How does Ukrainian electricity market work?

Author : Oleksiy Kushch

Source : 112 Ukraine

The new electricity market has been operating for the second month in Ukraine. Despite the apocalyptic assurances of some "energy commissioners" under the new government, nothing catastrophic happened: inflation did not break the chain, and industry did not announce tariff blackout
23:31, 14 August 2019

Open source

The electricity market has been operating for the second month in Ukraine. Despite the apocalyptic assurances of some "energy commissioners" under the new government, nothing catastrophic happened: inflation did not break the chain, and industry did not announce tariff blackout.

By analogy with the gas market, the current tariff for consumers has split into three main components: the direct cost of electricity, the tariff for transportation by networks and distribution charges.

From now on, the first part of the tariff is received by the trader who buys electricity in several types of markets, depending on the balance of consumption. For a generation, it can be the basic “day-ahead market,” “intraday”, balancing, or in the format of “guaranteed customer”.

Of the more than 400 traders, two hundred have already fallen into a pre-default state, and about fifty have been recognized as “defaulted” and “excommunicated” from the market, which is now undergoing a somewhat painful, but necessary crystallization of market “neural connections” that can be effectively formed only under symmetrical market game.

Related: How does Ukrainian electricity market work?

The second part of the tariff, for the use of backbone networks, goes to the benefit of Ukrenergo, and the Kyiv Regional Administrative Court decided to block the tariffs of this company approved by the National Commission for Regulation in the fields of energy and utilities (NKREKU) at the suit of one ferroalloy plant.

The third part of the distribution tariff goes directly to the local network operator. The boundary rate is also approved by the NKREKU.

In addition, some traders decided to play it safe and “shocked” their consumers with deliberate overpayments, which provoked the кгт of their customers in search of a new electricity seller.

As a result, some “more profitable providers” disappeared along with prepayment, others were disconnected from consumption due to the lack of the necessary limits for the trader.

As for the average price of electricity on the day-ahead market, here the price according to the Ukrainian Energy Exchange fluctuated in July - the first half of August in a relatively stable range of 1594 - 1714 UAH (69 USD) / MWh.

Related: New electricity market to allow Ukraine to attract up to $ 4 billion investments, - expert

The day-ahead market is now basic in terms of pricing and sale of the main lots of electricity. Unbought volumes go to another market segment - intraday. Its price parameters naturally differed from the "day-ahead" market in the direction of a slight rise in price: on average from 1947 to 1809 UAH (73 USD) / MWh.

In addition to market indicators that vary on a wide scale, it is necessary to analyze the so-called market extremes. The day-ahead market showed the maximum value of electricity prices in the amount of UAH 1,714 / MWh and minimum UAH 1,149 / MWh. The intraday market had approximately the same amplitude of price fluctuations: a maximum of 2030 UAH / MWh and a minimum of 1065 UAH / MWh.

But of course we are interested in the price for household customers, that is, the population. The social functions of the state require a considerable amount of money. Despite the process of desocialization in our economy in recent years and which is not least the result of the de-industrialization of the real sector, Ukraine is still considered a social state.

The structure of the state’s social policy, formed over the past decades, involves the use of not only budgetary mechanisms in the form of benefits, subsidies, and pensions but also the capabilities of state-owned companies in the process of adaptation of the population to market conditions.

Now the average household spending on electricity is in the range of several hundred hryvnias per month, even with electric stoves and boilers for heating hot water.

Related: New electricity market operates successfully, - Ukraine's PM

It’s a pity to pay someone such a sum, but we admit that even in comparison with the current level of salaries, this is not so much (if we are not talking about lonely old people with a minimum pension, but in these cases, the subsidy mechanism should work).

After the launch of the electricity market, the price mechanism will begin to work on a marginal basis: the last seller with the highest price sets the overall price trend.

As the “first law of a corrupt economy” that we have formulated says: political investment must bring financial dividends. By the way, one of the first bills of President Zelensky did not concern poverty reduction in Ukraine at all - but the postponement of the launch date of the electricity market, which, despite a whole batch of “sticks” (in wheels), nevertheless started on July 1 of this year.

But it is hard to say how long the market model of the electricity market will work in conditions of “mono-coalition.”

Ferroalloy plants are calling on. For them, the return of the manual mechanism of tariff regulation and the administrative reduction in electricity prices means saving several billion hryvnias per year. For such money, election campaigns could be won in Ukraine.

This means that the energy market is waiting for the time of "counter-reformation". The only positive point is that the population will not suffer much in the coming year in the context of electricity bill payments, regardless of which tariff model ultimately prevails.

Related: USAID: New Ukrainian electrical energy market launched successfully

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