Exclusive Under pressure: expensive electricity has become a burden for Ukrainian industry

The price of electricity is a critical factor for the competitiveness of enterprises

Representatives of energy-intensive industries are calling on government officials to review their approaches to the functioning and regulation of the domestic electricity market in order to preserve the country’s industrial potential – the current situation with prices for large producers is close to critical. This was discussed at the round table “Ukraine’s electricity market: challenges for industry and the iron and steel complex” organized by GMK Center.

The state of Ukraine’s energy sector

The price and availability of electricity are currently a real challenge for Ukraine, experts say.

Due to the war and Russian attacks, the country has a shortage of generating capacity. In particular, the Zaporizhzhia Nuclear Power Plant is temporarily occupied, domestic thermal and hydroelectric power plants have been damaged by Russian attacks, and a large part of wind power generation remains under occupation.

Since 2022, prices have risen significantly for all categories of consumers, both for the population and for industry. This is largely due to the increase in the cost of production and delivery of electricity.

Among the factors are currency fluctuations, which have affected the cost of energy resources, as the country imports a significant portion of them. The state has also introduced additional gas generation, and gas is an expensive resource for electricity production.

In addition, there has been an increase in tariffs by NPC Ukrenergo, which, according to experts, was linked to the desire to increase the level of payments to renewable energy sources, the need to restore damaged infrastructure, the deterioration of payment discipline, etc.

At the same time, electricity transmission volumes have decreased—since 2022, consumption has been about 30% of pre-war levels.

The cost of electricity in Ukraine also reflects technical (restrictions on export and import potential) and economic factors (price caps, lack of intergovernmental contracts). Ukraine will be dependent on imports as long as it has an electricity deficit, and this situation will affect prices, experts say.

Challenges for steelmakers

If the situation with electricity prices does not change, the country may lose its steel industry, and thus about 7% of its GDP, and become dependent on imports of steel products, emphasized Olga Buslavets, former Minister of Energy of Ukraine and advisor to the CEO of ArcelorMittal Kryvyi Rih.

She cited limited competition in the market, rising tariffs for natural monopolies, which are rooted in long-standing unresolved problems in the energy sector, and regional imbalances (the loss of generation in the east and the construction of new capacity in the west create a need for long-distance energy transportation) as the main factors driving price increases.

According to her, the last year has seen active construction of decentralized generation, but no growth in the number of new consumers. Therefore, the loss of current industrial consumption and its potential will be painful and directly affect the energy sector.

The price of electricity is one of the factors that determines the competitiveness of industrial enterprises, noted GMK Center analyst Andriy Glushchenko. At the same time, its cost in Ukraine is higher than in most EU countries. The average price on the domestic day-ahead market (DAM) last year was €112/MWh (+23% y-o-y).

Electricity accounts for a significant portion of the cost of production in the iron and steel complex: 50-60% for iron ore concentrate, 30-35% for iron ore pellets, and 10-15% for steel smelted in electric arc furnaces.

For example, the share of electricity costs in the selling price of ArcelorMittal Kryvyi Rih’s products was 7% in 2021 and will be 20% in 2025. According to CEO Mauro Longobardo, the company is very energy-intensive and currently consumes approximately 250 MWh per hour of operation, even when not operating at full capacity.

The Kryvyi Rih Metallurgical Plant manufactures products for the construction sector, which are sold at world market prices. The company is unable to pass on the increase in energy costs to its customers, and the scale of production does not allow it to rely on domestic demand. In export markets (currently mainly Europe), AMKR is forced to compete with manufacturers from countries with cheaper electricity.

In the first five months of this year, the company’s net loss amounted to UAH 3.8 billion. According to Mauro Longobardo, AMKR is now concerned not with development, but with basic survival.

“We have optimized everything we could. But without a systematic solution from the state, particularly regarding energy tariffs, we will not be able to continue our work,” he stressed.

Vasyl Honcharuk, director of Dniprostal-Energo LLC, an energy supplier within the Interpipe company structure, also calls affordable and competitive electricity a critical factor for cost and competitiveness in global markets.

In addition to directly affecting the cost of Ukrainian steelmakers’ products, expensive electricity has an impact on the value chain and reduces localization. According to Igor Kandaurov, head of procurement at Centravis, one of Europe’s largest suppliers of stainless steel pipes, its cost has affected the company’s purchases of stainless steel billets. Previously, most of them came from Ukrainian suppliers, but now they are also raising prices due to the rise in energy costs.

“In order to compete in the global market, since almost 100% of our products are exported, we are forced to buy blanks in India, and we are also considering China, for example,” Kandaurov noted.

He added that Ukrainian suppliers are more flexible, respond much faster to changes in demand, and have shorter order fulfillment times. However, Centravis is losing these advantages because domestic manufacturers cannot offer competitive prices.

Main problems

Industry representatives outlined a number of problems in the Ukrainian market that directly affect their production activities.

One of the most acute is the inability to predict prices and, consequently, the production process, as well as the lack of open information about the energy system balance, which, for example, is available to market participants in Europe (deficits, surpluses, generation forecasts), so suppliers and traders are forced to work virtually blind.

The roundtable participants point out the importance of predictable import conditions, in particular, the implementation of European instruments such as long-term auctions for access to inter-state crossings. Among other things, this will open up the possibility of concluding forward contracts with European suppliers and send the right signal to the domestic market. Currently, Ukrainian industrialists are forced to work on the basis of spot prices, on a day-to-day basis.

Another proposal is to sell electricity under special conditions. For example, Energoatom, which produces more than half of the country’s electricity, could be obliged to sell part of its volume at fixed prices to industry. As Olga Buslavets noted, Ukraine has already used this practice. In particular, in 2020, energy-intensive enterprises could purchase electricity from Energoatom for a long-term period at special auctions with a certain price corridor.

In search of a solution

Experts, representatives of the steel industry, and officials agree that a state policy is needed to bring the domestic electricity market as close as possible to a fair balance between the interests of energy companies and large consumers.

“This discussion should not be limited to the regulator, the NEURC, or even the Ministry of Energy. It is a broader issue,” notes Oleksandr Kalenkov, president of the Ukrmetprom public association.

In his opinion, the country’s European partners should also be involved in developing such a solution.

Oleksandr Kalenkov notes that, in addition to medium-term measures, immediate measures are also needed, with a horizon of months, since not only steelmakers but also ferroalloy producers, chemists, and other industrial sectors are in a difficult situation.

Deputy Minister of Economy, Environment, and Agriculture Andriy Telyupa says that the ministry understands the scale of the problem and is looking for ways to help businesses. However, the issue is complex. Increasing generation, and thus creating greater supply, which will eventually lead to lower prices, is a long process, so the ministry is ready to support the industry as much as possible.

He recalled that the Ministry of Economy is now fully responsible for industrial policy and is beginning to develop a new industrial strategy for Ukraine.

“The issue of the cost of electricity and energy resources in general is key in this process. According to our analysis, this accounts for almost half of the success of the country’s further industrial development,” he stressed.

The deputy minister believes that it is necessary to jointly seek a working solution—the most effective compensation programs, state support, or a special tariff that will meet the needs of the industry, be realistically implemented, and not cause a negative reaction from European partners within the framework of the European integration process. Forming a common vision and specific proposals, Andriy Telyupa noted, will allow this issue to be raised at the government level for political decision-making and preserving the competitiveness of Ukrainian industry.

After the destruction of energy facilities as a result of Russian attacks, blackouts, and significant restrictions, the cost of a kilowatt-hour has taken a back seat for politicians, as discussed at the round table. However, this situation cannot continue and requires an urgent solution.