Ukraine Gas and Power Market White Paper

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Ukraine gas and power market white paper

February 2018

GAS MARKET HEADLINES POWER MARKET HEADLINES

Naftogaz plans March restart to Russian imports Tight Hungary-Slovak spread pressures Ukrainian flows

Ukraine plans daily balancing for August Ukrainian power transit fee removal pushed back

Private firms expect to lose Ukraine market share Ukraine, Hungary to upgrade interconnector

European firms take Ukraine customs free storage Ukraine power production remained stable in 2017

Ukraine finalises system operator unbundling plan Ukraine outlines power export plans

Naftogaz plans March restart to Russian imports Europe this year, in addition to Russian imports. The firm Ukrainian state-owned Naftogaz plans to restart gas imports has not imported from Russia since late 2015, raising its from Russia in March, if an agreement between the firm European receipts instead. But a restart to Russian imports and Russia's Gazprom can be concluded, Naftogaz chief would significantly reduce Ukrainian import demand from executive Andriy Kobolev said. Europe. The two firms have held rounds of negotiations and Ukraine imported almost 14.1bn m³ last year, up from have prepared a draft document that is very close to what 11.1bn m³ a year earlier. will be signed, Kobolev said. Naftogaz hopes to implement But higher stocks at the start of January than in previous the arbitration decision regarding sale and purchase terms years and plans for higher domestic production from through the agreement. Naftogaz subsidiary Ukrgazvydobuvannya and the private Naftogaz and Gazprom largely agreed with a Stockholm sector could allow Ukraine to reduce its imports even arbitration court ruling reached in December on their 2009- further this year. 19 gas supply contract. The ruling reduced the contractual supply for 2018-19 to 5bn m³/yr, with a minimum take of 4bn Russian gas at German prices m³/yr and revised the pricing formula, both firms said. The revised price of Russian gas will be lower than the cost Naftogaz said that it will continue to buy gas from of European gas and “significantly lower” than Gazprom’s

Regional spot gas prices €/MWh Ukraine gas imports by route mn m³/d

21 Austria VTP Czech VTP Slovakia Hungary 80 Russia Slovakia Hungary Poland 20 70 60 19 50 40 18 30 17 20 10 16 15 Jan 24 Jan 2 Feb 11 Feb 20 Feb 0 Dec 14 Jul 16 Feb 18

NEWS AND ANALYSIS price under the old formula, Naftogaz chief commercial of gas to Ukraine in recent years and was the first western officer Yuriy Vitrenko said. European company to import supplies. The revised formula ties the price to a German hub and Modernisation is needed to drive the entry of European will be reviewed every quarter, he said. The cost of Russian firms to the Ukrainian market, including establishing the new gas will be lower than the cost of gas bought in Europe balancing system, Engie said. by the cost of transportation — equivalent to about $20- The Ukrainian market attracted stronger international 30/’000m³ (€1.54-2.31/MWh). participation in 2017. The number of firms importing gas The price under the supply contract’s old formula was in Ukraine almost doubled to 67 from 34 a year earlier, linked to crude prices and did not reflect European market state-owned Naftogaz said. A number of large international trends, he said. The revised price is about $20/’000m³ below trading firms — including AOT Energy, Trafigura, MET the old price now and will be about $50/’000m³ lower than Holding, Dufenergy, Socar and Trailstone Energy — and a the old price in the second quarter, when market prices fall. number of firms traditionally focused on different European NCG and Gaspool second-quarter 2018 prices have regions — such as Polish oil company PKN Orlen — have dropped in recent weeks. recently opened or are planning to open offices in Ukraine. Ukraine's natural gas imports rose to 14.1bn m³ from Ukraine import price vs NCG front-month €/MWh 11.1bn m³ a year earlier. Naftogaz’s share of the market fell as private-sector firms almost doubled their imports. Ukraine import price 25 But Ukraine’s imports from Europe are likely to drop this NCG front-month Oil-index front-month (10pc discount) year compared with 2017 and 2016. Higher stocks, stronger domestic output and a restart of Russian imports — planned for March — will limit import demand. This could leave 20 little room for private-sector traders and allow Naftogaz to reclaim some of its lost market share.

15 Private firms expect to lose market share Lower prices offered by state-controlled Naftogaz in March could drive private-sector importers out of the Ukrainian 10 market. Jan 16 Jun 16 Nov 16 Apr 17 Sep 17 Feb 18 Naftogaz is offering prices below the cost of buying gas at the Dutch TTF hub, a market participant said. Only domestic producers will be able to compete with these Ukraine plans daily balancing for August prices next month, as importers will not be able to offer Ukraine will move to daily balancing for its gas market industrial consumers a competitive price, he said. from a monthly system in August, state-owned transmission Naftogaz will cut prices for industrial consumers by 10.6- system operator Ukrtransgaz said. 10.8pc in March compared with this month, having already Energy regulator NCRE approved the daily balancing rules lowered prices for February. in December last year, but the balancing system will only Other firms had toreduce their prices to compete, come into effect once Ukrtransgaz finishes preparing its IT cutting into their profit margin. system, the operator said. The move to daily balancing was Ukraine's aggregate imports fell to 12.1mn m³/d on 1-17 previously planned for November 2017, but the operator February from 26mn m³/d in January, but the drop was and NCRE had different views of how to regulate the driven by Naftogaz halting imports at Budince. daily balancing market. NCRE wrote its own rules, while Naftogaz will be able to gain market share by offering Ukrtransgaz planned to transpose EU regulations into the lower prices, driving some firms out of the market, market Ukrainian market. participants said. The operator has been testing a daily balancing system, Private-sector firms haveincreased their share of imports but the transition has been difficult, because rules remain in recent years. They accounted for 38.3pc of imports in unclear and IT systems are outdated, French energy firm 2017, up from 26.1pc a year earlier. Engie has said. Engie has been one of the largest sellers The lower prices were justified by mild weather, high

Sales to Ukraine by firm mn m³ Company 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Jas 61.39 Alstkonix 26.96 5.24 19.89 55.93 18.36 32.69 ANTRA 184.52 25.27 AOT Energy Poland 0.31 6.00 25.70 93.67 114.18 56.21 ArcelorMittal Energy 68.47 51.96 44.74 44.68 44.36 44.75 45.56 Axpo Trading 380.81 128.45 240.20 823.54 485.09 453.25 494.68 Bendigo Investments 3.07 1.77 Cez 94.30 57.47 6.38 97.43 CFP Trading 3.52 CFP Trading Limited Vision Exchange Building 1.09 CYEB 6.71 1.79 CYEB Austria 0.00 Danske Commodities 0.02 Dourado Invest 2.99 DTEK Hungary Power Trade 0.07 15.20 16.75 DTEK Trading 0.09 2.98 DufEnergy Trading 18.15 29.10 28.77 260.20 380.25 702.93 124.12 Elektrix 0.35 Engie 322.31 156.21 396.74 849.47 626.84 276.68 124.95 Engie Energy Management 21.69 107.67 20.46 42.73 23.49 22.59 63.74 Eni Trading & Shipping 290.72 412.80 9.16 10.59 10.32 Enteneo Energy Trading 0.93 Eru Management Services 34.57 47.37 GDF Suez Energy Management Trading 32.87 GDF Suez Foldgazkereskedelmi Hungaria 208.08 Gunvor International 2.92 15.32 25.82 13.33 9.63 4.81 Handen 0.01 0.00 Hycori 0.00 Listrade 11.10 0.18 4.28 3.87 MET Gas and Energy Marketing 3.99 3.50 18.54 192.78 308.36 149.80 119.27 MET Hungary 1.01 2.01 2.96 0.10 MND 1.37 MOL Group 0.00 Nafta-Gaz Trading 29.30 156.51 560.35 430.03 187.67 163.16 Naftogaz Trading Europe 56.30 Nitrofer 15.53 22.32 0.75 4.15 7.35 9.35 9.44 Noble Clean Fuels 385.25 4.98 Nordwind Trade 10.11 1.06 NRG 0.10 ONICO Energia Spolka 44.30 7.83 1.52 4.01 10.72 7.35 0.25 PGNiG 156.97 186.43 175.61 99.42 115.70 PGNiG Supply & Trading 0.00 PKN Orlen 5.68 RWE Supply & Trading 38.60 276.04 461.27 294.72 952.37 Shell Energy Europe 171.54 312.31 20.64 Statoil 7.41 Total 2570.74 718.54 1906.55 4590.17 4381.66 3180.79 3104.57 Trafigura 11.50 81.92 167.28 Trailstone 167.4 0 4.53 162.52 585.67 291.39 303.34 11.00 Uniper Energy Sales 9.18 6.70 5.55 2.12 4.16 Uniper Global Commodities 372.44 78.11 95.06 293.02 502.35 165.09 235.84 Vertex Capital 0.10 West Oil Group 10.25 World Petroleum Group Polska 5.83 36.12 177.25 40.00 World Petroleum Group Trading 11.97 Worldenergy 36.19 16.41 12.53 127.37 69.65 6.00 2.44

NEWS AND ANALYSIS stocks and a weaker hryvnia compared with the US dollar, a this summer as high stocks, increasing production and a Naftogaz source said. planned restart to Russian deliveries leave little room for But a larger market share will also provide Naftogaz with European gas. the funding needed to buy gas from Gazprom, a market Stocks were just above 10.8bn m³ on 20 February participant said. compared with 8.52bn m³ a year earlier. Inventories were The firm plans torestart Russian imports in March the highest for the date since at least 2014. following negotiations with Gazprom. Withdrawals in line with the three-year average for 21 Gazprom's revised price for sales to Ukraine under February-31 March of 21.4mn m³/d would leave stocks at the terms of a ruling by the Stockholm arbitration court 9.95bn m³ on 1 April, well above the three-year average of in December will be tied to a German hub and is cheaper 8.15bn m³. than the cost of importing from Europe by the cost of But withdrawals have quickened in February, as Naftogaz transportation to the border, Naftogaz has said. choose to deplete storage in favour of continuing imports Naftogaz has been able to partly finance its European from Europe. The stockdraw could accelerate over the imports through international funding from the World Bank remainder of the month and into March, as overnight and European reconstruction and development bank EBRD. temperatures in Kiev were expected to drop well below But these funds will not be available to buy Russian gas. The seasonal norms. firm will have to pay for gas upfront using its own funds. Cold weather was forecast to continue into late March, which could leave stocks closer to average at the end of the European firms take up customs free storage winter if imports do not rise. Seven European firms have taken up Ukrainian storage Withdrawals in line with the 21 February-31 March 2016 capacity under a deal that waives taxes and customs duties. stockdraw of 43.7mn m³/d — the quickest in recent years — About 50mn m³ were stored in UTG's facilities under the would leave 9.06bn m³ on 1 April. scheme as of December, system operator Ukrtransgaz said. The stockdraw would have to average 66.5mn m³/d over The firms are planning to “significantly” increase usage the rest of the winter for stocks to reach 8.15bn m³. of the service in 2018, the operator said. But Naftogaz has said that it plans to restart Russian Under the scheme, firms reserving storage for up to imports at the start of March, which could curb withdrawals. three years do not need to pay taxes or customs duties on gas subsequently re-exported to neighbouring countries. Production gains Companies still need to pay system entry and exit tariffs and Higher expected domestic production could limit import will have to pay duties on any local sales. Firms do not have demand further this summer. to pay any taxes, including value-added tax (VAT), on gas Ukrgazvydobuvannya (UGV) plans to raise output to exchanged within storage facilities. 15.9bn m³ this year from 15.2bn m³ in 2017. The operator has signed contracts with eight firms But Ukrainian gas producers association AGPU expects from the Czech Republic, Switzerland and Malta — and Ukraine gas production mn m³ their Ukrainian subsidiaries — to store gas under the offer, Ukrtransgaz previously said. 60 Trafigura and private-sector Czech energy firm MND UGV Ukrnafta Others delivered at least 3mn m³ to Ukraine’s storage facilities under the scheme in September. 55 Ukraine has around 31bn m³ of gas storage space, but 50 facilities have operated well below capacity in recent years, with stocks no higher than 17.1bn m³ since 2014. The 45 introduction of the tax-free storage service is part of state- controlled Naftogaz's long-term strategy to integrate the 40 Ukrainian gas system with European markets.

35 Ukraine summer outlook: European imports to slow May 16 Dec 16 Jul 17 Feb 18 Ukrainian demand for European imports could slow further

NEWS AND ANALYSIS aggregate Ukrainian output to rise even further, with growth delivery capacity, making it easier to respond to a cold snap from the private sector. The group expects output to rise boosting demand. by 5-7pc this year from 2017, boosted by lower subsoil taxes Aggregate imports could be little over 20mn m³/d, down for new wells and regulations simplifying administrative from 35.4mn m³/d in April-September 2017, even in the procedures and ending mandatory stock evaluations. event of strong demand over the rest of the winter. A 5-7pc rise would lift output to 21.9bn-22.3bn m³ from Stocks of 9.95bn m³ on 1 April would require imports of 20.8bn m³ last year, which would equate to summer output 19.5mn m³/d to lift inventories to 16.4bn m³ by 1 October. increasing to just over 51mn m³/d from 48.4mn m³/d. This assumes production rises 6pc and consumption is unchanged. Receipts would rise to 23.7mn m³/d in the same Demand decline slows scenario but with inventories of only 9.06bn m³ on 1 April. Demand has decreased in recent years, but the decline has If Ukraine targets stocks in line with the three-year slowed this year even when adjusting for weather. Aggregate 1 October average of 15.5bn m³ it would take imports of consumption fell to 31.9bn m³ in 2017 from 33.2bn m³ a year 15.3mn m³/d from start-of-summer inventories of 9.95bn m³ earlier. and receipts of 19.4mn m³/d from 9.06bn m³. But most of the decline was driven by milder weather. Demand dropped furthest for households, religious Russian gas undercuts European flows organisations and district heating companies — the Ukraine’s demand for gas from Europe could fall much consumers most sensitive to changes in heating demand. further over the summer, following the planned restart of Industrial demand also fell by about 600mn m³ and could Russian deliveries. continue to edge lower this year. Naftogaz plans to restart Russian imports in March Consumption will be 40.7mn m³/d over the summer, following negotiations with Gazprom. A Stockholm assuming temperatures in line with the seasonal norm and arbitration court ruling reduced the contractual supply for the same correlation with weather as a year earlier. 2018-19 to 5bn m³/yr, with a minimum take of 4bn m³/yr and revised the pricing formula. Cumulative consumption bn m³ While Naftogaz is only required to take 4bn m³ this year, the firm has said that the revised price of Russian gas will be lower than the cost of European gas, which could encourage 45 2017 2016 2015 2014 imports closer to 5bn m³. 40 The import price will be tied to a German hub, the firm 35 has said. With NCG and Gaspool front-summer contracts at a wide discount to the winter 2018-19 markets, Naftogaz may 30 seek to maximise Russian imports over the summer. Imports 25 of 4bn-5bn m³ over the summer would leave almost no 20 demand for European imports. 15 Imports of 4bn m³ would equal 18.7mn m³/d over the 10 summer, and imports of 5bn m³ would equal 23.4mn m³/d. 5 Even if aggregate Ukrainian import demand reaches 23.7mn m³/d over the summer, this would leave only a maximum 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec demand of 5mn m³/d from Europe. And Russian receipts would still be 13.1mn-16.3mn m³/d Import demand in the event that deliveries are spread out evenly over Summer import demand could hinge on how much Naftogaz March-December, which would leave a maximum of 10.6mn plans to have in storage by the start of the winter. Stocks m³/d required from Europe. of 16.4bn m³ on 1 October 2017 were up from 14.3bn m³ a Naftogaz has said that it will continue to import gas from year earlier, giving more flexibility to turn down imports this Europe, but this could leave little demand for imports from winter. private-sector firms, driving some out of the market. A restart to Russian flows may further reduce the need for high stocks as it would raise imports and available

NEWS AND ANALYSIS

Ukraine finalises system operator unbundling plan Romania sees higher output by 2025 The Ukrainian government approved a resolution finalising Romania could almost double its gas output by 2025 with the timeline for unbundling the country's gas transmission existing discoveries, mineral resources agency ANRM's operations from state-controlled Naftogaz. managing director, Sorin Gal, said. All of current operator Ukrtransgaz’s assets must be Production will rise to 18bn-20bn m³/yr by 2025 from registered as the property of the new operator — Main 10bn-11bn m³/yr, Gal said, driven by new Black Sea offshore Gas Pipelines of Ukraine (MGU) — within 10 days of the production. Stockholm arbitration court's final ruling on Naftogaz's Output at new gas fields operated by Carlyle-subsidiary transit contract with Gazprom. A decision is expected by the Black Sea Oil and Gas is expected to reach 1bn m³/yr by firms at the end of February. the start of 2020, Gal said. Output would rise to 4bn m³/ MGU will be managed through the energy ministry. The yr once the fields are fully developed. And production from government had launched a tender to select independent Romania's Black Sea Neptun block — operated by OMV's members for MGU's supervisory board in August with Romanian subsidiary OMV Petrom and ExxonMobil — could applications accepted until 30 November but results have reach 6bn m³/yr by 2020-21, if an investment decision is not yet been announced. reached later this year, Gal said. A decision is expected by The new operator will gain control of Ukraine’s the end of November, he added. transportation system, underground storage facilities and And production could rise further if Lukoil and Romgaz service departments. decide to proceed with the Ex-30 Trident block, with Ukrtransgaz has already separated its operator functions estimated reserves of 32bn m³. Output could start by 2022- into an independent branch of the company responsible for 23, providing the firms decide to invest, Gal said. all gas transmission assets in preparation for its unbundling. Additional output is also expected from Romgaz’s 25bn- But the inclusion of Ukraine’s storage facilities could 27.2bn m³ Caragele gas field — Romania's largest onshore hinder efforts to secure international investors because gas discovery in the past 30 years. Expected output would of conflicting ownership claims on the gas in the system. be enough to make Romania a net exporter, according to This makes the storage assets "toxic" for any potential Romgaz. investor, Naftogaz chief executive Andriy Kobolev said. The Romania imported about 1.2bn m³ of gas in 2017, transportation and storage assets should be separated, with down from 1.5bn m³ in 2016, almost entirely from Russia's storage facilities remaining under Ukrtransgaz’s management Gazprom. and ownership under any unbundling plan, he said. Ukraine is seeking international partners to help Export possibilities manage and modernise the country's gas transportation Romania consumed 12.3bn m³ of gas last year, data from system. Co-operation with western firms is a prerequisite European system operators association Entso-G show. The for maintaining the transit of Russian gas through Ukraine, group expects annual gas demand in south and southeast Naftogaz said. Gazprom plans to reduce Ukrainian transit Europe to rise by 18.1bn m³ by 2026, although with Romania once its contract expires at the end of 2019, after the only accounting for 633mn m³. planned completion of the Nord Stream 2 and Turkish Stream Production rising to 18bn-20bn m³/yr and consumption pipelines. increasing by 633mn m³ would leave Romania with 5.09bn- Naftogaz has also proposed privatising the network. 7.09bn m³/yr available for export by 2025. Ukraine's government must retain majority ownership The planned Brua pipeline could deliver excess of transmission assets under Ukrainian law, but minority production to Bulgaria, Hungary and Austria. An open ownership is possible. season for transport capacity to Hungary late last year was The form of planned co-operation has not yet been oversubscribed. And system operators Hungary's FGSZ and decided, but the government is organising a competitive Gas Connect Austria are planning to auction annual capacity process to attract one or more partners for MGU and is to Austria from Hungary in July. consulting with foreign operators to determine possible The Romania-Bulgaria connection is already on models. stream Ukraine could be a new market for export, Gal The process has attracted proposals from seven parties said. Ukrtransgaz and Transgaz had planned to sign an so far with the search scheduled to end on 1 March. interconnection agreement that would allow Romanian

backhaul to Ukraine. The operators received interest from Ukrainian power transit fee removal pushed back five companies operating or planning to operate in Ukraine Fees for transmitting power between Ukraine and the EU and Romania. But backhaul to Ukraine cannot start under are now more likely to be scrapped at the beginning of next Naftogaz’s transit contract with Gazprom — due to expire in year, rather than this year, as previously planned. 2019 — Ukrtransgaz has said, although continuing arbitration Ukraine's Burshtyn Island power complex, connected to could lead to revisions to the terms of this contract. A court European transmission system operators (TSOs) association ruling is expected this month. Entso-E's network at the borders with Slovakia, Hungary and Backhaul is contractually possible at the Mediesu Aurit- Romania, could now join the inter-TSO (ITC) compensation Tekovo border point, which has a nameplate capacity of 145 mechanism at the start of 2019. There were moves at the GWh/d towards Romania, but the physical delivery of gas to end of 2017 to implement the change in the second half Ukraine is not technically possible because of low pressure. of this year, according to the EU-led Energy Community. The operators have said they are considering expanding The mechanism, administered by Entso-E, is designed to infrastructure to make physical flows to Ukraine possible, compensate parties for losses that result from handling but that implementation depends on demand. transit flows on their networks. Ukraine could have little demand for gas from Romania Entso-E and Ukrainian grid operator Ukrenergo have — or elsewhere in Europe — in the coming years. It aims agreed in principle on a roadmap developed with the Energy to raise output and curb consumption to become a net Community to initiate removal of the fees. Once effective, exporter by the start of the 2020s. any cross-border commercial flow between Ukraine and EU member states will only be subject to potential congestion Ukraine’s search for gas network partners advances fees charged through the cross-border capacity allocation Ukraine’s search for international partners to help manage process, according to the Energy Community. the country's gas transportation system has attracted Ukraine usually exports through its borders with Hungary proposals from seven parties, deputy prime minister and Romania, and facilitates transit flows from Slovakia to Volodymyr Kistion said. The working group assigned to determine the form of Power transit routes planned co-operation and select partners will conduct their first interviews with potential partners on 21-22 February, Kistion said. Two of the partners are European gas consortia. The government is organising a competitive process to attract one or more partners for its planned operator — Main Gas Pipelines of Ukraine — and is consulting with foreign operators to determine possible models. UKRAINE The energy ministry expects to receive more proposals from other firms over the rest of the month, Kistion said. Burshtyn Ukraine's energy ministry has extended the search to 1 Kapusany March from its original end date of 1 February.

Interest was received from Belgium, France, the SLOVAKIA Netherlands, Poland, Slovakia, Spain, Italy, Romania, Greece and Germany, Kistion said. The ministry invited EU and Mukachevo US system operators to participate in the consultations as Kisvada potential partners in December. Co-operation with western firms is a prerequisite for maintaining the transit of Russian gas through Ukraine, state-owned gas supplier Naftogaz said. The firm has already held negotiations with four European operators over the HUNGARY Rosiori modernisation and management of the country's network. Gazprom plans to reduce Ukrainian transit once its ROMANIA contract expires at the end of 2019, after the planned completion of the Nord Stream 2 and Turkish Stream pipelines.

Hungary and Romania. Fees for power transit along this €2.92/MWh premium to the Slovak Okte in January, as the route — comprising the Entso-E perimeter and grid access Hupx turned out at its lowest January level since the Hupx fees — are not fixed, but tend to total around €7/MWh. The day-ahead market formed in 2010, at €33.47/MWh. And the removal of these fees could boost the profitability of transit Hupx delivered at a wide discount to January's expiry as the along these routes, although some of these savings could front month — January 2018 was last assessed at €50/MWh, be eroded through higher costs in cross-border capacity down from a peak of €67.70/MWh on 10 November. Fees to auctions. transmit power from Slovakia through Ukraine to Hungary Slovak power flows to Ukraine fell to a 15-month low in are calculated ex-post and are around €7/MWh. January, as spot Hungarian power's premium to the Slovak The Hupx delivered at a €23.13/MWh premium to the market tightened. Slovak Okte in January last year as cold weather, lower Slovakia-Ukraine flows have been negligible this month, regional hydropower output, plant shutdowns and export as the Hungarian spot price has switched to an unusual bans in Bulgaria and Greece all combined to push spot prices discount to Slovakia. But Hungary-Slovakia front-quarter and in Hungary and Romania to record highs. front-month spreads are little changed on the year. Stronger supply in southeast Europe, driven by rising hydropower generation throughout the region, has coupled Tight Hungary-Slovakia spread pressures flows with milder weather at the beginning of this year to switch to Ukraine flow directions on some borders and allow Hungary to Slovak power flows to Ukraine fell to a 15-month low in become a bigger net importer compared with January January, as the premium for spot Hungarian power to the last year (see chart). The stronger supply to Hungary Slovak market tightened. has reduced the requirement for the country to run its Slovakia-Ukraine flows have been negligible so far this more expensive domestic generation this year. Gas-fired month, as the Hungarian spot price has switched to an generation in Hungary averaged just over 950MW in January unusual discount to Slovakia, although Hungary-Slovakia compared with more than 1.2GW in January last year, and front-quarter and front-month spreads are little changed after drought conditions in the fourth quarter helped gas- compared the same time last year. fired generation rise to nearly 1.3GW in November. Slovak flows transiting Ukraine to Hungary and Romania averaged just 35MW in January, the lowest since October Short-term outlook 2016, when they averaged less than 6MW. Ukrainian exports Hungary’s €3/MWh front-quarter premium to Slovakia to Hungary declined by around 300MW year on year to suggests transit flows through Ukraine would not be 475MW in January. Ukraine-Romania flows remained muted profitable at current prices. But the Hungarian second- at just 2.5MW last month, down from less than 30MW a quarter 2017 contract held a similar premium to Slovakia year earlier, as Romania traditionally has a lower import at the same point last year, and the Hupx turned out at a requirement than Hungary because of its more diverse sufficient premium to Slovakia at the time of delivery to power generation fleet. make transit flows profitable at times during that period. The Hungarian Hupx spot price delivered at just a Slovakia-Ukraine flows averaged just over 150MW in

HUPX-OKTE spot premium, Slovakia-Ukraine flows Hungary January border flows MW

25 Slovakia-Ukraine flows (MW, RH) 250 3,000 Austria Croatia Romania HUPX vs OKTE spot base load (LH, €/MWh) 2,500 Serbia Slovakia Ukraine 20 200 2,000 1,500 15 150 1,000 500 10 100 0

5 50 -500 -1,000 0 0 -1,500 Jan 17 May 17 Sep 17 Jan 18 Jan 18 Jan 17

April-June last year — the second highest quarterly level of CEE prices could see spikes in second quarter 2017, as the Hupx base-load spot delivered at a €7.45/MWh Spot prices in central eastern Europe (CEE) could be premium to the Slovak Okte. The spot premium on peak subject to spikes in the second quarter of next year, amid load was more pronounced, with the Hupx delivering at an widespread planned maintenance at nuclear and other average €46.89/MWh during the second quarter, at an €8.46/ thermal units and if hydropower levels remain weak. MWh premium to Slovakia. The Hungarian second-quarter In Romania, the 700MW unit 1 at the Cernavoda nuclear 2017 contract expired at a €4.50/MWh premium to Slovakia, power plant is scheduled to go off line between 4 May and 5 but had reached close to €5.50/MWh in late March 2016. June. And 420MW of capacity at the 860MW Brazi gas-fired The profitability of transiting Slovak power through plant is due to go off line over 15 April-27 May. Ukraine and exporting it direct to Hungary could gain In Hungary, one 500MW unit at the Paks nuclear power a boost in some periods during the second quarter, as plant will go off line on 30 April for maintenance until 30 maintenance at base-load units throughout the region June. The 428MW Gonyu gas-fired plant is due to go off line could leave the Hupx open to price spikes, although the over 7-15 April. The 224MW unit 5 at the Matrai lignite-fired spread could remain tight between the two markets during plant is due to go off line over 6 April-6 May. The 220MW maintenance at Slovak nuclear units. unit 3 is due to go off line over 16 May-1 June, while the And an initiative is under way to scrap fees on Ukraine’s 224MW unit 4 is due to be off line over 17 March-16 April. borders with the EU, potentially from the start of next year, In Bulgaria, the 1GW unit 5 at the Kozloduy nuclear plant potentially boosting the profitability of transit power flows is due to go off line over 24 April-31 May. Unit 6, with the from Slovakia, although some of the price spread could same capacity, is due to go off line over 15 September-25 be absorbed through higher costs in cross-border capacity October. auctions. In Slovenia, the 696MW Krsko nuclear plant is due to go The Energy Community has been developing a roadmap off line on 1-28 April. Krsko runs on an 18-month fuel cycle, with system operators group Entso-E and Ukrainian grid and previously went off line in October 2016. operator Ukrenergo to include Bursthyn Island in the inter- In the Czech Republic, the 500MW unit one at the TSO compensation mechanism from the second half of Dukovany nuclear plant will go off line on 11 May while the 2018, although this is now more likely to become effective 500MW unit two will be off line from 9 March to 7 May. The from the start of next year, the Energy Community said. 1GW unit two at Temelin will start maintenance on 29 June. Once effective, any cross-border commercial flow between The second quarter of 2017 delivered above expectations Ukraine and EU member states would only be subject to as hydro levels in the region fell below normal levels. The potential congestion fees charged through the cross-border Hungarian Hupx spot delivered at €42.11/MWh in the second capacity allocation process. quarter after the second-quarter base-load contract expired as the front quarter at €36.85/MWh. The second quarter of Ukraine and Hungary to upgrade interconnector 2018 was most recently assessed at €41.85/MWh, which is Ukrainian transmission system operator (TSO) Ukrenergo and Hungary’s Mavir plan to rehabilitate the power Serbian run of river generation MW interconnector between the two countries this year ahead of the Ukrainian grid potentially synchronising with the 2,000 European grid. 1,800 Mavir will build a new substation on the Hungarian 1,600 side of the border while Ukrenergo will upgrade the cable 1,400 equipment on its side of the border, with work planned for 1,200 completion by the end of this year. Cross-border flows on 1,000 the line are currently limited by the generation capacity at 800 Ukraine’s Burshtyn Island, but flows could increase if Ukraine 600 synchronises with the European grid. The Energy Community 400 is developing a roadmap with system operators group 200 0 Entso-E and Ukrenergo to include Bursthyn Island in its inter- Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 TSO mechanism in the second half of 2018. Hungary imports around 3 TWh/yr from Ukraine.

still below delivery levels last year. and they would cost a 72.4bn hryvnia (€2.3bn) to build. Hydro levels in southeastern Europe have been below the Construction of the units started in 1986 but was long-term average since April this year. River levels remain suspended in 1990. One unit is about three-quarters below seasonal norms but have narrowed the deficit to the complete, while 28pc of the work has been finished for long-term average. In Romania, water flows on the Danube the other unit, Energoatom said. The two units would lift at Bazias were 3,386m³/s below seasonal norms in April but Ukraine’s power export capacity to 2.6GW, the company the deficit has averaged just 363m³/s this month. said. Long-term hydrological outlooks provide little guidance. Last year, rainfall in the region was below seasonal norms Ukraine’s power production stable in 2017 and snowfall was low, particularly from February, reducing Ukraine’s power production in 2017 reached 100TWh, just the spring melt impact. 0.4pc lower than the previous year, energy ministry data show. Ukraine details export plans The largest decline was at thermal power plants, Ukrainian state-owned nuclear generator Energoatom has which produced 9.2pc less than 2016 output and 11pc detailed plans to export electricity from its nuclear plants to lower than planned. Most thermal plants use anthracite Europe. coal. This was supplied mostly from mines in the now- The company said the project — called Energy occupied territories in eastern Ukraine before 2017. But in Bridge Ukraine-EU — would lead to the reconstruction January 2017 volunteers and veterans from the Ukrainian of interconnectors to Poland and Romania, Slovakia and army started a blockade of rail traffic from the occupied Hungary. territories. Ukraine's security and defence council in March The project has several steps, Energoatom vice-president 2017 approved the suspension of all cargo traffic from the Oleksandr Savlakov said. First would be the renewal of a occupied Donetsk and Luhansk regions. At the same time, 750MW interconnector between the Khmelnytsky nuclear private-sector energy group DTEK lost control of some of power plant and Zheshuv in Poland and the connection its mining assets in the Donetsk and Luhansk regions, after of Khmelnytsky to the Burshtyn power island. The receiving a notice to register the mines with the separatist interconnector from Burshtyn to Albertirsa in Hungary would authorities, which it said was unacceptable. increase to 1.6GW from 650MW now, which would allow the The problems with the supply of anthracite led to a nuclear plant to export around 1GW. decline in power output at plants. Plant operators have The new lines would also allow for up to 1.3GW of power begun to import anthracite, from sources including South to be transited from Germany and Poland through Ukraine to Africa and the US. Hungary and Romania. Other power plants were re-equipped to burn Power exports from Khmelnytsky's 1GW unit to Hungary alternative types of coal instead of anthracite. State- could start from 2020 or 2021 if Energoatom and state- owned Centerenergo re-equipped two power units to other owned grid operator Ukrenergo are able to make quick types of coal and DTEK re-equipped two power units at its progress, Savlakov said. Pridneprovskaya thermal power plant last year. Total investment for renewing the Khmelnytsky- Ukraine’s power plants plan to decrease use of Zheshuv line is projected at €55mn, which includes repairs anthracite coal to 3mn t this year from 5mn in 2017, energy to infrastructure and new equipment purchases for minister Ihor Nasalyk said in December last year. Under Khmelnytsky. the ministry’s plans all power units using anthracite will be Energoatom has started negotiations with UK-based bank re-equipped this year, which will allow Ukraine to cancel Barclays about financing for the building two new units at anthracite coal imports from 2019. Khemlnytsky, Savlakov said. The profit Nuclear power plants increased power output by 5.7pc from power exports would be invested in building the to 85.6TWh in 2017 and increased their share in total new units. electricity output to 55.1pc from 52.3pc in 2016. The first unit could be launched as soon as 2024 and the Power exports to eastern Europe were nearly the same second one in 2026, Energoatom said. But this target seems as in 2016, slightly increasing by 0.5pc to 4TWh. Ukraine ambitious because all nuclear projects in Europe are well plans to increase power exports significantly starting from behind schedule. The two units would produce 15 TWh/yr 2020 or 2021, using Khmelnytsky's NPP 1GW unit.

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