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Return debts at consumers' expense: Why electricity tariffs are rising again?

Author : Olena Holubeva

Source : 112 Ukraine

National Commission for State Regulation of Energy and Public Utilities (NCSREPU) increased the tariff for the transmission of Ukrenergo, national power energy, by almost a third, which has direct consequences for the Ukrainian's wallets
13:00, 12 November 2020

Last week, the National Commission for State Regulation of Energy and Public Utilities (NCSREPU) increased the tariff for the transmission of Ukrenergo, national power energy, by almost a third, which has direct consequences for the Ukrainian's wallets. Moreover, the current increase is not enough to pay off the accumulated debts to suppliers of "green" electricity. So, most likely, next year the tariff will have to increase even more.

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Why tariffs are increased?

Since the beginning of the year and as of mid-October, Guaranteed Buyer state-owned enterprise owed about 60% of the funds, or almost 1 billion USD, to suppliers of electricity from renewable sources. The debt must be repaid by the end of the year. Zelensky’s power assumed such obligations in exchange for investors' consent to reduce "green" tariffs.

Guaranteed Buyer did not receive a significant part of funds from Ukrenergo. Its debt to renewable energy facilities in October reached 828 million USD. All this led to the company's unprofitableness - according to the results of 9 months of this year, it went negative by 1 billion USD.

Losses of Ukrenergo are fraught not only with an increase in tariffs for the population but also with the fact that Ukrainians would more often be left without "electricity" due to problems in the networks. The financial result might negatively affect the "credit history" of the company, which also receives funds from international lenders: the International Bank for Reconstruction and Development (IBRD), the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), German government bank KfW.

Related: Government offers increasing tariffs for power consumption

“The operator of the backbone networks is actively borrowing, in particular from the EBRD. They need funds to repair substations, networks. If they are unprofitable, they will not be able to attract credit funds,” ExPro electricity market observer Dmytro Sidorov states.

Ukrenergo reported that in 2021 it plans to invest 248 million USD in the development of networks - more than 75% of all investments will be loans attracted by Ukrenergo from international financial institutions.

Ukrenergo offers to cover the debts by increasing the tariff. Back in the summer, the company asked NEURC to raise it to at least 11,6 USD per MW/hour, but the commission approved it only at a compromise level – 8,5 USD per MW/hour. There were not enough funds for repayment, but the debt at least stopped growing.

As a result, at a meeting on December 4, NCSREPU raised the tariff for transmission of Ukrenergo for December from 8,5 USD per MW / hour to 11 USD per MW / hour.

The Ukrainians will notice this increase very soon.

New tariff for the ultimate customer

"The rise in electricity prices for the final industrial consumer in December will be approximately 3.5% (including taxes), if we take into account the average price of the day-ahead market in the UES of Ukraine for October," Dmytro Sidorov calculated.

Director of the Department of Economic Policy of the Federation of Employers of Ukraine Serhiy Salivon predicts an even greater increase of 3-5%.

After the summer increase in the transmission tariff from 5,3 to 8,5 USD MWh, the price of electricity for industrial consumers increased by an average of 5%. Taking into account that the current increase is the second one, we can talk about the general growth of the electricity price by 8-10% in six months, due to the cumulative effect.

Related: Verkhovna Rada approves bill to reduce green tariffs

The population is still protected by the PSO mechanism, therefore, such a rise in price is likely to be reflected not in utility bills, but indirectly - on prices for goods and services. Due to the peculiarities of the Ukrainian economy, one should hardly expect sharp changes in inflation indicators. Rather, the impact on the financial performance of most industries will be felt. But the impact of the situation on the Ukrainian will be, albeit indirect.

"The increase factor will have an impact on the competitiveness of manufacturers, especially those who are very dependent on electricity consumption: metallurgists, miners, construction, glass industries, and partly transport. Higher prices may lead to an even greater slowdown in the growth of the building materials industry, which was actively developing before the pandemic. Taking into account the growth of prices for transport, other important components, after a while the need to increase prices for their products will also be felt by manufacturers of food products, light industry products," Salivon told 112.ua.

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Consequences can also be expected for Ukrzaliznytsia (State Railways).

"The increase in the transmission tariff and the increase in the price of electricity as a result of this will deal a serious blow to Ukrzaliznytsia, which is one of the largest consumers of electricity. The railway state monopoly consumes about 4 billion kWh per year. Even such a small increase as 3% for it means hundreds of millions of hryvnias of additional expenses. But worst of all – now this money cannot be taken from. To raise tariffs for freight transportation (due to which the main income of the state company is formed and passenger transportation is subsidized) Ukrzaliznytsia cannot - it will finish off the Ukrainian industry and agriculture. electricity prices mean a further increase in losses of Ukrzaliznytsia. Due to the lockdown, which was introduced in connection with the Covid pandemic, the state monopoly has already lost a large share of passenger traffic and part of the freight. As a result, in the first half of the year, UZ received a loss of 319 million USD, while still a year ago, in the corresponding period, there was a profit of 35 million USD," Volodymyr Gusak, Director of the Federation of Transport Employers of Ukraine, reported.

And since Ukrzaliznytsia is unable to raise the tariff for freight transportation, it is likely that it will be “puffed up” at the expense of passenger traffic. Despite the fact that the cost of tickets is growing every year, the situation for a Ukrainian is not the most positive.

In addition, the increase in electricity prices will be felt to a large extent by the Ukrainian subway, as well as companies providing transportation services by electric transport (trolleybuses, trams). They are also large consumers of electricity, Gusak adds. So the rise in the cost of electricity may be reflected in the prices of travel.

Even a slight increase in electricity prices will put water utilities in a difficult position. So in the future, problems with a water supply can be expected. He emphasized that water utilities do not currently have sources of compensation for additional costs.

Related: Ukraine's government not to raise electricity tariffs for population

How would it affect unemployment?

The current increase in the tariff will negatively affect metallurgists and other industrial enterprises - it will worsen the macroeconomic situation, lead to the closure of enterprises and an increase in the number of unemployed, according to a letter from the Ukrmetallurgprom association to head of NCSREPU Valeriy Tarasyuk and Energy Minister Olga Buslavets.

"When enterprises start to close, the loss will be not only direct - in taxes and fees, but also social: due to the increased number of unemployed, social payments for unemployment. As a result, the state will pay an order of magnitude more for each hryvnia of the increased tariff," president of Ukrmetallurgprom Oleksandr Kalenkov states.

Even a slight increase in the cost of electricity due to an increase in the transmission tariff will lead to an increase in the cost of products of chemical enterprises, said Igor Holchenko, Vice President of the Union of Chemists of Ukraine. According to him, in order to remain competitive, enterprises will have to optimize costs by laying off employees. From 2016 to 2019, amid a deteriorating economic climate in which enterprises operate, the Ukrainian chemical industry lost 8,000 jobs.

At the same time, Ukrenergo emphasizes that they could not set a lower tariff.

Related: Why reducing 'green' tariffs leads to further complications in Ukraine?

Will prices rise further?

The current increase in the tariff is still not enough to pay off the green generation. Obviously, from the beginning of 2021, it will be necessary either to revise the operator's tariff again upward, which will provoke a new increase in electricity prices, or to introduce a financial PSO, Sydorov notes.

According to Ukrmetallurgprom, in 2021 it is planned to increase the tariff for the transmission of Ukrenergo to 18 USD/MWh. If other mechanisms for resolving the situation are not found, the increase may be more radical, up to 23 USD/MWh.

Of course, this will become an "aspen stake" in the bosom of the Ukrainian industry, which is already in a deplorable state, and will spur inflation.

“Economic crisis is only gaining momentum, and when the world economy begins to recover is difficult to predict. Therefore, European countries are trying to support the industry in order to prevent a collapse in the economy. Our competitors (Europeans, Russians) have falling electricity prices. And in Ukraine, they are growing. And at such a rate that they will soon exceed the pre-crisis level,” says Oleksandr Kalenkov.

The only alternative can be other sources of debt repayment, due to which it would be possible not to increase Ukrenergo's tariff. But they are not. The authorities considered the possibility of repaying the debt using budget funds - the Ministry of Energy proposed to allocate 408 million for this purpose, and then the amount was reduced to 140 million USD. This was opposed by the Ministry of Finance, which substantiated its position by the lack of sources for balancing the state budget.

The Ministry of Finance also warned against the implementation of the proposal of the Ministry of Energy to issue domestic government foreign currency bonds in the amount of 319 million USD to offset debts to renewable energy sources. The American Chamber of Commerce calculated that it would be possible to cover about 40% of the accumulated debt to renewable energy sources at the expense of government bonds. For the implementation of this project, it is necessary to adopt bill No. 4151.

Related: Ukrainian govt wants to abandon state regulation of tariffs for heating, hot water, - PM

"These proposals cannot be supported, since an increase in domestic borrowing can lead to an imbalance in public finances and a decrease in Ukraine's credit ratings," the Finance Ministry said in a letter, published by Censor.net outlet.

It also says that such measures will cause an increase in the volume of public debt, which will increase the cost of servicing it. This will jeopardize compliance in 2020 with the general government deficit beacon established by the Memorandum with the IMF.

The possibility of attracting loans from foreign banks was also considered as another source of debt financing. In particular, this was discussed at Ukrenergo. But international financial organizations are in no hurry to issue them. Like the Verkhovna Rada – to provide energy companies with state guarantees to obtain these loans.

Once again, only the population remains in this solitaire: by canceling the PSO mechanism and letting electricity prices float freely, the authorities could significantly reduce the load on Guaranteed Buyer and Ukrenergo, which would improve the situation with settlements in front of the "green" and state-owned companies carrying this load – Energoatom and Ukrhidroenergo.

Not wanting to lose political ratings, the authorities persist: there will be no increase in electricity prices for the population, PSO will continue. As you can see, there is no financial basis and economic justification for this persistence. And obviously, the dam of this populism will soon burst.

 

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