Rising prices for goods and services: What you need to know about new electricity market

Author : Olena Holubeva

Source : 112 Ukraine

From July 1, electricity sales schemes are changing in Ukraine. Wholesale trade of electricity now will operate in market conditions. found out what will change as a result of the transition to a new sales model, how much prices will rise and who will most of all feel the difference
20:27, 1 July 2019

Open source

Why does Ukraine need the electricity market?

The electricity market reform was launched after Ukraine signed the Association Agreement with the EU. In accordance with the commitments made by the country in the framework of the European integration course, from January 1, 2015, the implementation of the standards stipulated by the Third Energy Package began. One of the changes was a radical reform of the electricity market and the transition from manual control to a competitive model.

Back in 2014, at the Adam Smith forum, then deputy minister of energy Volodymyr Ulida, said that Ukraine should build a full-fledged electricity market that would allow it to integrate into the European community as much as possible. There were opinions that the transition to a market model of sales will allow the country to join the ENTSO-E European network of system operators. We note that for now this is unrealistic: the Europeans are not eager to annex Ukraine, but some progress is still there. On June 26, the head of Ukrenergo, Vsevolod Kovalchuk, and the Secretary General of the ENTSO-E, Laurent Schmitt, signed an agreement to transfer data on the operation of the Ukrainian energy system to the Transparency Platform, where the members of the integrated system exchange data on the load, capacity and energy balance. .

Business supported the authorities’s idea on the transition to a market electricity tariff for other reasons: the majority were dissatisfied with cross-subsidies.

The National Commission in the field of energy and utilities set low tariffs for the population, compensating them with high tariffs for industry. The volumes of subsidy certificates, which covered the preferential tariff for the population and other consumers, reached enormous sums. In 2014, it was about a figure of up to 40 billion UAH.

The transition to the creation of the electricity market was supported by the state-owned Energoatom, which is the largest electricity producer in Ukraine with a share of 55.16%, as well as the state-owned Ukrhydroenergo (its share in total sales was 7,84%). The nuclear power generation operator and the company managing the Ukrainian hydropower plants have repeatedly stated that the National Commission sets unfairly low tariffs for them. They expected that in the conditions of the market they would be able to sell the generated electricity at a higher, fair, in their opinion, tariff.

How was electricity sold before July 1 and what has changed?

Until July 1, 2019 National Commission in the field of energy and utilities was a regulator with very broad powers. It approved tariffs for the supply of electricity to the population, tariffs for each type of production and tariffs for the transmission and distribution of electricity. The entire volume of electricity produced by all generations (nuclear, thermal, hydro, and green) was sold to the only state trader – Energorynok company. This trader was selling electricity to suppliers who deal with the end user, and distributed the money received from them between producers, transmission system operators (Ukrenergo) and distribution networks (oblenergos).

On July 1, the state-owned enterprise Energorynok ceases to exist. The basis of the market model for the wholesale trade in electricity is the segment of bilateral contracts that manufacturers enter into directly with traders, suppliers and large consumers (as a rule, these are industries, etc.). The segment of bilateral agreements will account for, as Ukrenergo predicts, at least 70%. Price will be negotiable.

The universal service providers identified at the first stage of the reform (January 1, 2019), which sell electricity to the public, small and medium businesses, and state institutions, will buy electricity at a regulated price from the Guaranteed Buyer company, which was separated from Energorynok.

The remaining segments of the new electricity market are built on the principle of auction sites, at which all market participants can at any time purchase additional volumes that for various reasons can be fulfilled by deliveries under bilateral agreements.

Among the reasons may be the insufficiency of the contracted volumes of electricity, and the emergency repairs of power units, and much more.

Related: Ukraine's electricity consumers to get services by competitive prices, - Minister of Energy

There are four such auction sites, and at each next price will be higher than at the previous one. The first is the "day-ahead market", where, according to forecasts, up to 20% of the total electricity will be sold. Its operator will be the second enterprise selected from the liquidated Energorynok - Market Operator. In the "day-ahead market," electricity producers offer prices at which they would like to sell electricity, and traders, suppliers, etc. - prices at which they would like to buy it. Thus, an average selling price is formed at the site, at which electricity is traded. At the same time, only the Market Operator will see the price bids of the participants on this site.

If in the "day-ahead market" someone fails to purchase all the necessary volumes of electricity, the buyer will have to go to the "intra-day market." The operation of this site is also provided by the Market Operator, but the price offers on it will be affordable, and buyers will be able to choose them independently. Due to high prices on this site, it is expected that no more than 5% of all electricity will be sold.

The most expensive will be the segments of the Balancing Market and the Market for Additional Services, which are operated by Ukrenergo. Each of the segments will account for no more than 5%. At the same time, prices at these sites can be 5-8 times higher than in the market of bilateral agreements. The peculiarity of the additional services segment is that the generation-supplier receives payment for readiness at any moment and very quickly to issue the required amount of electricity. In this case, operators receive the money, even if they did not have to load or unload on command. "This market segment guarantees the adequacy of the system and reserve capacity to meet demand," said Vsevolod Kovalchuk, head of Ukrenergo. Eight thousand MWh per year are reserved. Ukrhidroenergo, which is the most maneuverable generator, which can generate the required amount of electricity in a short time, will be able to supply electricity to the site.

The market model also implies the participation of the Guaranteed Buyer Company, which will be state-owned: it was created on the basis of the Energorynok, which has been terminated since July 1. From July 1, Guaranteed Buyer will provide calculations with "green generation", for which until 2020 one of the highest tariffs among European countries is valid.

For those who do not enter into a single contract, there is the “Operator of Last Hope”. At the end of December last year, the Cabinet of Ministers appointed state-owned enterprise Ukrinterenergo (specializes in the export of electricity, the provision of electricity transit services, transit services in the electricity networks of Ukraine) as such a supplier. "Since the appointment of the company as the operator of the last hope, a significant increase in payments was not observed, the current debt continued to accumulate, and the state company faced the risk of bankruptcy," said Dmytro Sidorov, leading analyst at EXPRO Electricity.

What will happen to electricity prices?

Obviously, the market model will lead to a sharp surge in electricity prices. "Despite the fact that Prime Minister Groysman demanded that prices for industry grow by no more than 5-6%, there are already published price proposals for July with prices rising by 25-35%," said EXPRO Electricity analyst Dmytro Sidorov. According to him, the price increase will affect the utilities that consume large amounts of electricity for the provision of services: for street lighting, water supply and sanitation, urban electric transport. They will be forced to turn to Energy Commission with the requirement to revise tariffs upwards. It is possible that we will see an increase in electricity prices in the price of food products (especially those in the cost price of which there is a large share of electricity), in the checks of restaurants, sports clubs, in the cost of renting office space.

At the last government meeting, presidential representative in the Cabinet Andriy Gerus said that regional energy supply companies will increase tariffs for consumers with a connected capacity of up to 150 kW (small, medium-sized business and public institutions) by 15-25% from July 1. According to him, in the Kharkiv region tariffs will increase by 26%, in Chernivtsi - by 22%, in Vinnytsia region - by 24%.

Related: EBRD allocates $149 million of euro for modernization of Ukrainian electricity grid

Deputy Prime Minister Gennady Zubko warned about the wave of rising prices for goods and services as a result of rising electricity prices. "The projected price of electricity for all consumers in the market will increase by 40-50% and will be about UAH 3.25 per 1 kWh  (including VAT). This means that it will be reflected in the cost of goods and services for the population," he wrote on Facebook.

However, it is difficult to predict exactly the price of electricity for industrial consumers at the moment, because the regulator only recently adopted the procedure for setting marginal prices in two important market segments (day ahead market and intra-day market), in the future these prices should be calculated and published by Operator of the market", said Dmytro Sidorov.

The Kyiv enterprises that buy electricity at free prices will be able to buy it on the market directly. Or through the supplying company, which will provide a universal regulated tariff or individual conditions. All relevant commercial offers, which come into force on July 1, are posted on the Kyiv Energy Services website.

Direct prices for the population will not rise. According to the decision of the Cabinet of Ministers, for its needs, electricity will be sold at a special tariff, by analogy with the gas market. To meet the needs, Energoatom and Ukrhydroenergo are obliged to sell 75% (Energoatom) and 20% (Ukrhydroenergo) of electricity produced to the Guaranteed Buyer.

"In Ukraine, electricity prices look like this: the population pays an average of 1.05 UAH per kWh, and the industry pays about 2 UAH per kWh. Thus, the burden of cross-subsidization falls on the shoulders of business. According to the document adopted by the government, obligations are imposed on state-owned companies Energoatom and Ukrhydroenergo. These manufacturers should provide the population with 80% of electricity at prices lower than the tariff for residential consumers starting July 1. The supplier must buy the remaining 20% on the open market, “ said Lubomyr Vasyunyk.

What other problems may arise?

Problems may arise with software that supports the functioning of the “day ahead”, “intra-day”, “balancing” and “additional services” segments. Until July 1, they worked in test mode.

"Separately, it is worth talking about the problem of conducting commercial accounting of  electricity, which generator released, which was accepted by network operators and consumed specific consumers. To understand how cumbersome and complex the system is, it suffices to say that there are 16.5 million electricity consumers in Ukraine. Recently, the head of Ukrenergo Vsevolod Kovalchuk presented data on the necessary points of commercial accounting actually registered in the system. For example, from the necessary 518 points of manufacturers, as of June 10, we received the data of only 11 points, from 2460 points of suppliers - the system receives data only from the 366 points. The correct maintenance of commercial accounting will determine the correctness of the consumer accounts, suppliers and all market participants, so this issue is very important," says Sidorov.

Also, the problem is the unresolved issue of debt in the electricity market, which stretches along the chain from the consumer, oblenergo, Energorynok, generators (in the old model) and amounts to about UAH 30 billion, says leading analyst of EXPRO Electricity Dmytro Sidorov: "The mechanism for solving this issue must be adopted and applied before the launch of the market in order for companies to enter a new market without debts, which equalizes their ability to compete with each other. Such was the idea, but it was not implemented.”

To resolve all pressing issues, many attempts have been made to delay the entry of new rules of games in the wholesale trade in electricity. On June 4, the Parliamentary Committee on the Fuel and Energy Complex supported the postponement of the introduction of the electricity market for three months. However, in the session hall the bill was never considered. It is not excluded that the political situation also affected this: on the eve of the elections, the MPs decided not to give trumps to the presidential party Servant of the People, hoping that the deterioration in the price situation would increase dissatisfaction with the new president.

Note that appeals not to rush to the introduction of the electricity market were voiced by the European Bank for Reconstruction and Development, the World Bank and the EU Delegation. Concerns on this issue were expressed by the National Security and Defense Council and the Security Service of Ukraine, which warned of a threat to national security. But Prime Minister Groysman and Energy Minister Nasalyk insist on the country's readiness for the wholesale electricity market from July 1.

* * *

Since the new convocation of parliament will be much more loyal to Igor Kolomoisky, it is difficult now to predict what the actions of the new Verkhovna Rada regarding the reform of the wholesale electricity market will be. If the market works, then it will not be able to roll it back to the previous sales model through a single state trader. Obviously, international partners will oppose this, because, as already mentioned, reform is provided in the Third Energy Package. Most likely, the Parliament will adopt bills aimed at resolving problematic issues and minimizing their consequences.

Related: New electricity market needs to be introduced in Ukraine as soon as possible, - USAID


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