The Environmental Upgrading of Ukraine’s Coal-Fired Power Generation: An Accounting-Framework Model For Impact Evaluation
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Research poster for participation in the International School on Energy Systems, Germany.Forschungszentrum Jülich — Inst. of Energy and Climate Research, September 2017. Abstract: Electricity market reform in Ukraine coincides with a transition to higher ecological standards and an overhaul of the entire supply chain. Obsolete coalfired power generation (CFPG) is playing a critical role in supplying a maneuverable load to the power grid and needs particularly large investments. To quantify the economic effects of the environmental upgrade of the CFPG, this the paper develops a dynamic accounting-framework a deterministic model of the sector. According to our modeling results, full compliance of CFPG with the EU limits regarding air pollution will lead to a 2x decline in real electricity cost (accounting for damage to the environment) but is not feasible before 2026.
![Results
1. Full upgrade is not feasible before 2026
Such upgrade would cover of 8.7 GW of capacity,
incl. 10% reserve margin, for a total cost of circa
$4bln. A sooner completion would require exceeding
the cap on the target debt-to-capital ratio of 50%. A
faster completion would require larger investments
over a shorter period. This would raise the debt ratio
well above its benchmark level and indicate higher
financial risk of the industry due to its impeded
capability to honour its debt obligations.
2. The upgrade will lead to a 2x decline in real
electricity cost…
… accounting for damage to the environment on the
back of decreasing emissions and increasing thermal
efficiency, from a current 32% to 39%.
THE ENVIRONMENTAL UPGRADING OF UKRAINE’S COAL-FIRED POWER
GENERATION: AN ACCOUNTING-FRAMEWORK MODEL FOR IMPACT EVALUATION
Konstantin Yakunenko, PhD, University of Kyiv-Mohyla Academy
Abstract
Electricity market reform in Ukraine coincides with
a transition to higher ecological standards and an
overhaul of the entire supply chain. Obsolete coal-
fired power generation (CFPG) is playing a critical
role in supplying a maneuverable load to the
power grid and needs particularly large
investments. To quantify the economic effects of
the environmental upgrade of the CFPG, this
paper develops a dynamic accounting-framework
deterministic model of the sector. According to
our modeling results, full compliance of CFPG
with the EU limits regarding air pollution will lead
to a 2x decline in real electricity cost (accounting
for damage to the environment) but is not feasible
before 2026.
High emission rates
The emission rates of SO2, NOx and particles are
1.7x, 5.3x and 24x higher than the limits
according to the Large Combustion Plants
Directive, or LCPD
• Air pollution accounts for an estimated 6% of
mortality in Ukraine
• The air of the neighbour countries is polluted
• Monetary costs are USD 2.6bln/year,
or 4% of GDP
• The upgrade is Ukraine’s membership
obligation to the Energy Community
Direct effects of upgrade?
The goal of this paper is to calculate direct
monetary effects of the upgrade on the sector. We
develop and apply a sector model with MS Excel
to analyse the upgrade’s:
• Investment structure, financial feasibility,
and duration
• Impact on electricity cost
• Corresponding sector’s annualized
operationals & financials
• Scenarios
Method
1. A counterfactual-analysis approach
A comparative analysis of actual scenarios: ‘with
policy’ (WiP, or ecological upgrade) in comparison to
counterfactual scenario ‘without policy’ (WoP, or no
upgrade)
2. An accounting-framework model
Calculates direct effects — as opposed to estimating
potential effects
3. Sector = ∑(5 largest companies)
Five companies, 95% of the sector, output are
aggregated into one benchmark company in terms of
financials and operationals
Pros: Allows one to model the sector dynamics as
a ‘sum’ of very similar companies (in terms
of age and technological level of their
capacities, and a common overregulated
environment)
Cons:Ignores companies’ behavior in general and
interaction between them in particular
4. Model engine
The model both holds the balance sheet identity
(Assets = Equity + Liabilities) exhibited below…
… and keeps the sector’s financials health indicators
(debt-to-equity ratio, interest coverage ratio etc.)
within the acceptable of range their values:
A scenario is deemed to be
feasible if new investments
come along with normal
indicators of the sector’s fin-
ancial health (mainly, if the
credit burden stays within
conventional limits)
Ecological upgrade means large
investments in fixed assets, and
the growth of the latter must be
balanced by growth in the
companies shareholders’ equity
(via reinvestment of profit) and
liabilities (via raising new debt)
Debt
on balance
sheet
Interest
expenses
on income
statement
Net income
on income
statement
Retained
earnings
on balance
sheet
Equity
on balance
sheet
Capital
structure
International Summer School on Energy Systems 2017 | Download URL: yakunen.co/ises2017poster | Contacts: k.yakunenko@gmail.com https://lnked.in/yakunenko
Key assumptions
Operationals
• Duration of renovation of one power unit is 2Y
• Renovation cost is $350/kW, and upgrade costs
extra $150/kW
Financials
• Constraints: maximum debt-to-capital ratio is
50%, maximum interest coverage ratio is 3.0x
• Net income is calculated as required return on
equity, set at 18% based on our analysis of peers
in emerging markets
• Entire net income is reinvested
Acknowledgements
I wish to present my special thanks to my scientific
supervisor Prof. Igor Burakovsky, Doctor of Econ.
Sciences, Head of the board of Institute for
Economic Research and Policy Consulting, Kyiv,
Ukraine. I also would like to show my gratitude to the
University of Kyiv-Mohyla Academy, Ukraine, where I
completed my PhD study and during which this
paper was written. Furthermore, I must recognise
numerous valuable feedbacks on this paper during
the 5th Groningen Energy Summer School, held by
the University of Groningen in August 2016.
References
Gertler, P., Martinez, S., Premand, P., Rawlings, L. B.,
& Vermeersch, C. M. J. (2010). Impact evaluation
in practice. Washington: World Bank
Khandker, S. R., Koolwal, G. B., & Samad, H. A.
(2010). Handbook on impact evaluation:
quantitative methods and practices. Washington:
World Bank Publications
Leeuw de, F. (2002). A set of emission indicators for
long-range transboundary air pollution.
Environmental Science & Policy, 5(2), 135–145.
DOI: 10.1016/S1462-9011(01)00042-9.
Ogarenko, I. (2010). Problems of Ukraine’s coal
sector and greenhouse gas emissions from coal
mining and consumption. Kyiv: National
Ecological Centre of Ukraine. http://www.necu.
org.ua/wp-content/uploads/ukraine_coal-sector_
web201011.pdf.
Sevenster, M., Croezen H, (2008). External costs of
coal: Global estimate. CE Delft reports,
08.7766.63.
Strukova, E., Golub, A., & Markandya, A. (2006). Air
Pollution Costs in Ukraine. FEEM Working Papers
(No. 120.06). DOI: 10.2139/ssrn.932511.
Yakunenko, K. (2011). Methodology of estimation of
the regulated rate of return on equity of Ukraine’s
thermal power generation companies [title
translated from Ukrainian]. Donetsk State
University working papers, vol. XIII, 206–216.
Discussion
The results imply that acid-equivalent volume of
emissions is forecasted to decrease by 96% due to
the ecological upgrade. The cost of such reduction
would be the CapEx rate of $500/kW. An alternative
would be to replace coal-fired capacity with
renewable energy sources (RES) such as solar or
wind power plants. Such option looks very promising
particularly in the South of Ukraine, washed by the
Black Sea and Azov Sea. It would return a 100%
decline in emissions but require a much higher
CapEx of $1,300-1,600/kW. It remains to be seen
how Ukraine will combine these two seemingly
contradictory options: upgrade of coal-fired
generation and promotion of RES.
3.78
2.11
(0.19)
(1.98)
0.07
0.03
0.08
(0.03)
0.05
0.26
0.04
0.00
- 1.00 2.00 3.00 4.00
Status quo, 2016
Fuel
Air pollution
Labour
Social expenses
Depreciation of plant
Overhead expenses
Interest expenses
Return on equity
Income tax
Other
Upgrade by 2026
UAH/kWh
2018
2019
2020
2021
2022
2023
2024
2025
2026
Cap
10%
20%
30%
40%
50%
60%
70%
80%
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Labels = year of
upgrade completion
Debt-to-capital
ratio dynamics
Growth
in debt
to
finance
the
upgrade
Limits
on debt
pile up](https://image.slidesharecdn.com/yakunenkoises2017poster-201207190312/85/The-Environmental-Upgrading-of-Ukraine-s-Coal-Fired-Power-Generation-An-Accounting-Framework-Model-For-Impact-Evaluation-1-320.jpg)
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The Environmental Upgrading of Ukraine’s Coal-Fired Power Generation: An Accounting-Framework Model For Impact Evaluation
- 1. Results 1. Full upgrade is not feasible before 2026 Such upgrade would cover of 8.7 GW of capacity, incl. 10% reserve margin, for a total cost of circa $4bln. A sooner completion would require exceeding the cap on the target debt-to-capital ratio of 50%. A faster completion would require larger investments over a shorter period. This would raise the debt ratio well above its benchmark level and indicate higher financial risk of the industry due to its impeded capability to honour its debt obligations. 2. The upgrade will lead to a 2x decline in real electricity cost… … accounting for damage to the environment on the back of decreasing emissions and increasing thermal efficiency, from a current 32% to 39%. THE ENVIRONMENTAL UPGRADING OF UKRAINE’S COAL-FIRED POWER GENERATION: AN ACCOUNTING-FRAMEWORK MODEL FOR IMPACT EVALUATION Konstantin Yakunenko, PhD, University of Kyiv-Mohyla Academy Abstract Electricity market reform in Ukraine coincides with a transition to higher ecological standards and an overhaul of the entire supply chain. Obsolete coal- fired power generation (CFPG) is playing a critical role in supplying a maneuverable load to the power grid and needs particularly large investments. To quantify the economic effects of the environmental upgrade of the CFPG, this paper develops a dynamic accounting-framework deterministic model of the sector. According to our modeling results, full compliance of CFPG with the EU limits regarding air pollution will lead to a 2x decline in real electricity cost (accounting for damage to the environment) but is not feasible before 2026. High emission rates The emission rates of SO2, NOx and particles are 1.7x, 5.3x and 24x higher than the limits according to the Large Combustion Plants Directive, or LCPD • Air pollution accounts for an estimated 6% of mortality in Ukraine • The air of the neighbour countries is polluted • Monetary costs are USD 2.6bln/year, or 4% of GDP • The upgrade is Ukraine’s membership obligation to the Energy Community Direct effects of upgrade? The goal of this paper is to calculate direct monetary effects of the upgrade on the sector. We develop and apply a sector model with MS Excel to analyse the upgrade’s: • Investment structure, financial feasibility, and duration • Impact on electricity cost • Corresponding sector’s annualized operationals & financials • Scenarios Method 1. A counterfactual-analysis approach A comparative analysis of actual scenarios: ‘with policy’ (WiP, or ecological upgrade) in comparison to counterfactual scenario ‘without policy’ (WoP, or no upgrade) 2. An accounting-framework model Calculates direct effects — as opposed to estimating potential effects 3. Sector = ∑(5 largest companies) Five companies, 95% of the sector, output are aggregated into one benchmark company in terms of financials and operationals Pros: Allows one to model the sector dynamics as a ‘sum’ of very similar companies (in terms of age and technological level of their capacities, and a common overregulated environment) Cons:Ignores companies’ behavior in general and interaction between them in particular 4. Model engine The model both holds the balance sheet identity (Assets = Equity + Liabilities) exhibited below… … and keeps the sector’s financials health indicators (debt-to-equity ratio, interest coverage ratio etc.) within the acceptable of range their values: A scenario is deemed to be feasible if new investments come along with normal indicators of the sector’s fin- ancial health (mainly, if the credit burden stays within conventional limits) Ecological upgrade means large investments in fixed assets, and the growth of the latter must be balanced by growth in the companies shareholders’ equity (via reinvestment of profit) and liabilities (via raising new debt) Debt on balance sheet Interest expenses on income statement Net income on income statement Retained earnings on balance sheet Equity on balance sheet Capital structure International Summer School on Energy Systems 2017 | Download URL: yakunen.co/ises2017poster | Contacts: k.yakunenko@gmail.com https://lnked.in/yakunenko Key assumptions Operationals • Duration of renovation of one power unit is 2Y • Renovation cost is $350/kW, and upgrade costs extra $150/kW Financials • Constraints: maximum debt-to-capital ratio is 50%, maximum interest coverage ratio is 3.0x • Net income is calculated as required return on equity, set at 18% based on our analysis of peers in emerging markets • Entire net income is reinvested Acknowledgements I wish to present my special thanks to my scientific supervisor Prof. Igor Burakovsky, Doctor of Econ. Sciences, Head of the board of Institute for Economic Research and Policy Consulting, Kyiv, Ukraine. I also would like to show my gratitude to the University of Kyiv-Mohyla Academy, Ukraine, where I completed my PhD study and during which this paper was written. Furthermore, I must recognise numerous valuable feedbacks on this paper during the 5th Groningen Energy Summer School, held by the University of Groningen in August 2016. References Gertler, P., Martinez, S., Premand, P., Rawlings, L. B., & Vermeersch, C. M. J. (2010). Impact evaluation in practice. Washington: World Bank Khandker, S. R., Koolwal, G. B., & Samad, H. A. (2010). Handbook on impact evaluation: quantitative methods and practices. Washington: World Bank Publications Leeuw de, F. (2002). A set of emission indicators for long-range transboundary air pollution. Environmental Science & Policy, 5(2), 135–145. DOI: 10.1016/S1462-9011(01)00042-9. Ogarenko, I. (2010). Problems of Ukraine’s coal sector and greenhouse gas emissions from coal mining and consumption. Kyiv: National Ecological Centre of Ukraine. http://www.necu. org.ua/wp-content/uploads/ukraine_coal-sector_ web201011.pdf. Sevenster, M., Croezen H, (2008). External costs of coal: Global estimate. CE Delft reports, 08.7766.63. Strukova, E., Golub, A., & Markandya, A. (2006). Air Pollution Costs in Ukraine. FEEM Working Papers (No. 120.06). DOI: 10.2139/ssrn.932511. Yakunenko, K. (2011). Methodology of estimation of the regulated rate of return on equity of Ukraine’s thermal power generation companies [title translated from Ukrainian]. Donetsk State University working papers, vol. XIII, 206–216. Discussion The results imply that acid-equivalent volume of emissions is forecasted to decrease by 96% due to the ecological upgrade. The cost of such reduction would be the CapEx rate of $500/kW. An alternative would be to replace coal-fired capacity with renewable energy sources (RES) such as solar or wind power plants. Such option looks very promising particularly in the South of Ukraine, washed by the Black Sea and Azov Sea. It would return a 100% decline in emissions but require a much higher CapEx of $1,300-1,600/kW. It remains to be seen how Ukraine will combine these two seemingly contradictory options: upgrade of coal-fired generation and promotion of RES. 3.78 2.11 (0.19) (1.98) 0.07 0.03 0.08 (0.03) 0.05 0.26 0.04 0.00 - 1.00 2.00 3.00 4.00 Status quo, 2016 Fuel Air pollution Labour Social expenses Depreciation of plant Overhead expenses Interest expenses Return on equity Income tax Other Upgrade by 2026 UAH/kWh 2018 2019 2020 2021 2022 2023 2024 2025 2026 Cap 10% 20% 30% 40% 50% 60% 70% 80% 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Labels = year of upgrade completion Debt-to-capital ratio dynamics Growth in debt to finance the upgrade Limits on debt pile up