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Gas supply rules change in Ukraine: What's the final selling price?

Author : Olena Holubeva

Source : 112 Ukraine

The authorities continue to practice shocking know-how in the field of gas supplies to the population. Last Friday, the National Commission for State Regulation of Energy and Public Utilities (NCSREPU) approved a draft resolution, according to which the annual contracts announced by Prime Minister Denys Shmygal become binding. In fact, this means abandoning the free market, under which suppliers could still freely offer any contracts and delivery terms, and consumers could choose terms and suppliers
23:16, 10 March 2021

Price of natural gas for the population
Open source

The key question now is what will be the gas price, which will be set by April 30, 2022. There are several basic scenarios for the development of events, which will depend on further decisions of the authorities. Based on the current realities, on April 25, suppliers can publish prices for the whole year at least 0,28 USD / cubic meter which is after the government 0,25 USD / cubic meter, obviously, will cause great discontent among people.

Annual contracts

In January, Prime Minister Shmygal announced active work on the development of "fair rules and mechanisms on the gas market," according to which all gas supplying companies should present their annual products this spring.

Market participants and experts then even refused to discuss what such contracts might make the binding. They say there are no such mechanisms. According to the generally accepted practice, normal for Europe, the essence of annual contracts is that the consumer is offered to buy gas at a fixed price throughout the entire period. This is a kind of roulette. If the market price rises above the fixed price, then the consumer who has entered into a one-year contract will benefit, but if it falls below the fixed price, he will lose. Gas supply companies will not refund him the difference between a fixed price and a lower price.

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In the Ukrainian realities, a mechanism has been invented that differs from the European one. Last Friday, NCSREPU at a meeting approved a draft decision on the introduction of a basic annual proposal, which suppliers must offer to all household consumers from May 1, 2021, to April 30, 2022. The next step will be public comment and then document approval. Obviously, everything will be done very quickly, since there is very little time left until April 25, when suppliers will have to publish their annual offers. The commission's website says that comments and suggestions from individuals and legal entities, their associations and other interested parties are accepted until March 15 of this year, that is, within one more week.

"The project will allow residential consumers to receive gas throughout the year at a fixed price, which will operate from May 1 of this year to April 30, 2021. It is stipulated that all suppliers who supply or intend to supply natural gas to the population will be required by April 25 to publish on their official websites the price, which will not change for the consumer throughout the entire period," Tetiana Ryabukha, Director of the Department for Regulation of Relations in the Oil and Gas Sector, described the document.

She stressed that consumers can still freely change suppliers and switch from one to another. In addition, suppliers may offer on par with annual products others, including contracts with a monthly payment condition. True, according to the text of the document, in order to switch to them, consumers will be obliged to re-conclude connection agreements. They will be transferred to an annual contract (if the document is accepted) automatically.

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Gas prices

The NCSREPU claims that the obligatory annual contracts introduced in the current edition will help to level the price volatility in the gas market and thus protect consumers.

The text of the document itself notes that its adoption "will enable household consumers to consume natural gas throughout the year at a fixed price, which will operate from May 1 of this year to April 30, 2022." It is said that the commission is guided by the desire to reduce the impact of price fluctuations in the gas market on the financial condition of household consumers. With the beginning of the autumn-winter period, there is a significant fluctuation in natural gas prices on the natural gas market, which negatively affects the financial condition of consumers, says the text of the draft resolution on the transition to annual contracts.

The commission remains silent about the fact that when popular discontent with the prices for gas and utilities peaked, and the war of tariff Maidans swept across the country, the government limited the upper price bar for suppliers at 0,25 USD/cubic meter. Since the decision was made at the end of January, suppliers published prices within the corridor set by the government for February, but then unexpectedly lowered them, and retroactively, for January. They say that it was not without a call from the President's Office with an insistent request.

Thanks to the manual control of the market this year, mainly suppliers who were forced to sell gas at 0,25 USD / cubic meter suffered from price volatility. m and below, while purchase prices beat records and did not fall below 323 USD / cubic meter. By March, prices have decreased slightly – to 0,28 USD / cubic meter. In March, the company was again offered a price at or below the level set by the government. This suggests that a number of them are operating at a loss, and a number of companies are buying gas at a special low price from Naftogaz, which sells them cheap gas from Ukrgazvydobuvannya (largest Ukrainian gas producer), thus supporting small suppliers and the myth that selling gas within the limits set by the government, it is not so unprofitable, market participants told 112ua.tv.

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The resource of Ukrgasvydobuvannya is the main bone of contention on the gas market. According to market participants, the gas cost of the UGV does not exceed 97 USD / cubic meter. At what price the daughter sells gas to Naftogaz is a secret behind seven seals, they say. However, judging by the prices to which, unlike other market participants, the state-owned company fell, it is much lower than the price of imported gas, which everyone is guided by. Market participants have repeatedly accused Naftogaz of dumping in order to lure as many household customers as possible, which is due to access to the cheap resource of Ukrgasvydobuvannya, which accounts for up to 70% of the country's production.

"Ukrainian gas must be sold as transparently as possible, and the price must be the same for all suppliers. Transparent sale of the resource will create an internal price indicator that will replace import parity. Formulas like hub plus or hub minus are not effective, we need to form our own indicator," Yevhen Natsvin-Stepanov, First Deputy Head of the Board of the Association of Energy Resources Suppliers, told 112ua.tv.

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The decisions on the gas of Ukrgasvydobuvannya would directly determine the price of gas for Ukrainians from May 1 of this year to April 30, 2022. The main news on the gas market, followed by market participants with great attention, is a decision taken on the initiative of acting Minister of Energy Yuriy Vitrenko. This is the order of the Ministry of Economy to prepare a draft of changes, according to which Ukrgasvydobuvannya should start selling gas of its own production to natural gas suppliers and heat energy producers for the needs of household consumers at a fixed price from April 1, 2021, to April 30, 2022.

Will the government manage to make such a radical decision before April 1, so that all market participants can contract gas from the UGV at a fixed price before the publication of the final prices for the year - April 25? A big question, given the position on this issue of Naftogaz, which itself is a serious player in the market for gas supplies to the population and used a cheap resource as a tool to aggressively build up its customer base.

"If you do not take any action until April (do not oblige Ukrgasvydobuvannya to conclude contracts with suppliers), then the gas price under an annual contract with many suppliers will most likely be higher than 0,25 USD. For example, the cost of purchasing a resource in May at UEB was 255 USD. Poltava gas and oil company sold at 250 USD, and Naftogaz Trading - at 255 USD. Plus the cost of gas transportation by main gas pipelines (6 USD per 1,000 cubic meters) and the supplier's margin (approximately 20 USD per 1,000 cubic meters). Thus, it turns out already 280 USD per 1,000 cubic meters," Yevhen Natsvin-Stepanov, the first deputy head of the board, told 112ua.tv.

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He stressed that after the price of 0,25 USD/cubic meter, according to which the population has been paying for gas since January, the price is 0,28 USD / cubic meter "will definitely cause a new wave of discontent."

If such a price is fixed in annual contracts from April 25, then gas consumers will find themselves in a situation where they will have to pay about 0,29 USD / cubic meters in the summer or abandon the annual contract, switching to monthly products, which will be cheaper in the summer. True, we remember that according to the rules that were previously approved by the NCSREPU, the consumer will no longer be able to return to the annual contract until April 30, 2022.

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