Restoration of power supplies from Transnistrian region and weakness of European factor

Supplies of electric power from the region controlled by the separatist regime to the rest of Moldova were restored on June 5, 2017, as a result of a decision taken by the state-run energy company Energocom. Thus, outside an open tender contest, Energocom negotiated and signed a contract with the Cuciurgan Power Plant (Moldavskaya GRES). The given contract, which wasn’t made public, provides that as of June 7 Energocom will purchase 70% of the necessary electricity from the Transnistrian region. The other 30% are to be bought from the Ukrainian company DTEK-Trading. According to the state-run Energocom, the producer from the Transnistrian region, which belongs to the Russian concern RAO EES, offered a price of US$ 45 per 1MWh. This is by 10% less than the electricity price negotiated with the supplier from Ukraine (US$ 50.2 per 1MWh) as a result of the open tender contest.

The message of Energocom was disseminated by the Ministry of Economy (MEC, June 2017), which justified the necessity of purchasing electricity from the Transnistrian region. The Ministry’s arguments referred to (1) the energy situation in the region; (2) necessity of diversifying supply sources; (3) securing of a more convenient price; and (4) strengthening of the country’s energy security.

The total lack of transparency in the signing of the contract with Moldavskaya GRES generated dissatisfaction among the European partners. These monitored the first open tender contest to purchase electric power, staged in January – March 2017, based on the recommendations formulated by the Energy Community Secretariat. Consequently, the representatives of the Energy Community, the EU Delegation and the EU High-Level Adviser on Energy asked for clarification about the national power supply system. But no official explanation followed. Instead, the authorities focused on the denial of the accusations that the supplies from Moldavskaya GRES financially support the separatist regime and contribute to the augmentation of the natural gas debt to Russia, which totals US$ 7 billion.

Chronology of events:

21 December 2016 Energy Community Secretariat transmitted a handbook on the annual purchase of electricity, to be used as of 2017, to the Ministry of Economy.
5 January 2017 Ministry of Economy adopted by a ministerial order the instructions on the purchase of electricity, which 99.9% consists of the provisions of the handbook proposed earlier by the Energy Community. One of the conditions of the instructions is to form a Group of Observers (Energy Community, EU Delegation to Moldova, EU High-Level Adviser on Energy)
January – March 2017 Tender contest procedures were launched – publication of invitation to take part in tender contest, expression of interest in bidding, inviting and receiving of bids, negotiation of price and choosing of winner.
24 February 2017 Ministry of Economy asked to delay the bids submission until March 16, arguing that Ukraine is not a safe source for the supply of electricity
13 March 2017 Energy Community Secretariat issued a letter to the Ministry of Community, certified by the representative of the EU Delegation and the EU High-Level Adviser on Energy, whereby this requests that the purchase procedures should be respected and that the principles of transparency and non-discrimination should be ensured.
14 March 2017 Ministry of Economy repeatedly asked to delay the bids submission until March 27, invoking the difficulties in the energy sector of Ukraine, related to the blocking of supplies of coal from Donbas region.
24 March 2017 Group of Observers was informed about a new delay in the submission of bids until March 31, which was also the date when the old contract, signed for 1 April 2016 – 31 March 2017 with the controversial trading company Energokapital, expired. The Ministry of Economy explained that bids were being expected from DTEK and, respectively, Energocom. The latter had no clarity as to where it would purchase power at advantageous prices.
31 March 2017 There were assessed the bids submitted by Moldavskaya GRES and Energocom, with the letter suggesting purchasing power from DTEK Pavlogradugoli. Also on March 31, Energocom was selected as a winner, with the final price of US$ 50.4 per 1MWh, the bid of the Transnistrian producer, which offered a price of US$ 54.4 per 1MWh, being rejected. Ultimately, Energocom informed it will deliver electrical energy from DTEK-Trading, not DTEK Pavlogradugoli, as it announced initially, during April 1, 2017 and March 31, 2018.
16 May 2017 Energy Community published the Report of the Group of Observers on the holding of the tender contest to purchase electric power for the period between April 1, 2017 and March 31, 2018. The report points to a series of shortcomings in the bidding and puts a series of questions that weren’t answered by the Ministry of Economy.
25 May 2017 Ministry of Energy and Coal Industry of Ukraine announced that the export of electricity to Moldova rose by 69.5%, up from the 810 million kWh set on March 3.
26 May 2017 One day later, the Ministry of Energy and Coal Industry of Ukraine worsened the forecasts for the export to Moldova. Consequently, it decided to decrease the exports three times, from 270-280 million kWh in April-June to 90 million kWh in July-December 2017.
6-7 June 2017 State-run company Energocom, and then the Ministry of Economy, announced the signing of a contract with the Cuciurgan Power Plant, which offered a price by 10% lower. According to Energocom, the provisions of the contract were negotiated in April – May, when power was already bought from Ukraine.
7 June 2017 Energy Community informed that the Group of Observers asked for an immediate clarification from the Ministry of Economy about the supply of electric power, reacting thus to the announcement of the coming into force of the contract with the Cuciurgan Power Plant for June 5, 2017 – March 31, 2018.

 

Why was the purchase of electric power from Transnistria necessary? Three causes

Evidently, the authorities’ decision to initiate a contract with the Cuciurgan Power Plant runs counter to the principles of transparency in the purchase of electric power agreed with the European partners at the end of 2016. In consequence, notwithstanding the commitments, the authorities decided to keep the supplies from the producer based in the Transnistrian region. There are at least three objective causes that can explain such a decision.

First cause – volatility of export forecasts in Ukraine

The Ukrainian side’s forecasts about the export of electric power are extremely volatile. The sudden decrease in the volume of electricity forecast for Moldova, shortly after deciding to double the exports of power to Moldova, clearly shows this (See Table above). The changing forecasts can be caused by the deficiencies faced by the Ukrainian energy system after the blocking of goal supplies in Donbas region. As a result, a state of emergency in the energy sector of Ukraine was declared in February, which in June (Unian, June 2017) was extended for a month.

Second cause – insufficient volume of electricity in Ukraine

In December 2016, Ukraine expressed its readiness to export to Moldova 810 million kWh or about 90 million kWh a month, which is about 30% of the volume needed by Moldova during a year (Expert-Grup, March 2017). The same volume, of 810 million kWh, was confirmed in March 2017. Consequently, long before the Donbas coal blockade and after this, there was a low probability that Ukraine will supply enough electric power to satisfy Moldova’s consumption of 3 billion kWh.

Third cause – risks related to regime in Transnistrian region

The Moldovan authorities realize that the Transnistrian administration is unpredictable. At the same time, the non-functionality of the Cuciurgan Plant could generate negative effects on the whole economic potential of the separatist regime. Consequently, to avoid larger crises concerning the energy and, respectively, economic collapse of the region, the Moldovan authorities preferred to reintroduce Moldavskaya GRES into the power supply scheme. The problem of natural gas debt was left on a secondary place, even if the debts will increase because the Power Plant produces electricity exclusively from natural gas for which it does not pay to Moldova Gaz, which is to GAZPROM. Moreover, the contract with the Cuciurgan Plant enabled the Moldovan authorities to temper the aggressiveness of the Transnistrian administration concerning the joint control on the Moldovan-Ukrainian border, at the Cuciurgan-Pervomaisk border crossing point, as of March 31, 2017.

Ignoring of transparency procedures

At the start of 2017, Moldova pledged to implement a transparent mechanism for purchasing electricity, inspired by the recommendations of the Energy Community. In reality, the authorities continue to prefer the old practices according to which the contracts for the purchase of electricity were negotiated in a non-transparent way. The authorities’ decision to sign the contract with Moldavskaya GRES was described as bringing of transparent purchase procedures to “absurdity” (Free Europe, June 2017).

This type of behavior worries the European partners, which make effort to support the reforms in the energy sector, such as the reorganization of the National Agency for Energy Regulation, improvement of the legal framework or promotion of the interconnection with Romania.

The contract with the Cuciurgan Plant is a logical consequence of the fact that the European partners didn’t oppose Moldovan authorities’ successful attempts to mutilate the bidding on different occasions.

First of all, the authorities didn’t fully follow the recommendations of the Energy Community formulated at the end of 2016. Thus, the instructions on the purchase of electric power of the Ministry of Economy excluded the mandatory condition for the suppliers to prove that they pay for the raw material used to generate electricity. This deviation enabled the Cuciurgan Plant to remain eligible, even if it does not pay to Moldova Gaz for the natural gas used to produce electricity, which is later sold on the right bank of the Nistru.

The second deviation that was overlooked by the European partners was the moment when Energocom was included in the list of potential suppliers, even if this didn’t meet a number of technical criteria. Moreover, not being producer, but only an intermediary, Energocom could not demonstrate that it has the sufficient volume of electrical energy. Nevertheless, the state-run company was accepted to the tender contest by the market operates (such as Gas Union Fenosa, Red NORD, etc.).

According to the monitoring report of the Group of Observers, the Ministry of Economy, which founded Energocom, postponed the bidding procedures for several times (Energy Community, May 2017). The last delay was on March 31, when the old contract with Energokapital expired. The reason invoked by the Ministry was the lack of certainty as to the source from which Energocom would supply electric power. In other words, even if Energocom didn’t know from where it would purchase power, this was allowed to take part in the tender contest. This thing was signaled by the Group of Observers only in May, through the monitoring report that was presented one month and a half after the contest.

Ultimately, the European partners accepted a reduced role from the very beginning. These agreed to take part in the Group of Observers without making sure that they have efficient leverage to enforce the bidding procedures. The same type of impotence was seen at the post-bidding stage, when the Ministry of Economy fully ignored the procurement monitoring report and the recommendations of the Group of Observers. Consequently, the Group of Observers played rather a ceremonial role, being used by the authorities to simulate openness to the European partners and transparency in relation to the national public opinion.

Instead of conclusion…

The authorities’ incoherence in relation to the rules of the game is rather a general problem than an accidental one. The European partners are trying, but seldom manage to change the status-quo. This situation is not typical of the energy sector only and can be met in almost any sphere.

In the case of the tender contest to purchase electricity, the European partners were turned into passive observers of repeated manifestations of non-transparency on the part of the government. Besides promoting the state-run Energocom, the authorities, by their actions, discouraged competition and intimidated the potential participants in the tender contest from Ukraine and the local energy market operators.

The instructions on the electric power purchase should be thoroughly reviewed so as to exclude the shortcomings that allow for abuses on the part of the Ministry of Economy. Also, the power purchase procedures should be regulated by the primary legislation so as to make them obligatory. The role of the Group of Observers should be mandatorily strengthened and this should be extended by including representatives of civil society in it.

The rules of the game should be common for everyone, including for state-run companies, such as Energocom. Regardless of everything, the power supplies should be based on the principles of transparent and competitive bidding, diversification of the sources of supply and financial integrity of suppliers, which must repay the debts for the hydrocarbons used to generate electricity.
Ultimately, the transparent purchases of electrical energy from Ukraine, the payment of debts for the natural gas consumed by MoldGRES and its deeper integration into the Moldovan legal space as well as the further interconnection with Romania remain key priorities for the electric power sector.

This article was initially published on IPN News Agency on 26 June 2017

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