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Crimea`s energy future

The Energy Expert Center is organizing an online conference on the future of Crimea’s energy sector. The deadline for questions is March 31. The experts’ answers will be published on April 3.

Two regions joined Russia on March 18, Crimea and Sevastopol. Since then Ukraine has kept threatening to leave Crimea without energy, while Russia has reassured the region that there are lots of ways for it to have energy without Ukraine: to develop alternative sources, to join the energy system of Krasnodar region, to build own power plants using conventional fuels. Many experts and government officials in Russia are now trying to find out how much money Crimea will need to become energy independent. It is clear that the region will not be able to break away from Ukraine’s energy system immediately.

The following experts of the Energy Expert Center will try to answer these and many other questions:

 

Alexey Grivach
Deputy Director General of the National Energy Security Foundation
 
 
 
 
 
 
Semyon Uralov
expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org
 
 
 
 
 

Valentin Zemlyansky

energy expert, ex-Spokesman of Naftogaz of Ukraine
 
 
 
 
 
 
 
Alexey: What do you think about the idea to lay the South Stream gas pipeline through Crimea? Is this real, how much will this cost and what geopolitical consequences may this have?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation:
In my opinion, construction of the South Stream pipeline via the peninsula would be ineffective. First, change of the project would result in significant delays, which under the current unclear situation with the Russian gas transit route to Europe and Turkey via Ukraine makes higher and longer the transit risks for stable gas supply from Russia. Second, partners in the project are European companies – Eni, EdF, Wintershall, for whom such change of the route will pose an additional risk.
Even moving the sea section closer to Crimea will hardly be a sound idea. When the route was drafted, naturally, they decided to lay it a bit to the south, through the Turkish, but not the Ukrainian sector of the Black Sea. This made the pipeline a bit longer (approximately by 10%), but the problem of evident Kiev refusal to give a permission for construction was lifted. Now, there is no such problem, so, they can save in terms of the pipeline length and services for laying the pipe. Probably, we can speak about 5-7% cost cut taking into consideration additional costs of new research, re-design, changing contracts with pipe suppliers. But, still, it will mean a delay of at least two years, and the time is more precious here than the money.
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: You should ask this question to Gazprom and its engineers. As a matter of principle, to Gazprom this means a cheaper project as the pipeline will run either by land or in shallow waters. In monetary terms, this will save Gazprom no less than 5bn EUR. But the question is whether the company’s contractors are ready to go through political risks and partial losses.
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: The issue of gas supply to Crimea is more in issue of safety than of economics, because if the political leadership in Kiev choses the strategy of economic warfare towards the peninsula, the question of price becomes irrelevant. It will be vital if they have a gas pipeline or not.
 
 
Anastasia: Dear experts, how real is it to make Crimea fully energy independent? And is this goal worth the price we will have to pay for achieving it?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation:
Energy independence is a good thing. But it does not seem to be the best way to achieve it at any cost. Any activity needs to be balanced and effective. Actually, the question of building own generating capacity in Crimea is vital, as they depend on the supply from Ukraine by 90%. Of course, they need some back-up capacities in case of force majeure or hostile actions from their neighbors. In a long-term perspective, they must develop power generation in Crimea, first of all, based on gas and renewables. At the same time, they can and need to come to agreement with Ukraine on market terms of energy delivery to Crimea. This would serve interests of both parties.
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: As far as gas and oil products are concerned, Crimea is self-sufficient. Its key problem is electric power: here it produces just 20% of what it needs. Whether this will fit into Russia’s federal budget is rather a political question – just like most of the energy projects Russia has implemented in the last years.
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: Today, Crimea depends on electricity from the Ukrainian nuclear power plants. Clearly, the green energy, wind farms are more possibilities, but not the main energy source. So, it is a question of either building an NPP in Crimea or coming to an agreement with Ukraine. However, while Ukrainian NPPs depend on the Russian fuel, we see the things intertwined here. Thus, they will have to negotiate, no matter if they want it or not.
 
 
Ivan Fyodorovich: How quickly will Crimea be able to become fully independent in terms of energy?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation:
Initially, we need to answer the question to what extent they want to be self-sufficient in terms of power production. If they can count on continuation of the cooperation with Ukraine in the energy sphere. In order to fully meet the demand, they need a thermoelectric power plant with the capacity of 800 megawatt, it will consume about 1.6 bn cubic meters of gas annually. To compare, Crimea now consumes about 1.8 bn cubic meters of gas, but they do not produce electricity on gas. It will take about 2-3 years to build such a gas-power plant. About the same time will be spent to solve the issue of gas supply either by increasing the production of gas on the Crimean shelf (which is more preferable) or by laying a pipe from Krasnodar territory.
 
 
Zelyony: What do you think about the future of solar energy in Crimea? And wind energy on its coast?
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: The prospects are quite good. The problem is who will pay for this quite expensive pleasure. Without special tariffs, renewables are a loss-making project.
 
Viktor Zavyalov: How many gas-turbine stations will Crimea need as a back-up power source? Recently, nine such stations have been brought to Crimea from Sochi, how much does it need?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: See my reply to Ivan Fyodorovich.
 
 
I.E.: Could you say approximately how much money they will need to develop the Crimean energy system? How much of it could be private investments? On what terms can private business enter the industry?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: The Russian Energy Ministry has announced preliminary costs as 100 bn rubles. If they manage to increase gas production up to the level they need, the investments can be much lower. Construction of a power bloc with 800-megawatt capacity will cost about 35 bn rubles plus investments in the infrastructure that will bring gas from the shelf.
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: I think here the question is about several billions of US dollars. And this money will most probably be provided from the federal budget as political instability will hardly attract private investors in the coming years.
 
 
Nestor Petrovich: What do you think of the amount of money needed for modernization of the energy infrastructure in Crimea?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: If you mean electrical grid, it is already private. The Krymenergo company that operates the grid and delivers energy to consumers is under control of Renat Akhmetov’s DTEK Holding. On the other hand, this business, possibly, will need restructuring, as according to the Russian law, grid ownership and electricity sale must be separate.
 
 
Irina: What do you think of Chernomorneftegaz perspectives? Will it be able to attract investors to development of the shelf in such a difficult situation? Who else, apart from Gazprom, can show interest?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: First, Chernomorneftegaz instead of an investor needs a transparent and legally impeccable structure of ownership and management. In the long run, probably, Gazprom will have to take up this project, but it seems to me, the Russian consortium will not participate directly in the tender in order to evade legal risks.
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: All questions concerning the development of the Black Sea shelf will be discussed only when the legal problems with Ukraine are solved. The disputable status of the area will hardly attract anybody other than Gazprom.
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: I think that shelf development is more an issue of new technologies and groundwork for future. Major profits from the Black Sea shelf can be seen in 10-15 years.
 
 
Nikolay: When do you think the social norms for energy consumption will be introduced in Crimea?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: The Russian government decided to postpone introduction of social norms for two years. The issue will be left to the competence of regional authorities.
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: Everything depends on how deep the crisis in the Moscow-Kiev relation will be. Taking into account the closing high season, energy consumption will rise. And if Ukraine tries to impose an energy blockade, the issue of social norms will become acute as early as in June-July.
 
 
GG: What do you think to be the optimal energy balance for Crimea in terms of types of power generation? I mean gas, coal, renewables, nuclear. What options seem to be the most real, in what proportions?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: The most optimal would be an option with limited development of renewables (for instance, through tax relief), construction of own gas generation that will be meeting the general demand and giving an opportunity to import energy from Ukraine.
 
 
Salima: The Russian government intends within a fortnight certify defense industry companies of Crimea and Sevastopol and start giving orders to them, both civil and military. Besides, Russia’s regions think of deploying their companies in Crimea. Meanwhile, power shortages cannot be excluded. The Russian government says it can guarantee energy supply due to alternative sources, for instance, diesel generators, mobile gas-turbine stations. Will it be enough for supplying power to industries in Crimea?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: Unfortunately, it is only an option for emergency. These capacities will not be able to cover Crimea’s demand for electricity.
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: We must calculate the current energy balance and compare it with the figures from early 1990s. But in general, there is an assumption that it would be difficult to fill the industry with orders and launch new industrial parks without the nuclear.
 
 
Tourist: Can we expect that during the high season Crimean residents and guests will have enough electricity and water?
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: Everything depends on how ready Kiev is to blockade Crimea fully.
 
 
Galya: I wonder, you know, Crimea has been a kind of conservancy area, its energy system has been developing under Soviet patterns, and it successfully escaped the Russian reform conducted by Chubais. Can we compare now Krasnodar territory and Crimea and say if the reform in Russia was good? Or, maybe, we should modernize the rest of Russia instead of Crimea?
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: Unfortunately, Crimean energy system has not been developing; only the Soviet inheritance was overexploited. Experiments with the green energy aimed more towards forming special tariffs in the interests of certain financial and industrial groups instead of establishing a new energy system in Crimea.
 
 
T.S.: Will Crimean consumers win or lose after switching to Russian tariffs for gas and electricity?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation:
As for gas, it is quite possible to keep current gas prices for households, taking into account that the gas is produced in the Crimean territory, not from outside. There are such territories in Russia, for instance, in Orenburg or Astrakhan regions. For them, lower controlled prices are set than for neighboring regions that receive gas from Western Siberia. At the same time, other categories of consumers (industry, agriculture, small businesses) will definitely face significant drop in gas price – by 2-3 times. More specific figures can be given after Chernomorneftegaz is privatized and economic parameters of the gas delivery are calculated. 
Electricity tariffs are a more complicated issue, as the investments in construction of new generating capacities and infrastructure development need to be paid back. So, in order to prevent from upsurge of electricity prices, the government will probably have to pay subsidies.
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: In terms of tariffs, they will certainly lose. In Russian tariffs are much higher than in Ukraine (by 25-30% on an average).
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: Most probably, the electricity bills will be higher, because at least for a year or a year and a half it will be delivered from Ukraine, so the prices will go up significantly. Gas and petrol will become cheaper down to the Russian price. So, most probably, consumers will break even.
 
 
Vladimir Petrovich: Dear experts, could you, please, answer my question: As far as I can understand now, they are going to make a kind of show-case, a second Sochi, pour a lot of money in it, create a climate for investments and so on and on, but what will common people have from it? When and how will common people living in Crimea and those visiting it for holidays see a payback?
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: In order to make a showcase from Crimea, it is necessary to establish functional ties with the continent. Without construction of the Kerch Bridge, they will be constantly depending on the Ukrainian transit. So, most probably, anti-crisis management will be the most wanted thing in Crimea, but not showcase projects. It will take time to bring Crimea to Russia’s average level, so, it is too early to speak of it as a second Sochi.
 
 
Vasily: Don’t you think, it is worth use more electric transport in the Crimean resort areas? Trolley buses can go from Simferopol not only to Yalta, but to Sevastopol, Kerch and so on. It is a unique experience. Can it be used in future, or will it be substituted by railway transport?
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: You should ask your question to transport engineers but I think that trolleybus is not just a good story but a precondition for preserving the unique environment of Crimea.
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: I think, electric transport is a future of not only Crimea, but of all southern and especially resort areas in Eurasia. However, it needs to be integrated with railways – express trains and so on.
 
 
DimDimych: My question is not strictly about Crimea. How much gas did Ukraine lose when losing Crimea? In percent, or in shares, doesn’t matter. Can it be somehow assessed, if the gas lost comparable with the gas and water being supplied now from Ukraine to Crimea?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: 8% of the gas produced in Ukraine in 2013 was produced by Chernomorneftegaz. Gas reserves in the Crimean shelf as of 2011 (Ukrainian officials do not give more recent figures) totaled 4%. It is not that much, but the thing is that it is the Crimean shelf that is the most promising gas-bearing region in Ukraine. Under official data from Kiev, Black Sea and Azov Sea shelf contained 40% of prospective gas resources in Ukraine. Add to this a number of disputed gas facilities in the neighboring zone with Russia that are now in the Russian territory.
Valentin Zemlyansky, energy expert, ex-spokesman of Naftogaz of Ukraine: Ukraine has a zero balance on gas now. On the Black Sea shelf they are planning to produce 2bn c m this year. Exactly as much Crimea needs. With Crimea Ukraine produces almost 20bn c m a year, without it the country produces something about 18bn c m.
 
 
Svetlana Sochi: Plans are a good thing. But the high season is near. Doesn’t an energy collapse expect Crimeans this summer?
Alexey Grivach, Deputy Director General of the National Energy Security Foundation: Unfortunately, there are risks of electricity shortages. And it is fully in the hands of Ukraine. If Kiev decides to punish Crimean residents for joining Russia, it has enough tools for it. On the other hand, Europe must need an incentive not to let the Ukrainian authority act this way, as an energy war in Crimea can provoke a gas war between Russia and Ukraine, from which European consumers can suffer.
Semyon Uralov, expert on Eurasian integration and restoration of post-Soviet area, chief editor of Eurasia.Odnako.org: If we speak of threats, the energy issue comes along with the issue of fresh water, because Crimea depends on Dnepr waters no less than on Ukrainian NPPs.
 
Energy Expert Centre, April 7, 2014

 


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