EHEPFETHKH TA
HCIIOBUCTI 

Ill'lH F'Kpn'l'tml
tllotll. ill 
E-mailz Kim E?jll?! it 3747hell?rjiif "jtn? [in N2 nut

August2015
Kyiv

To: Ernest Moniz, United States Secretary of
Energy

CC: Amos Hochstein, the Special Envoy and
Coordinator for International Energy Affairs

Herewith 1 would like to express my highly appreciation of your support of
reforms in energy sector of Ukraine, at the same time I still would need to share some

of my concerns on our recent cooperation on development of the anti-crisis and
resilience plans.

As you should be aware since early uly there was the Joint Ukraine-USA-
Canada?EU Working Group led by LLS. Deputy Assistant Secretary of Energy for
Infrastructure Security and Energy RestorationlNilliam Bryan working in Ukraine.

Last week. the Working Group presented an evaluation of. and plan for,
Ukraine's preparations for the 2015/2016 heating season to the Prime Minister of
Ukraine.

There are aspects of this report that, in my opinion, must be clari?ed to avoid
misperception of the actual state ot? preparations and the likely scenario For the
upcoming heating season.

Temperature assumptions

The report covers two possible temperature scenarios for the ?winter period"
(mild. with temperatures averaging and severe. with temperatures averaging -
We struggle to understand the justi?cation for the severityr the scenarios
outlined in the plan. As the severity of the temperature and the duration of the
winter period have a direct correlation to increased needs in energy resources. this
obviously has signi?cant bearing on the report itself.

Justi?cation:

(1) The report lacks a clear definition of the ?winter period" itself and. accordingly,
duration of temperature spells indicated above. Moreover, the report comprises a
table reflecting historical temperatures in Ukraine presented during the last
few years, which averaged at the Si gni?cantly milder levels.

(2) According to the long-term weather forecasts prepared by the Ukrainian
Hydrometeorologieal Center tliHC), temperatures in the 2015:9016 winter season are
expected to be moderate and generally in line with the 2014153015 season averages of
A weather Forecast schedule attached to the report itself shows average forecast
temperatures in the to range.

Minimum required energy reserves

The report cites minimum required energy reserves of 3.5 million tons of coal
and 17.7 billion m3 of natural gas for a balanced and planned heating season. In our
opinion, these ?gures are not well justi?ed.

Justification:

(1) According to our calculations (based on various factors, including climatic,
technical characteristics of each TPP block to be used, all also applied in the
electricity market balance developedr'agreed jointly by the ministry and the regulator),
we will need 2.7 million tons of coal and 19 billion 1113 of natural gas for a balanced
and planned heating season. Our estimate for coal usage is based on actual
consumption over the last ?ve years, despite the fact that electricity consuption has
decreased this year by 12 percent just this year, the share ofthermal power in the total
electricity balance has declined to 35.5 percent from 43.1 percent last year due to
increased nuclear electricity production to 54.8%. In our opinion, these ?gures point
to a smaller demand for coal in the 2015/2016 heating season.

I am personally con?dent the situation with coal procurement is not as critical as
it has been presented by Ukrainian media. We currently have 1.6 million tons of coal
in our warehouses versus about the same volume on October 1, 2014 {when we
entered the last heating season, while we were pros-riding about 800 a month
to the war area). In addition 1 hat-'e succeeded in cont-'incing the Cabinet of Ministers
to allocate UAH 2 billion 85 million) for purchases of imported coal. We are
reasonably certain that respective procurement contracts will be executed shortly.

(3) Due to lower production ofelectricity by local situation with availability of
locally produced thermal coal is much better. Tints, DTEK currently is having on its
storage facilities at the coal mines (Pavlograd. Dobropilla) more than 600 thousand
tons of coal, which they for some unexplained reason for me, do not want to transfer
to their warehouses at the TPPs. Very similar situation is with the anthracite coal
mined by DTEK in the war zone. where they also have about 3 million tons at the
surface waiting a transfer to TPPs. Thus, if they would transport all their reserves
already mined and currently stores at the mines, there would be no problem with the

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coal reserve statistics. Massive reserves of coal at the mines is the key reason for
DTEK. not to import coal, which we have asked them to do multiple times, as suclt
new huys of coal would require additional resources.

The report also assumes a possibility of a shortage of coal in the middle of the
winter period due to a potential interruption of production by DTEK as result of
insufficient financing of their mines. As of today, we have sufficient evidence that all
mines managed by DTEK are well prepared for production of no less than 23-24
million tons of coal in 2016. More than 50 longwalis are prepared for extraction at
their mines in Pavlograd and Dohropillya; all equipment producing plants are
working all full capacity (no layoffs intendedl; given ?xed costs reach at mines 
in the cost structure lowering production is counterproductive; generation companies
are making at least 20% net pro?t margin with current 0.95 UAl?l tarrif per 1 kWh;
out off-1h UAH allocated tior the coal reserve buys DTEK will get about 60%.

Price of imported coal

The report does not fully re?ect the reality with regards to coal imports. The report
cites For coal from Russia, to lEO/t from South Africa, and 
to 99ft for coal produced in Ukraine.

Justi?cation:

Actual prices under current contracts are US$65tt for Russian coal, US$77i?t for
South African coal, and for domestic coal produced in the territories that
are out of the Ukraine govemment?s control (the A10 zone).

According to our estimates, under normal conditions the cost ofcoal production is
UAH 900d ($40ft) which translates into 20 percent pro?tability at the 100 UAH/ton
price. Ukrainian state-run mines receive for this coal 1,100 If we
convert these figures to thermal energy, the. cost will be approximately 0.?5
while the rate determined today by the Regulator is 0.95
Accordingly, pro?tability comes in at over 20% for the
electricity generation segment. We have documentation that outlines the ?gures
above; these have been provided to Mr. Bryan and the members of the Joint Working
Group.

Monopoly price of coal and electricity

The report references concerns about monopolistic ownership in some areas
and not others. From the Ministry?s point of view, the cost of coal and
need to he looked at separately.

Justi?cation:

t1) D'lilz'K has been increasing its pro?ts through increases of the cost of production
in both mining and generation segments (inflating depreciation and amortization,
expenses For rent from affiliated companies, assuming excessive energy consumption,

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etc.] DTEK estimates a fair price of its coal in the range of LEGO-1.700 and
electricity at Ll UAl-ikah. If this rate were to be approved by the Regulator,
profit margin would top 80 percent, a monopolistic level by any measure. A
manufacturer with a monopoly status includes economically unjustified components
to the cost of production, ultimately, hurting the consumers. My position on the
matter is clear - no player should be allowed to abuse its market position.

(2) Surprisingly, the report also has not included any references to a monopolistic
situation in the thermal power generation. coal mining and electricity distribution,
where DTEK does capture a market share of 70%, 75% and 40%, respectively. This
way. one company can in?uence by collection ofcash ?nancial position of the entire
electricity production value chain. including ?nancial position of Energoatorn,
LIerudro, Likrenergo. Energomarket. Last year we have already seen unexplained
stops of their PPS due to unexpected maintenance works, at the time when the
eleCtricity system was short of generation capacity.

Political inputs to the report

While 1 have no intention to discriminate against anyone, i do believe it is
important to understand the backgrounds and af?liations of some involved in the
Working Group.

I

V. Hlamasdim and Aleksander l-iarchenko have been the drivers of engaging

Deputy Assistant Secretary Bryan and the Working Group in the process of writing
the Resilience Plan.

hey are advisers to V. Voshevskiy and are ex-director and cit-deputy director.
respectively, of the EIR Center, an analytical think tank funded by DTEK (and
others). First Vice Prime Minister of Ukraine, is an active critic of the
Ministry and of me personally. He has been appointed to the government as a
representative of O. Lyashko's Radical Party. The energy sector is not part of the
scope of his direct responsibilities and he has not been active in the energy sector or
its reforms over the past seven months. Mr. Lyashko has repeatedly spoken
negatively about my policy in carrying out the reforms, particularly about my
ongoing struggle against DTEK.

I personally doubt that the motivation here lies in the realm of energy sector
reforms, but rather in building influence over the Ministry. Rather than approaching
the Ministry with constructive ideas and advice, they are focused on building a broad
negative perception of the Ministry?s work. I aiso highly doubt it is a coincidence that
the issuance of the Working Group?s report has coincided with a surge of criticism of
the Ministry in the mass media.

1 would appreciate an opportunity to meet with you to discuss this report and a
path forward. I will have my representatives reach out to yours to determine an
appropriate time and place for a meeting.


The Minister