Archive 2009

  • 10.12.2009

    Prospects for Ukraines steam coal industry - high time for reform


    Steam coal has always been a central pillar of Ukraine’s energy mix. In the light of the recent gas crises, the importance of steam coal for national energy security has increased even further. However, the steam coal sector so far operates predominantly under direct state control in a planned economy environment. In particular, output volumes and prices are determined administratively. As a consequence, permanent state interventions and strict administrative management created an ailing steam coal sector. Ukrainian coal mines are loss making, despite huge annual transfers and subsidies from the central budget. At the same time they suffer from very low productivity levels and belongs to the world’s most dangerous mines. Nevertheless, prices at which Coal of Ukraine sells steam coal to state-owned power generating companies - the almost exclusive usage of steam coal in Ukraine – are more than 60% higher than those of private mines. In turn, this pricing scheme reduces margins in power generation and undermines the investment capacity of power generators.

    The current sorry state of the Ukrainian steam coal sector contrasts sharply with the solid global prospects of steam coal. However, the future use of steam coal requires huge investments in more efficient thermal power generation technologies to address the increasing environmental concerns. In Ukraine, this need for investment is even greater because of the depleted capital stock of its thermal power generating companies.

    Obviously, price levels for steam coal determine overall economic viability of the coalelectricity value chain. Pricing a crucial input such as steam coal within its value chain is not a trivial task. Since too high or too low prices benefit different players at the expense of others, it is unlikely that an administrative solution can fully balance all economic potentials and shortcomings. Competitive market forces are much better suited to balance supply and demand of steam coal while considering the need for electricity generators to invest in new capacities as well as the potentials of the mining industry to increase efficiency.

    Hence, we conclude that the sustainable development of Ukraine’s steam coal sector demands the liberalisation of the wholesale electricity as well as of the steam coal market. Generally, this requires the abolition of all price interventions as well as the privatisation of electricity generating and coal mining companies. However, to ensure proper success of this reform and to avoid negative consequences, the sequence of reforms should be such that first, market liberalisation creates business opportunities. Only afterwards, property rights should be sold to private operators while the concrete design of privatisation laws needs to ensure that too high levels of ownership concentration are not possible.

    Attached file  (131.5 kb)
    Research spheres:  Infrastructure, Real sector
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