Lights out – prices up: How energy shortage affects Ukraine's economy and business
Consumers pay for energy supply problems out of their own pockets (photo: Getty Images)
Constant power outages hit Ukraine's economy as a whole and the pocket of the end consumer hard, while businesses are forced to rebuild their operations in light of the new reality.
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Doing business in the face of a permanent power outage turns into a quest: production processes are disrupted, labor productivity falls, and the result is not guaranteed. As a result, the end consumers also suffer, having to pay for business problems out of their pockets.
How power outages affect prices and exchange rates
Electricity produced by a small diesel generator is many times more expensive than that produced by a power plant. Therefore, in the event of prolonged power outages, the share of electricity costs in the cost structure increases to a great extent.
Rising production costs may even lead to some businesses being closed, thus to a decline in business activity. Above all, it will hit small businesses, especially manufacturing, and trade to a lesser extent, says Mykhailo Kolisnyk, Professor at Kyiv School of Economics and President of CFO Club Ukraine.
Moreover, there is a risk of the trigger event effect, meaning businesses can massively raise prices for their products amid negative market expectations. In this case, a mere increase in consumer demand is enough to drive up prices.
The exchange rate may even drive up too. The reason is simple: power equipment is mostly imported. Growing demand for it triggers a boost in purchases, which means an increased demand for foreign currency. As a result, the raised pressure on the hryvnia.
Myroslav Laba, Associate Expert at CASE Ukraine, Tax and Regulatory Policy Specialist at the Economic Expert Platform, names a decrease in labor productivity among the potential negative consequences of power outages for business. It also includes an increase in unproductive costs and even possible losses due to disruption of production processes, loss of raw materials and finished products, and breakdowns of production tools.
The expert mentions the following hypothetical situation as an example. Imagine concrete production. Suddenly, the power goes out. The production process stops. The semi-finished concrete hardens, disabling the production equipment. Employees are paid for the downtime. As a result, the cost of production increases. The profitability of production is in question. The very existence of the company is also in question.
How Ukrainian business reacts to the crisis
The Ukrainian League of Industrialists and Entrepreneurs warns that large enterprises that can afford electricity imports will have a competitive advantage over smaller enterprises, which will lead to additional market concentration.
Small and medium-sized enterprises will be forced to use generators.
The ULIE provides an example of calculating the cost of fuel for a diesel generator for a medium-sized enterprise.
Generator capacity: 100 kV (for medium-sized production).
Operating time: 7 hours (including shutdown schedules and possibly emergency ones).
Fuel consumption: Approximately 10 liters per hour of operation (depending on the generator's efficiency level and load).
Fuel consumption per day: 10 l/h * 7 h * 52 UAH($1.2)/l = 3,640 UAH ($90).
Fuel costs for a diesel generator for a month (with 22 working days): 3,640 UAH($90)/day * 22 days = 80,080 UAH (nearly $2,000).
"Let's say the total cost of producing the goods is UAH 500,000 ($12,000), and the cost of fuel for the generator for the month is UAH 80,000 ($2,000) - this amount will be added and will affect the cost and final price of the goods," Anatoliy Kinakh, President of the Ukrainian League of Industrialists and Entrepreneurs, calculates for RBC-Ukraine.
Increased electricity costs are included in consumer prices. Photo: Vitalii Nosach / RBC-Ukraine
However, large industrial enterprises do not use diesel generators due to the high cost of fuel for their maintenance (factories require a generator capacity many times more than 250 kW) but prefer gas installations.
"According to our internal estimates of ULIE member companies, using gas plants adds 20% to the previous electricity costs. It is clear that this will be included in the cost and price of products," explains Kinakh.
Among the additional factors that currently affect the prices of Ukrainian producers, he mentions the volatility of the exchange rate, a decline in consumer demand in the domestic market, a lack of business personnel, and the still-existing problems with the mechanism of booking specialists, constant changes in legislation and plans to increase taxes.
All these affect the business and investment climate, reducing the competitiveness of domestic enterprises, which, along with rising electricity tariffs, power outages, and, the future rising fuel costs, is guaranteed to affect prices upward, the ULIE predicts.
Power outages have a significant impact on the agro-processing industry, says Maksym Hopka, an analyst at the Ukrainian Agribusiness Club Association. For example, for the production of dairy products, it is important not to stop the processing of milk and by-products. This process requires a stable power supply. The situation is similar with the production of meat products.
"As for egg production, the electricity consumption is slightly different, but the poultry also needs to have light around the clock. Besides, there is technical and mechanical work in water supply, egg collection, etc. Therefore, additional energy sources are used whenever possible," explains the RBC-Ukraine source.
Accordingly, the costs of alternative electricity generation are growing. For some time, the end consumer will not feel it. However, at the end of summer, when the cost of electricity will fully affect all stages of the value chain, one can expect a noticeable blow to prices.
The impact of the energy situation on pricing policy is also discussed in the telecommunications sector. For example, lifecell states that providing subscribers with mobile communications in the event of prolonged power outages across the country is a huge challenge for lifecell and other mobile operators. After all, the networks were planned and built with the availability of stationary power in mind.
"So when the power goes out, we become dependent on batteries, generators, and fuel. And these are resources that need to be constantly charged, refueled, and delivered," the company explains.
For example, to power only one base station from a generator during a power outage, up to 50 liters of diesel fuel per day is required, depending on the type of generator, and at least one person to refuel it regularly. Lifecell has about 10 thousand base stations across Ukraine, so one can imagine how many people are needed to keep the entire network running on generators.
The scale of the problem is much larger than the resources of a single operator. The issue can only be resolved by joint efforts of the state and all mobile and fixed-line operators, lifecell believes.
In general, the company notes that during the war, the costs of Ukrainian business are increasing every day. And it's not just about investments related to power outages. Every day, resources are spent on transferring production to other regions, purchasing equipment in foreign currency, paying for energy supply and logistics, restoring destroyed and war-damaged facilities, building new base stations, and finding new staff to replace employees who serve in the Armed Forces or have gone abroad, as well as on other business tasks.
Carlsberg Ukraine also talks about the negative impact of power outages on business. According to Yuriy Guk, Sustainability, Maintenance, NPD Director at the company, this directly affects the cost of goods, creating instability throughout the supply chain.
This forces businesses to invest in energy independence, such as diesel generators, cogeneration, solar panels, or even import electricity. However, even this does not guarantee stability, as there may be companies in the supply chain that are not ready for such changes. This leads to the suspension of production or restriction of its operation. As a result, producers of the final product are forced to look for alternatives, forced to choose a higher price within the country or, worse, outside the country.
"The specifics are very simple. The cost of electricity from diesel generators is 2-3 times higher than the market price, and imported electricity is 1.5 times higher," the RBC-Ukraine source said.
The real sector cannot survive without electricity. Photo: Getty Images
The Retail Association of Ukraine says that the electricity shortage will change logistics and production. Those retailers that have kitchen or wholesale storage facilities will have to install more powerful generators at their facilities or abandon mass storage of goods in refrigeration units and production.
Any problems and instability will disrupt established technologies and chains and will require changes and investments. This will increase the cost of goods.
The key problem is not even the fuel for power generators, but the fact that this equipment has a limited lifespan and cannot constantly balance the lack of a centralized power supply. It is a temporary solution for emergencies or unbalanced peak hours. Generators are not designed for 5-10 years of regular operation until new power plants are built.
If the issue of energy supply is not addressed centrally by the state with international assistance, modern technologies, and soft loans, businesses will be forced to look for other solutions and sources of investment for a stable energy supply, the Association says.
But it seems that this path will not be easy. For example, manufacturers of low-power turbines (from 0.5 to 30 MW) will not be able to expand production quickly.
The situation is similar with fuel suppliers: technologies for providing distributed generation with wood, peat, bioethanol, straw, or other fuels have not been developed.
There is also no hope for a stable gas supply and electricity generation from natural gas: the GTS facilities, especially large storage facilities, have been attacked by Russian missiles. EU countries do not have sufficient domestic gas production to meet Ukraine's consumption. And Ukrainian production is close to the frontline, localizing in the Kharkiv, Poltava, Chernihiv, and Sumy regions.
There is also no sufficient production of powerful and affordable lithium-ion battery storage tanks for electricity storage. And the massive installation of solar panels does not solve the issue of evening peak electricity consumption and night work.
The Retail Association of Ukraine also notes that retail chains are using all opportunities to ensure stable operations.
Obviously, the problem of power outages in Ukraine has no quick fix. Therefore, domestic businesses will have to survive in the new reality, and consumers will have to pay for their problems out of their own pockets. And to build a new infrastructure as efficiently as possible - adapted to the realities in which Ukrainians will probably have to live for a long time.
