Coal Sector Casts Shadow on Ukraine Electricity Market

Intense fighting in eastern Ukraine has forced coal mines to cut production or close entirely, imperilling the country's electricity market and potentially forcing the government to cut exports or limit consumption.

Coal mining is centred in the industrial regions of Luhansk and Donetsk, where a months-long conflict between pro-Russian separatists and Ukrainian forces has seen infrastructure destroyed by artillery fire and supply networks disrupted.

Around half of the 115 coal mines in Ukraine, Europe's second-largest coal producer, have halted production entirely and output fell 22 percent year-on-year in July to 5.6 million tonnes, said Mykhailo Volynets, the chairman of the Independent Union of Miners.

"The remaining mines are operating chaotically, stopping and starting production depending on the electricity supply and the proximity of fighting," he told Reuters.

On Wednesday, the government declared a state of emergency in the electricity market due to difficulties transporting coal to thermal power plants (TPP), which provide around 40 percent of the country's electricity.

The government is discussing limiting exports, Volynets said.

Ukraine, a net exporter of thermal coal, which is used for power generation, may also begin to import the fuel, according to the director of Energy Resources Ukraine, Andrey Faforov.

"Imports from Poland, Russia, Indonesia, South Africa, Colombia and other countries will be boosted. The issue is the price," he said

The damaged state of supply routes is also a key problem.

"Access roads to the mines and power plants have been blown up, so even if you import coal it's not clear how it could be delivered," said Dragon Capital analyst Denys Savka.

A trader at Ukraine's largest private power and coal producer, DTEK told Reuters a number of Ukrainian TPP's had enough coal reserves for 16 days.

DTEK, part of the empire of Ukraine's richest businessman, Rinat Akhmetov, declined immediate comment. It accounts for about 29 percent of the country's thermal power generation and controls about 46 percent of Ukraine's coal production.

The coal shortage comes at an awkward time for Ukraine, which had been hoping to burn more thermal coal to fuel TPPs and reduce use of natural gas, due to the high price it has to pay to import Russian gas.

In 2013 Ukraine produced 83.7 million tonnes of coal, of which around 60 percent was thermal coal, according to energy ministry data.

Other Ukrainian industries have also been rocked by the violence in the country's east. Steel production, which accounts for around 15 percent of Ukraine's economy, fell 7 percent in the first half of 2014 because of damage to operations from artillery fire and supply disruptions.

(By Svetlana Burmistrova and Alessandra Prentice; Editing by Crispian Balmer)