Exclusive If electricity prices continue to rise, Ukraine risks losing its large industrial sector, particularly steel industry

The electricity transmission tariff includes many unresolved, or simply postponed, problems in the industry, which now require greater financial expenditure

In recent years, the cost of electricity and tariffs for its transmission and distribution in Ukraine have risen significantly, which has had an extremely negative impact on the financial and economic performance of energy-intensive enterprises. In particular, the share of electricity costs in the cost of ArcelorMittal Kryvyi Rih’s sales in 2021 was 7%, and in 2025 it will be 20%. This problem requires an urgent and comprehensive solution.

GMK Center quotes Olga Buslavets’ remarks at the round table “Ukraine’s electricity market: challenges for industry and the iron and steel complex”.

Balance between energy and industry

The constant rise in the cost of electricity is negatively affecting Ukrainian industry, particularly energy-intensive enterprises. This is not a problem for a single industry, but a threat to the national economy as a whole. If electricity prices continue to rise, Ukraine risks losing its large-scale industry, particularly steel industry. The consequences will be painful: a 7% decline in GDP, the loss of thousands of jobs, the need to import steel products for the future reconstruction of the country, and, for the energy sector, the loss of large consumers.

Over the past year, we have seen active construction of decentralized generation facilities. But where are the new production facilities and new consumers of this electricity? It is obvious that investments in new production facilities and industry will not go to a country with expensive electricity. Therefore, it is necessary to create conditions for optimizing electricity prices.

Factors contributing to the rise in electricity prices

I will outline three key reasons for the rapid rise in electricity prices and propose possible solutions.

1. Limited competition in the electricity market.

Full-scale war destroyed almost half of the generating capacity. The remaining generation capacity is approximately equal to demand, meaning that there is virtually no competition. Under such conditions, the market does not ensure fair pricing. For example, Energoatom produces more than half of Ukraine’s electricity, the volume of which is unavoidable, in particular due to limited imports from Europe. Therefore, the price of electricity produced by nuclear power plants, which have the lowest cost among producers, will still approach the maximum during periods of shortage — the established price caps.

The following can be considered as tools to solve the problem:

• introduce mechanisms of artificial competition, following the example of France, where nuclear generation dominates;
• oblige Energoatom to sell part of its electricity at fixed prices to industries that need state support. Such a price support mechanism is in line with European practices and can be implemented by the Ukrainian government.

2. Regional imbalance between generation and consumption.

After the loss of the Zaporizhzhia NPP and large TPPs in the east and center of the country, these regions became energy-deficient. At the same time, most industrial enterprises are concentrated here. Instead, the construction of new generating capacities is taking place mainly in the western regions. This region is already oversaturated with generation, with the existing powerful nuclear power plants — Khmelnytskyi and Rivne NPPs, with a total capacity of 4,800 MW.

Long-distance transmission of electricity leads to overloading of the transmission system, which has both technical and economic consequences:

Therefore, electricity must be transported hundreds of kilometers from the west to the east and center, including imported electricity, which leads to overloading of the transmission system. This has negative technical consequences, reducing the reliability of the network, as well as economic consequences, leading to higher electricity prices for consumers due to:

• an increase in technological losses in the networks;
• an increase in the cost of reconstruction of transmission systems;
• the use of redispatching, when, in conditions of technical impossibility to transmit electricity, instead of cheaper generation in the west, more expensive generation in the center is activated.

What can be done in this case:

• Stimulate the construction of new maneuverable generation closer to consumption centers by holding an additional competition for new generating capacity.
• Create conditions to ensure an optimal energy mix of generation in terms of price per kWh.

3. Increase in tariffs of natural monopolies.

In recent years, tariffs for electricity transmission and distribution have been rising too rapidly. And this is not only due to the war and attacks on energy infrastructure. In particular, the transmission tariff includes many unresolved, but simply postponed, problems in the industry, which now require greater financial costs than before. These costs are passed on to consumers, particularly industrial ones. This does not stimulate economic development in any way.

The only solution to this problem is a comprehensive approach that takes into account not only the energy sector’s need for financial recovery, but also the economy’s need for affordable electricity.

Does Ukraine need industry?

The key question that the government must answer is: does Ukraine need industry, particularly steel sector? If the answer is yes, then state support for energy-intensive industries is necessary in conditions of war and energy instability.

The experience of European countries, in particular France, Poland, Hungary, and Slovakia, shows various examples and mechanisms for supporting their own industries during crises. Germany, Britain, and the US are focusing on industry in their updated development strategies, creating the most favorable conditions for its development.

Ukraine also has relevant experience in providing price support to energy-intensive industries. In 2020, at the suggestion of the Ministry of Energy, the government introduced a mechanism of special auctions for energy-intensive enterprises, which allowed them to purchase electricity from Energoatom under a bilateral agreement at a fixed price. Later, Ukrainian Railways also purchased electricity using a similar mechanism with a 30% discount.

So, the mechanisms are there. There are, of course, many more. All that is needed is a strategic vision and the political will to listen and solve the problem. Without an adequate response to the existing challenges, Ukraine risks losing not only its industry but also the chance to build a strong, sustainable economy.