Stanislav Kazda, RGC: If you compare Ukraine’s gas distribution networks with those in Europe, we are somewhere in prehistoric times

In an interview to OilPoint, Stanislav Kazda, Development Strategy Director, Regional Gas Company, told how to prepare gas distribution networks for the 21st century and where the investments to redesign the entire system may come from.

In an interview to OilPoint, Stanislav Kazda, Development Strategy Director, Regional Gas Company, told how to prepare gas distribution networks for the 21st century and where the investments to redesign the entire system may come from.

In an interview to OilPoint, Stanislav Kazda, Development Strategy Director, Regional Gas Company, told how to prepare gas distribution networks for the 21st century and where the investments to redesign the entire system may come from.

Transit of hydrogen and other synthetic gases for Ukraine is a matter of a five-year perspective. In the meantime, companies engaged in gas transportation are at the testing phase.

Interim results show that synthetic gases will sooner appear not in the main gas pipelines, but in regional ones, i.e. low and medium pressure gas pipelines.

To this end, according to gas experts, a lot of work has to be done with Ukraine’s gas distribution system, which, in turn, requires investments.

Underground gas pipelines in villages were built according to the principle “we buried what we had”: on the technical condition of Ukraine’s gas distribution networks

Over the past two years, NERC (the National Regulator), responsible for public regulation in the fields of energy and utilities, has significantly changed the distribution pricing to include an investment component into the tariff.

Is the current gas transit tariff sufficient to modernize gas distribution networks? According to the gas experts, not yet.

OilPoint talked to Stanislav Kazda, Development Strategy Director, Regional Gas Company, about the current state of Ukraine’s gas distribution networks, as well as how much money is needed to move Ukraine’s gas distribution system into the 21st century.

In 2015, you argued that every hundredth meter of the networks was faulty, and by 2020, every 50th meter will be in critical condition. Did your prediction come true? What is the state of Ukraine’s gas distribution networks now?

 — From what I see in the RGC GIS (RGC geinformation system is a proprietary software that allows you to map static (all networks and gas equipment) and dynamic (results of networks inspections, monitoring and repairs) information used to make inference about the technical condition of a particular part of the network - Ed.), the forecasts have come true in part.

One can observe deterioration in the technical condition of the networks, in part because of insufficient investment, i.e. gas distribution companies (not only those operating under the RGC brand) do not have the resources to put the networks in order.

Moreover, the real issue is that the networks need to be prepared for operations in the 21st century. If you compare Ukraine’s gas distribution networks with those in Europe, we are somewhere in prehistoric times.

Could you specify?

— Aside from the technical condition of the networks, there are issues pertaining to their quality. In the 1980s, at the times of the massive construction of gas networks by state and collective farms, their quality was not supervised. As a result, the state of the networks built in the 1980s and 1990s is much worse than that of the networks built in the 1960s.

Underground gas pipelines in villages were built according to the principle “we buried what we had”. Often they were not covered with sand, because there was simply no sand. Consequently, they covered it with rubble, which damaged the insulation. Such networks deteriorated much faster.

As for the investments, first, we need to bring the entire infrastructure into technical order so that we can guarantee uninterrupted and safe gas supply to the customers. This is our statutory obligation.

The next step would be to upgrade the networks. This will allow not to spend extra money on their operations, and prepare the networks to work with synthetic gases. Without the large-scale reconstruction and redesign of Ukraine’s gas distribution networks, it will be difficult for Ukraine to deliver on the European Green Deal commitments.

 What amount of investments are we talking about in terms of all gas distribution networks? 

— Given the average reconstruction costs for one kilometer of a pipeline, one gas distribution point, etc., the complete redesign of Ukraine’s gas distribution networks could cost more than UAH 200 billion.

This implies elimination of technical faults and failures that have arisen because for more than 20 years regional gas companies have not received the necessary funding for maintenance. A complete redesign is necessary to bring the networks into the state that allows operating them effectively.

The main task of the redesign is to bring the capacity of the networks in line with the customers’ demand. After all, only a quarter of the gas distribution system capacity is utilized at present. Customers bear the maintenance costs for 75% of the unclaimed capacity, which is wrong.

At the moment, Ukraine uses the most expensive and ineffective way of operating the networks, i.e. periodical operation. In simple words, it is written in instructions what, where and when to check, regardless of the need. The redesign will allow you to switch to other methods of maintenance that are practiced in Europe, though not yet regulated in Ukraine.

Could you tell us more?

— Operation of the networks depending on their technical conditions, when the DSO decides at its own discretion what and where to check, depending on the state of the network.

At present, by convention, gas workers need to come to each GDP (gas distribution point - ed.) once a week regardless of how old it is and when it was reconstructed. They have to come there anyway to check and control, i.e. take various measurements.

Let’s take specific example: in 2014-2015, I compared Czech gas distribution systems with Ukraine’s ones and found out that whereas in Czech Republic a gas worker visits one gas distribution point four or even two times a year, to reconfigure it for winter and summer modes of operation, in Ukraine they do it 56 times a year.

Over the past few years, we have managed to do away with the most of this work. Still, employees of gas distribution companies come to each of 100,000 gas distribution points in Ukraine 16 times a year.

This work is useless.

— Yes. However, it is necessary, since the networks are in substandard technical conditions. Without networks redesign, it is hard to do away with this practice and switch to actual service or service contingent on the technical condition, or risk-based service, i.e. when gas workers themselves determine how often and what works to perform at a particular gas distribution point.

If gas distribution point has remote metering capabilities, then information about consumption, pressure and gas content parameters are automatically recorded and transmitted remotely. If the dispatcher sees that everything is in order, then gas workers should go there only on their way to other works; in this case, it costs nothing.

Redesign is also needed to optimize the networks in terms of the stock of equipment. Currently, Ukraine’s gas distribution networks do not require a large stock of equipment, especially GDPs and GDCs (gas distribution cabinets - ed.).

Ukraine’s gas distribution systems are designed to consume 100 bcm per year, whereas current consumption is 4 times as less or at 25 bcm, including industry.

Consequently, many technologies built in the Soviet era are not needed now. Hardly anyone will use them in the future because consumption will never reach those levels again. On the contrary, due to energy efficiency, consumption will continue to decline.

What equipment are we talking about - pipelines or gas distribution points? 

— We are talking about everything, i.e. pipelines, gas distribution points and electrochemical protection systems, of which there are about 15,000 units only in our network and 20,000 - 25,000 units all over Ukraine; in fact we need much less of them.

For example, the Czech gas distribution networks are five to six times less than those in Ukraine in terms of mileage, though they have 15 times fewer CPSs (cathodic protection stations - ed.).

These stations protect underground steel pipelines against corrosion that occurs when the soil is salty or acidic. If CPS is malfunctioning, the pipeline will fall apart in five years. This problem is especially acute in the cities with electric transportation, for example, in Kharkiv and the Dnipro.

Still, CPSs need maintenance, they consume electricity, but they are not fit for the purpose as they were built for large consumption volumes and are now located in those places where such consumption is not needed.

Redesign is also necessary within the context of the Green Deal implementation, namely the commitment taken by Ukraine to reduce methane emissions into the atmosphere. It needs reconstruction and redesign from the future point of view, so that distribution networks could receive synthetic gases.

Do they include hydrogen?

— Not only. It is a given fact that synthetic gases will be in the networks. Definitely not tomorrow or in a year, but in 5-7 years it will be a reality.

They will be massively pumped into distribution networks, and not into main ones, because most manufacturers will not be able to provide the pressure required for transportation through the main gas pipelines, i.e. 20 - 60 kgf/sq. cm. It will be much easier to pump synthetic gas into the distribution network, where the pressure is of the next lower order of magnitude, i.e. 1 - 3 kgf/sq. cm.

That is why we need a redesign. Moreover, this is a matter of changing the network architecture itself, i.e. some of its components should be removed from the network altogether, and some should be added.

Could you specify what shall be removed and what shall be added?

— Following the results of our hydrogen tests, it is necessary to fundamentally reduce the number of detachable joints, i.e. screws, nuts and flanges. They turn out to be the weakest link through which most of the leaks of the hydrogen mixture occur. A hydrogen molecule is 4 times smaller than a gas molecule and passes through packing materials more easily. The fewer connections, the better.

Does this imply a complete overhaul of the pipelines?

— The fact of the matter is that, initially, you need to define the redesign concept, build a model, estimate the hydraulics. You will have to add new technologies for online monitoring of the chemical composition of the gas, for example, flow chromatographs. Chemical composition of the gas will change depending on where from, what and how much gas is pumped into the system, as well as by who will consume it and how.

Most important of all is that networks need the large-scale automation, i.e. installation of remote sensors, modems, remote access to valve control, automatic restriction of access to the system (in case the biogas is of very low quality), or vice versa, the permission to inject increased volumes to maintain the required chemical composition of the gas in the system.

You mentioned the amount of UAH 200 billion. How much of it can be spent on system automation?

— The question, as a matter of principle, is about the possibility of automation and its architecture. Following the results of our hydrogen project, we will try to develop a new strategy and new requirements for the architecture of distribution networks.

There are several automation options that require different funding. For example, first-generation automation or the passive collection of data from the system. Then the data is analyzed by dispatchers, who, in turn, make decisions based on this analytics.

“It is not popular, but it is true: maintenance of gas distribution networks costs money”

This is a fairly simple option, but not entirely optimal from the point of view of the process dynamics. If DSO experiences problems, for example, with the chemical composition of the gas in the pipelines, DSO must correctly change the flows in the system within 5 minutes. There will be no time to get to the GDP and turn off the valve manually.

Ukraine has the necessary technologies and systems to implement the first-generation automation. The only thing that is missing now are the professional systems of technological dispatching, especially for such a large number of customers as in Ukraine.

Ukraine has the largest network in Europe with up to 400,000 km of pipelines supplying gas to 12 million customers. Germany and Spain may have more customers, but their networks themselves are more compact.

The second option is a high-tech one, when everything goes automatic. In this case, the maintenance services work only with electronic systems, and the number of personnel working on the networks drops sharply.

At the times when I was finishing the work in the Czech branch of RWE, the entire system, which is 6 times as smaller as the Ukraine’s one and has about 70,000 kilometers of pipelines, was maintained by 1,500 people. In Ukraine, the number of gas workers is way more, i.e. about 50,000 employees.

At the same time, RWE invested annually about USD 3.5 billion to maintain the system, whereas in Ukraine the level of investments is at UAH700 million! In the Czech Republic, the level of investments is equivalent to UAH1,500 per customer whereas in Ukraine it is only about UAH120.

Who shall invest into the renovation of gas distribution networks?

— There are only two options. You can either follow the Soviet model of public funding, at the expense of budgetary funds, which, figuratively speaking, will be free of charge to the customers; or you can choose more or less democratic approach and collect money from the customers.

Even if the funding comes from the Government, customers will still bear the costs, because the Government has no other major sources of income aside from taxes. As a result, even if a customer does not pay directly, he or she will pay through a different type of tax.

 How about attracting investors?

— If an investor comes and gives money, you will have to pay the money back to investor. The customer will yet again bear the costs. Even if we are talking about the funds of international financial companies, we are not talking about a non-repayable loan, the cost of money will be 0.5-1% for 20 - 30 years instead of 5 years. Anyway, the loan payments will be included in the tariffs.

It is not a popular idea, but if you want to get a service, you have to pay for it. Nobody will provide you services free of charge.

How much will the tariff rise if you include all the necessary investments?

— I made calculations back in 2014 taking into account, inter alia, how much I pay for gas in the Czech Republic and labor costs in Ukraine. While the average salary of a gas worker in the Czech Republic is equivalent to UAH40,000, in Ukraine the average salary is about UAH9,000.

In Ukraine, a cubic meter of gas costs UAH9-10 for household customers (including the actual cost of gas, DSO tariff, transportation costs, etc.). In Czech Republic, a cubic meter costs UAH150.

This difference arose because the fundamentally wrong pricing method was applied in Ukraine.

Could you tell us more?

— In Ukraine, big customers pay more. The expenses of the household customers are offset by cross-subsidization.

The more gas a customer consumes, the lower its cost should be, since you as a DSO spend less money on maintenance per unit of gas.

There are also conditional fixed expenditures for the gas distribution system, which are here to stay, i.e. they must be paid constantly, even if a customer does not consume gas.

In 2021, the booked capacity by DSOs went down by 25%, whereas the costs did not decrease. Consequently, gas distribution tariff has increased. Accordingly, if the system is not optimized and consumption continues to decline, the distribution tariff will grow steadily.

If distribution tariff keeps on growing, customers will stop using gas.

— Yes. Yet again, gas supply, like any other utilities, is not a social service. This is a worldwide experience. If the customer does not want to, he or she cannot use gas and find another source.

Electricity, for example?

— Yes, as an option, or the customers may heat themselves using firewood. Gas is not an irreplaceable resource of energy; it has an alternative.

There are customers who need gas but are unable to pay for it. Though this is a completely different story. This is where the Government shall come into play and offer such people a subsidy at the expense of the state budget and not at the expense of the service provider. This might be unpleasant and unpopular, but it is true.

If the customer does not want to pay, he or she might be offered the option to disconnect from the network. After all, what he or she is paying for is the possibility to come home, press the button and get the gas.

This is a classic European two-rate tariff, i.e. when the customer pays for being connected (in the Czech Republic, for example, this rate is 70% of the total gas charge) and for the volume consumed.

Imagine a situation. The distribution tariff is growing, people will get massively disconnected, regional gas companies are losing a large number of customers because heating with electricity may become more lucrative. At the end of the day, companies will not get the funds for modernization. Consequently, delivery rates will grow higher and higher.

— As a matter of fact. In that case the amount of money needed for reconstruction will decrease, because there will be no need to renew those connections that are not used anymore.

The assumption is flawed however, i.e. electricity cannot be more lucrative than gas. Electricity is a secondary source of energy, which is also produced from gas. How can it be cheaper than the main resource?

Even at the retail price of UAH 10 per cubic meter of gas, a kWh of energy would cost less than UAH 1. Yet at present, 1 kWh of electricity for households costs UAH1.68. Most likely, if households consume more than 300 kWh per day, the tariff will rise to UAH 3.

Consequently, those who use electric heating, in any case, will pay more than those who use gas.

How should the calculation of the gas distribution tariff be changed?

— It is necessary to introduce a regular tariff setting method, i.e. to include all necessary expenses in the tariff.  Today, many tariff components do not take into account real costs.

You are talking not only about production and process gas?

— First of all, you need to start with a decent salary for gas workers. How is it possible that the average salary in Kyiv is UAH20,000, and the average gas worker salary is UAH9,000? The same applies to the entire sector.

This is an issue of general economy, i.e. the salaries that gas workers will receive will return to the country’s economy. This money is not for regional gas companies; it will go to employees who will immediately spend it on consumption, i.e. the money will immediately return to the system.

Second, tariffs need to include normal optimization coefficients. You must work efficiently, to reduce the tariff. To work effectively, there must be a good infrastructure.

This is already RAB regulation.

— Yes. Aside from this, the tariff must include the correct gas networks operations expenditures. For example, in 2015 they were reduced by half of the expenditures that were needed. If we were talking about 20-30%, one could refer to an error in the calculations, but here the difference was 100%.

Investment costs are profits. Only with the calculated profit, can regional gas companies attract investors’ money and distribute some investments on customers in time, i.e. 10-20 years instead of 3-5 years.

We are not inventing anything new. This is a standard RAB-regulation methodology and it works in most European countries.

Moreover, the money that the DSOs will receive for the maintenance of gas distribution networks will immediately return to the economy when regional gas companies buy tow, lubricants, pipes, etc. This money is not kept in a safe. Investment money is about a job for Ukrainian companies to dig, excavate and weld.

This will also almost immediately return to the economy, i.e. regional gas companies, having received money from the customers, will immediately spend it to purchase materials and do the works on a monthly basis. I am not even talking about value added tax; the more investments, the more companies will purchase and the more VAT they will pay.

The only thing that will not return is profit. However, at the beginning of RAB-tariff, the profit is spent on attracting and servicing investments, and on optimization of processes.

It is not clear to me what the problem is. My only assumption is that people do not want to pay for the maintenance of gas distribution networks. It is not popular, but it is true: maintenance of gas distribution networks costs money.