and social area, and 30% population. Even now, when the tariff price was increased, they pay a bit less than 50% of the market price.” Market prices and strict enforcement of utility payments will encourage conservation, Sakharuk said.