The Rotterdam+ Formula and Corruption in Ukraine’s Energy Market
13 March, 2020
A combined heat and power plant (CHP) in the town of Shchastya in the Luhansk region, November 19, 2014. Photo: Valeriy Shmarkov / UNIAN

Ukraine’s ruling Servant of the People party announced that the new government has cancelled a corrupt formula for calculating electricity prices, known as Rotterdam+. This was the party’s way of justifying the appointment of Denys Shmyhal to the post of prime minister – he had previously worked as a manager for oligarch Rinat Akhmetov’s DTEK energy company, which profited from the formula. We take a look at what Rotterdam+ was, and what’s happened to it.

1. What was Rotterdam+?

Rotterdam+ is a formula used by combined heat and power plants (CHP) that calculates electricity prices. CHP plants in Ukraine burn coal for both heat and energy. The coal prices were set by the formula, which tied coal prices to prices on the European market – specifically, the prices at the Rotterdam port in the Netherlands.

The formula also adds the price of transport from Rotterdam to Ukraine – the “plus” in Rotterdam+. In practice, however, coal transit prices were often much cheaper than Rotterdam+ – coal sourced from Ukraine itself, Russia, or the occupied territories have far smaller transit costs than shipping from Rotterdam.

 2. Who benefited from Rotterdam+?

Owners of CHP plants in Ukraine were the biggest beneficiaries of Rotterdam+ prices – the biggest of which is oligarch Rinat Akhmetov, owner of energy company DTEK. One of Akhmetov’s plants was previously run by Ukraine’s new prime minister, Denys Shmyhal.

According to the National Anti-Corruption Bureau (NABU), implementing Rotterdam+ cost the Ukrainian government approximately $710 million. This money was paid out to CHP plant owners in order to bring up costs in line with Rotterdam+ norms. 

3. Why is Rotterdam+ No Longer Used?

Officially, the Rotterdam+ formula stopped being used for price calculations from July 1 2019, when a new energy market model was implemented. The new market radically changed the regulator’s role: it no longer interferes in pricing elements that make up electricity prices (such as the price of coal for CHP plants or nuclear fuel for nuclear power plants.) Now, electricity prices are set by supply and demand of electricity, like any other product.

De facto, though, Rotterdam+ had stopped working a month earlier, in May. At that time, CHP plants were buying coal much more cheaply than Rotterdam+ prices, lowering electricity prices for end-users and for industry as a result.

The previous Parliament created the new energy market model, and former prime minister Volodymyr Groysman implemented it. But it corresponded neatly with Ukrainian president Volodymyr Zelenskyy’s inauguration, and new parliamentary elections – meaning that it isn’t quite correct to say that the Zelenskyy government cancelled this rule.

4. How’s the Rotterdam+ Court Case Going?

The National Anti-Corruption Bureau (NABU) is investigating the approximately $723 million loss. In 2019, NABU filed a case against the former management of the price regulator – the National Committee for Implementing Regulation in Energy Regions and Utilities.

A separate case was started against top management of Akhmetov’s DTEK company. All suspects have been released under bail.

DTEK considers the Rotterdam+ formula to have “implemented transparent rules for working on the wholesale electricity market, which earlier was absent.” DTEK adds that the formula was checked by international auditors who did not find any violations.

5. Could Ukraine’s new PM be party to corruption?

The Rotterdam+ formula wasn’t set up in secret – it was implemented at the highest levels of government. It was confirmed by the energy regulator. NABU believes that top managers from DTEK were part of the implementation process. But Ukraine’s new prime minister, Denys Shmyhal, only became the director of one of Akhmetov’s CHP plants long after Rotterdam+ was in place, so he could not have influenced this decision.

However, a new case was filed against DTEK in late 2019, which was tied to the company’s work in the new energy market. This case relates to malfeasance committed by DTEK Zakhidenergo and the CHP plant at which Shmyhal worked.

That plant – the Burshtyn TES – is found on what’s called the “Burshtyn energy island”, because it is connected to the E.U power grid, and not the Ukrainian one. Ukraine’s Anti-Monopoly committee believes that DTEK specifically lowered the volume of electricity on the futures market, where its price is lower, while simultaneously selling electricity to the domestic and balancing markets, where the price is higher.

The biggest energy producer in the Burshtyn energy island is in fact the Burshtynska TPP that Shmyhal was in charge of. And it gained the most benefit from these market manipulation, believes the Anti-Monopoly Committee.

Additionally, DTEK limited electricity imports from the EU. These imports could have lowered electricity prices for end-users on the energy island, which is why  the European Energy Community joined in the investigation against the plant, which was headed by Shmyhal until 2019.

An interesting fact to note is that the Anti-Monopoly Committee has been investigating DTEK malfeasance even under the previous government, when the company was not yet declared a “monopolist” and was not yet fined for monopolistic behavior.