DTEK is a strategic holding company that develops business in the energy sector and employs around 73,000 people. Its diversified businesses produce coal, natural gas, renewable energy and supply electricity to consumers. As a key player in Ukraine’s energy sector, it is leading by example and aims to develop a new energy ecosystem in the nation that is innovative, clean and efficient. With sizeable investments planned, primarily in renewables and gas, it is seeking international partnerships. Maxim Timchenko, DTEK CEO since 2005, outlines DTEK’s new energy strategy and importance of investors’ confidence, and describes wide-range opportunities for investment in Ukraine’s energy sector
DTEK is Ukraine’s largest private power producer. In which areas do you lead and what are your priorities?
Today, there are four subsectors in the energy sector of Ukraine where DTEK is a leader among private players: coal mining and power generation, power distribution, renewables and natural gas production. We entered the gas business in 2013, and over the next four years, we managed to increase the production threefold – to 1.7 bcm. Keeping such momentum in our gas fields is our first priority. Besides, we will be eager to participate in auctions for new gas licenses, when they are finally launched, after an undue delay. Our ambition will be to bring production up to about 3 bcm over the next three years.
We are also focused on renewables. We have a very extensive investment program for the next two years. Today, our portfolio consists of the largest Ukrainian 200MW-capacity wind farm; with our Chinese partners, we are in the final stage of construction of another 200MW of solar capacity; another 200MW wind farm will be built in partnership with the General Electric (commissioning of the first stage is planned later in 2018). In 2019, we intend to build another 350MW of renewable capacity. By the end of 2019, we expect to have 1GW of capacity in solar and wind, which requires around €1 billion.
Of that €1 billion, how much is already covered?
It’s already partially covered; around €400 million remains. In general, we have the principle of a 35-65 split between equity and debt. Interestingly, German banks are the largest investors in our renewable sector. The German LandesBank Berlin (LBB) financed our first project, the 200MW Botievo wind farm.
What makes Ukraine an attractive testing ground for renewable energy?
There are several reasons. First, we have the natural resources: good wind and good locations; grid connection costs are relatively not prohibitive. The second is regulation – we have attractive feed-in-tariff, which is quite high and is protected by law. The third is that Ukraine adopted the new energy strategy that aims to increase renewable energy to 25 percent of our generation mix by 2035 (today, it’s only about two percent). Thus, it has become a sort of nation-wide governmental objective, which is another good indicator that this industry will boom and remain interesting for investors. I believe it is important to work on new legislation on renewables and switch from feed-in-tariff to a new auction system, the way it is done in EU. DTEK participates in various working groups aimed at elaborating this new approach and turn it into legislation. The industry will only benefit if we bring our legislation on RES in line with the EU trends.
By the way, the German example is quite interesting. The bold decision to replace nuclear energy with renewables is very educative on different aspects of managing such drastic change in the generation mix.
How do you rate the current dynamics of innovations implementation in Ukraine?
Today, the energy sector is undergoing one of the biggest transformational changes ever. I am talking about the worldwide trends like digitization, new technologies and innovations. If you want to stay as a market leader, you would need to aim at creating a new energy industry ecosystem. We want to move from being the company that produces and sells electricity and fuel, and build a company, which sells energy services. We are talking about distributed decentralized generation or about EV-charging or about smart technologies that enable consumers to be flexible in consumption and even production turning households into ‘prosumers’, with a special niche at the energy market. Of course, then we will need to find and implement smart technological solutions for balancing and optimizing the whole system and providing better services to consumers.
Ukraine and its economy went through a difficult period in 2014-2015. How did you manage to keep up investors’ confidence?
2014 was a perfect storm for our company: economic crisis, currency devaluation and political crisis – everything happened at the same time. Since we are one of the most important companies in the country, not only in the energy sector but also across the whole economy, we had to deliver on our promises to international investors and on our commitment to employees and to communities.
Talking about the international investors, it was certainly difficult to honor our debt obligations in that period and we had to undergo a complex restructuring process. We spent a laborious two-year’ effort working with our creditors side by side, and being fully open about the company and the situation we were in. Our transparent approach paid off. The challenges we faced were due to external factors, not problems with the business model or management, and we asked our investors for extensions so we could get the company back on its feet. Those creditors who decided to stay with the company didn’t regret their decision afterward.
They benefited not only from high returns but also from a better knowledge of the market. I know that some of our investors later decided to make their own investments in the renewable sector; after working with DTEK they learned more about the energy sector and better understood how to weigh risks and opportunities.
Ukraine has made some progress in implementing reforms in recent years. How have the reforms benefitted Ukrainian energy sector?
I think the reforms have made a positive impact on the energy sector. A new law on liberalization of the gas market came into force two years ago. Today, we observe that it has created a real market – we have many companies in this sector already, not only in trade but also in gas production. We also switched to European suppliers of gas, moving away from Russia, which increased the opportunity for cross-border trade.
A new law on the electricity market was passed more than a year ago. Ukraine is switching from the outdated single-buyer electricity market to the European market model where generators of electricity sell directly to consumers. The market should be opened by mid-2019. I hope that everything can be done within this time-limit because all parties involved in the process are moving in the right direction. I think this will provide an important signal to investors. For Ukraine to achieve its goals in energy it needs about €80 billion of investment by 2035 – about €40-45 billion should go into the grid and about €35 billion into generating capacities. It’s mission impossible without active involvement of foreign investors.
Last September, the German government said that it is ready to provide €40 million to Ukraine for its energy modernization projects. Where could those investments best be used?
Energy efficiency is key. Our economy has one of the highest levels of energy intensity and this is something that we have to deal with that as a matter of urgency. German technology and experience would help Ukraine to bring down its energy consumption. For companies like Siemens, there are many opportunities here to invest in electricity grids. Today, wear and tear of the grids is about 80 percent and we need huge investments to renovate them.
How would you define ‘new Ukraine’ and how does your group embody it?
New Ukraine is modern, technological, environmentally friendly, independent and open to new ideas. When I say independent, I mean independent in terms of Ukraine relying mostly on its own resources, its own people, its own ideas and its own finances. It should be more self-sufficient. DTEK’s future is related to these ideas because in keeping up with being a national leader we absolutely need to remain young, technological, innovative and smart. In the new Ukraine, DTEK is a modern European utility at the most promising emerging energy market of Europe.