WHO NEEDS SMOKESTACKS? Or why economic forecasts do not come true in Ukraine

There are two reasons for this: Ukrainian (Russian) energy companies are undervalued compared to Western enterprises, and they have a monopoly. In fact, energy supplying companies are natural and irreplaceable monopolies.

In 1997 the energy sector outdistanced all others. Energy stocks rose on a wave of a buying frenzy, leading the market for a certain period. Then it became necessary to close the gap with other sectors of the market. This meant either other sector prices had to rise (and considering the economic situation in Ukraine, this was virtually impossible) or energy stocks had to fall. The financial crisis has put everything precisely in its place, pushing down energy stocks.

Only a small quantity of energy companies' stock was available, with a controlling interest remaining state property and even strategic investors dreamed of purchasing a blocking interest in the future.

Proving the attraction of domestic energy generating companies, analysts used the correlation between market capitalization and fixed power station capacity. Ukrainian energy generating companies had the best offer - their index fluctuated around $100 per kilowatt, when the stocks were at their peak. Compare that with Russian $300 per kW and Western $500 kW.

However, there is a number of negative points. First, in order to bring generating facilities up to international standards it is essential to invest into their modernization and reconstruction triple or even quadruple as much money as market capitalization would bring. Which means that a perspective strategic investor, deciding to rebuild our heat power stations, would need to increase their productivity up to 40%, because all of our stations were launched in the mid-1950s and have never been modernized. He would also need much money for environmental programs and higher quality fuel.

As a rule, developing stock markets do not make long term operations, the average is 12 to 18 months. The energy branch has played out its role.

It should be noted, that heat power stations have the lowest profitability of all energy enterprises. The energy generated here is relatively expensive and would be unprofitable if its wholesale prices equaled those of nuclear and hydroelectric stations. Current prices for heat energy are too high in Ukraine, Russia, and a few other countries. And with the development of nuclear and hydroelectric stations, the importance of heat power stations will decline and the smokestacks will lose their attractiveness for stock buyers.

Currently there is a tendency for nuclear power to increase its share of the energy market - 44% in 1997. Correspondingly, the heat energy loses market share.

Nuclear and hydroelectric power stations are the most profitable enterprises in the sphere and completely belong to the state. Privatization of nuclear power stations in Ukraine is forbidden by law. Hydroelectric privatization is still under discussion and so far no decision has been made.

Russia, however, has already started privatization of its hydroelectric stations. As a rule, regional energy companies wind up holding controlling interests. The situation has led to interesting results: the more hydroelectric capacity a regional energy company has, the higher the demand for its shares.

Ukraine does not have hydroelectric resources, and dams account for only 4% to 8% of all electrical energy produced in this country. This index is unlikely to exceed 10% in the immediate future.

Ukraine might purchase energy abroad if cost is lower there. This option might be a better solution than buying expensive fuel for heat power stations abroad and then polluting the environment by producing expensive energy at old heat power stations.