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Ukraine's authorities freeze tariff escalation: At what price?

Author : Olena Holubeva

Source : 112 Ukraine

The Cabinet of Ministers secured the consent of the mayors of large cities that they would not allow local heating companies to raise prices for heat and hot water. This means that in the current heating season, the population will pay according to the tariffs that were set back in 2018
10:00, 4 October 2021

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The concession, at the price of which the government buys the preservation of voters' sympathies, will cost the Ukrainian energy industry dearly: without systemic solutions and transformations that were never proposed, the state of worn-out heating networks will worsen, even more, fountains of boiling water will continue to flood the streets, and due to numerous accidents, whole microdistricts.

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The authorities again postpone the solution of problems in time, which further exacerbates the acute crisis in the energy sector. The Cabinet of Ministers announced the signing of a second memorandum, according to which local authorities agreed not to increase tariffs for heat and hot water in the current heating season. The document was signed at a meeting of the Congress of Local and Regional Authorities under the President of Ukraine. President Zelensky himself, who does not hide his involvement in the manual control of energy prices for the population, also attended.

Hence the question: why in general it was necessary to launch a free heat market, on which the authorities put a bold cross with the current decision, as in the gas market? It is hard to believe that the rise in gas prices, which began in the spring, came as a complete surprise to its representatives.

Related: Gas supply companies increase monthly gas tariffs for Ukrainians

Experts have repeatedly stressed that the memorandum is not a binding document. But, apparently, this form was not chosen by chance. The first memorandum was signed in February. And, as reported, the local authorities kept their promise and kept tariffs at the level of 2018, which further exacerbated the crisis in communal heating companies, and the authorities did not fulfill most of their obligations.

The provisions of the current memorandum do not even take into account most of the requirements, which are fundamental for thermal workers.

“It should be noted that the government has not fully satisfied the requirements and expectations of the heating companies. "can fine in full. Payment discipline of the population has decreased last season. On average, the level of collection from the population was 80-85%, although earlier it was 95%. As of August 1, the population owes the heat workers 0,8 billion USD. At any time, the bank can withdraw funds from the accounts of the heating companies. The gas issue has been taken into account, but how can we pay for electricity, for gas transportation? From the level set in the tariff, the cost of electricity has already increased 2.5 times," President of the Ukrteplokomunenergo Association Arsentiy Blashchuk notes.

Blashchuk stresses: Naftogaz is a state-owned company. If there is money, the heat specialists will pay for the gas, if not, debts will accumulate. Unlike Naftogaz, electricity suppliers and GDS operators are private companies, and they have a switching rule: if you don't pay, you are turned off.

Related: Another record: Gas price in Europe exceeds $1,100 per 1,000 cubic meters

According to him, the difference in tariffs for thermal workers has not yet been calculated, but there is already an understanding that it will be less than the amount that they should have been paid from the state budget.

"The commissions that are currently meeting for most enterprises are guided by the norms of the government decree, according to which, when calculating compensation, real losses in networks will not be taken into account. They amount to about 20%, but the tariffs take into account 8-9%, like in advanced European countries. The rest is attributed to the mismanagement of the heat workers. This is extremely unfair," said Blashchuk.

"The main positive in the signing of the memorandum is that now the heating companies know exactly what they can count on. There will be gas, we will turn on the heat, and so we will last until spring. At the current market prices for gas, tariffs for heat should be raised by 40-60 %. But now we remain at tariffs that have not changed since 2018 and in which gas was laid at the level of 0,19 USD / cubic meter," the president of the Ukrteplokomunenergo Association told.

Among other things, the Memorandum only partially solved the problem of budgetary institutions, for which gas must be purchased at market prices. The Association of Cities calculated that the costs of local government to provide heat to budgetary institutions (schools, kindergartens, hospitals) due to the increase in gas prices for them from 0,3 to 0,6 USD / cubic meter will amount to 64 million USD in the heating season, which is 340 million USD more than in the previous year.

In a memorandum, the government promised to fix the upper limit of the cost of gas for budgetary organizations at the level of 0,49 USD / cubic meter. Head of the Association of Cities Vitali Klitschko said that the government was asked to 0,41 USD / cubic meter for state employees.

In exchange for a promise to keep the current tariffs for centralized heating in the Memorandum, the authorities promised to transfer to local budgets a part of the income from personal income tax in 2022 - 4%, which, according to the Cabinet of Ministers' estimates, will be at least 410 million USD. In addition, an excise tax on fuel in the amount of 13.44% will be left to local budgets in 2022, the Cabinet of Ministers said in a press release.

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Of course, these promises will be fulfilled provided that the government manages to collect taxes in the declared amount, which is possible when overcoming the problem of the shadow fuel market and tax twists, that is, the reasons for insufficient revenues.

It is obvious that part of the burden of the unresolved, but the delayed problem has further increased the financial pressure on Naftogaz, which now, in addition to the population and heat workers, is obliged to subsidize budget institutions, selling them gas at a price twice lower than the market price. The NAK is not doing well anyway. The financial report for the first half of the year has not yet been published. Recently, the media reported that Naftogaz asked the Cabinet of Ministers to find an additional 4,6 billion USD. A third of this amount is needed to buy gas for the winter. It is not known what happened to the 210 million USD that remained in the accounts of the state company after Kobolev's dismissal.

Thus, systemic problems remained unresolved: they were simply temporarily frozen until spring, summed up Arsentiy Blashchuk.

“Now the government will promote itself on this (keeping tariffs at the level of the last heating seasons, - ed.), And after the heating season it will again face the need to solve all the same problems, only aggravated over the winter,” he says.

According to the estimates of the Association, taking into account all factors, by the end of the heating season, TKE enterprises, according to the most optimistic expectations, will again have another 1,2 USD billion in losses from the difference in tariffs, and the government will again need to think about how to compensate them. Thermal workers will again be in debt like in silk, without funds to replace heating systems, which means accidents and fountains of boiling water on the streets from breakthroughs in pipes. They will not be able to invest in energy saving measures and equipment modernization.

Related: Gazprom has right to suspend gas transit via Ukraine, - Naftogaz CEO

Experts say that there is no hope for a sharp drop in gas prices in the spring. So, problems with gas tariffs for the population will be added to the problem of heat tariffs.

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