Cancellation of Gas Subsidies for Electricity Producers: Director of 'Cherkasyteplokomunenergo' Proposes Solutions for Cogeneration Development

As of April 1, 2023, the government of Ukraine has abolished gas subsidies for electricity producers, putting the further development of cogeneration installations in heating and communal energy enterprises at risk. The situation is compounded by the fact that these enterprises currently lack access to natural gas procurement mechanisms in the market. Nevertheless, Pavel Karas, the director of 'Cherkasyteplokomunenergo', is optimistic that several potential solutions exist that could promote the growth of cogeneration.

In an interview with the online portal 'EnergoReforma', Karas pointed out that government resolution No. 812 allows for gas supplies for heat production, and there is also a so-called Volume No. 2 – gas used for electricity production (cogeneration) for both internal and external needs. 'Therefore, it is possible to simply allow TKE (heating and communal energy enterprises) to use natural gas under the so-called Volume No. 2. This will be gas at market price,' he explained.

Karas emphasized that while such gas would be relatively expensive, it would enable heating and communal energy enterprises to operate in the electricity market for two to three hours, or at most four hours a day. This, in turn, would allow them to cover operational costs and avoid the costly conservation of cogeneration machinery.

The director of 'Cherkasyteplokomunenergo' also suggested that the government could establish a fixed price for TKE on electricity production, significantly increasing it. 'However, the ideal option, in my opinion, would be to provide a special price for distributed generation at least at the level of 25,000 UAH per 1,000 cubic meters (previously it was 19,000 UAH per 1,000 cubic meters – ER). This is the optimal price, according to our calculations, at which we could operate for up to 10 hours a day,' Karas noted.

He clarified that with the cancellation of the public service obligation (PSO) as of April 1, the profitability of electricity production at his enterprise was approximately 50%. However, the enterprise has calculated the economics of electricity production under various scenarios. 'For example, with a gas price of 28,000 UAH per 1,000 cubic meters, our cost is approximately 7 UAH per kWh. Therefore, during all hours when the market price of electricity is less than 7 UAH per kWh, we will not sell electricity; the machines will simply stand idle. And at such a gas price, as I calculated, we would operate for about six hours a day, at 30,000 UAH per 1,000 cubic meters – four hours, and at 25,000 UAH per 1,000 cubic meters – up to 12 hours,' Karas described the situation.

It is important to note that all revenue generated from electricity sales is directed exclusively towards preparations for the upcoming heating season. According to Karas, thanks to the funds from electricity sales, TKE has maintained its basic profitability and fulfilled its function of providing heat and hot water despite significant state debts in compensating the difference in tariffs.

'Consider that the state’s debt in tariff differences to 'Cherkasyteplokomunenergo' amounts to nearly 368 million UAH, which is 1.5 times more than our debt to 'Naftogaz' – 213 million UAH,' Karas explained.

It is worth recalling that the Cabinet of Ministers of Ukraine, starting April 1, amended resolution No. 222 and canceled preferential gas for electricity generation, leaving it only for six months for frontline territories. 'Cherkasyteplokomunenergo' announced that it was forced to shut down its cogeneration installations and ceased generating electricity. The heating and communal energy enterprise stated that it cannot purchase gas on the market as there is currently no procurement mechanism for TKE.

In his interview with 'EnergoReforma', Director Pavel Karas emphasized that heating enterprises are ready to operate in the market, but clear mechanisms and fair conditions are necessary for this.