Leaked document: Doubling of electricity tariffs in Ukraine, condition for EBRD nuclear safety loan

January 27, 2014

The project through which the life time of old Ukrainian nuclear reactors is being prolonged with EBRD financing would not be economically feasible without a doubling of electricity tariffs, shows a document leaked to EurActiv last week.

The document disclosed by EurActiv has been prepared for the Board of Directors of the EBRD and outlines the conditions under which a 300 million euros loan to be provided by the EBRD to Ukrainian company Energatom would be viable. Among the conditions is a state guarantee that Energoatom’s tariff would be sufficient to repay the loan. Financial assumptions in the EBRD document show that a doubling of Energoatom electricity tariffs would be needed for that.

“That the EBRD would consider it justifiable to ask Ukraine to practically double electricity tariffs without any elaboration of impacts of such a sharp increase is a shocking finding,” comments Bankwatch’s coordinator for Ukraine Iryna Holovko. “Environmental groups consider this EBRD loan to be an inappropriate investment as it is a direct support for the nuclear energy sector. But now we see that even the economic viability of the project is dubious as some key financial assumptions appear to be far from reality – it is hard to imagine this doubling of tariffs would be as smooth as assumed in this document.”

The financial analysis that the EBRD relied upon to decide in favor of this loan is based on some shaky assumptions: 1) a sharp and significant tariff increase for Energoatom's electricity (to 27,1 kopeks/kWh in 2012 and 42,6 kopeks/kWh in 2013), 2) maintaining the current level of electricity generation and 3) whooping revenues of Energoatom. By the time this document was completed (March 2013), it was already clear that the nuclear electricity tariff in Ukraine was not increasing according to the projections made by the EBRD (it was 22,8 kopeks/kWh) and that Energoatom was not as profitable as the EBRD thinks (Energoatom closed the year 2012 with 2,73 billion UAH loses instead of profits). The assumptions on the basis of which the EBRD relied to make the decision about this loan are simply flawed.

„It is highly unikely that the Ukrainian government would go ahead with such a tariff increase as assumed by the bank – the raising of electricity tariff is historicaly a very sensitive issue in Ukraine,” says Holovko. „Demand for nuclear electricity in the contry is decreasing lately and a number of nuclear units are now facing the end of their technical lifetime. Instead of investing millions of euro in upgrades to all units, it would make more sense to close down expired units and utilize the remaining ones with higher load factor allowing for decreased nuclear risks and less financial burden.”

„The EBRD should have done a much more thorough analysis of the project’s economics and the issue of electricity affordability and of how the tariff increase would be implemented in practice should have been discussed publicly in Ukraine before the EBRD made any decision,” says Fidanka Bacheva-McGrath, Bankwatch EBRD coordinator. „Instead, the EBRD chose to keep the documents secret.”

Ukrainian NGO NECU, which has recently published an analysis of EBRD investments in the Ukrainian energy sector, argues that it is a feature of this bank’s activity in the energy sector of Ukraine that it does not manage to ensure either economic or environmental sustainability of projects.

According to a NECU analysis, of the 1.2 billion euros invested by the EBRD in Ukraine between 2006 and 2013, over 60 percent were invested in unsustainable energy sources, such as nuclear, oil and gas. Even more, the biggest chunk of the EBRD’s financial support to the Ukrainian energy sector was allocated to nuclear energy and supporting infrastructure (such as transmission lines) that would ensure electricity exports to the European Union, in line with both the EU’s and Ukraine’s long-term plans of making Ukraine a provider for Europe.

“Ukraine’s problem with energy is not a lack of resources – the real problem is the shameless wasting of these resources,” comments Fidanka Bacheva-McGrath. “Six to seven times more energy is consumed per square meter of residential and office areas in Ukraine than in EU. Why doesn’t the EBRD focus its efforts in Ukraine on the development and effective implementation of state or regional energy efficiency programs?”