Ukraine's gas market: Changes in prices for population

Author : Olena Holubeva

Source : 112 Ukraine

August 1, Ukraine introduced a gas market for the population
14:00, 12 August 2020

112 Agency

Ukraine introduced a gas market for the population on August 1. As reported, the main struggle for residential consumers unfolded between the largest players - Naftogaz, which is aggressively conquering the market, and traditional suppliers - gas sales, which are faced with the task of saving their customers and maintaining their positions. Naftogaz has a valuable resource - cheap gas from state largest Ukrainian gas producer Ukrgazvydobuvannya (produces 70% of the country's natural gas), and its subsidiary has become a supplier of last resort. In turn, gas sales companies have a valuable client base, which they are in no hurry to share with either Naftogaz or other traders. The future of the gas market for the population depends on the outcome of the competition between Naftogaz and gas sales

Maksym Rabynovych, the head of Gas Supply Company Naftogaz of Ukraine LLC, spoke about how Naftogaz and its gas-supplying subsidiary would operate on the gas market for the population, whether the fears of market participants and specialized Associations voiced in the public are justified.

Related: Naftogaz raises price of natural gas for population

Gas price from Naftogaz

The main innovation brought by the market model to the gas segment for household consumers (individual households consuming gas for heating purposes, heating hot water or gas stove burners, apartment buildings equipped with individual heating units) is that a single price for all gas is a thing of the past: each supplier (including the gas supply company Naftogaz of Ukraine, private gas distributors) creates its own price, depending on the purchase prices for gas and the established trade margin, said Maksym Rabynovych, the head of Gas Supply Company Naftogaz of Ukraine LLC.

For August, the gas supply company Naftogaz of Ukraine set the price of natural gas at 0,12 USD per cubic meter for household customers within the tariff "Monthly", which is 0,0097 USD more expensive than the last PSO price (calculated using a formula that ceased to operate with the introduction of the gas market on August 1). The price of natural gas for the population at the "Annual" rate is significantly higher than the price at the "Monthly" rate and amounts to 0,17 USD per cubic meter.

According to Rabynovych, about 70% is the price at which the supplier buys gas in the structure of the prime cost of the final gas price for the population. This is a key factor influencing the gas prices for the consumer. Important components of the gas price are also the tariffs for the transportation, which are set by the National Commission for State Regulation of Energy and Public Utilities (tariffs are set for a long period). The supplier's trade margin also affects the gas price: it finances operational activities, marketing costs. If in the PSO era the trade margin was regulated by the Cabinet of Ministers and 2.5% was set for deliveries to the population, now each company can set it at its own discretion without restrictions. The gas supply company Naftogaz of Ukraine has formed its current prices for customers with a trade margin of 5-6 %. The monthly price of the gas supply company Naftogaz will be published on the company's website 5 days before the start of the month of delivery.

Related: Transit of Russian gas through Ukraine through TurkStream decreases by half

Gas prices during the heating season

Taking into account the fact that the main component of the gas price for the residential segment is the cost of gas purchases, seasonal fluctuations in the global gas market will have a significant impact on the final prices. As a reminder, Serhiy Makohon, General Director of GTS Operator of Ukraine, rightly notes that as long as the volume of domestic gas production in Ukraine does not exceed the volume of its consumption, pricing in the country will be tied to import parity: namely, "price at European hubs plus delivery." “As long as we are a net importer of gas, the price in Ukraine will become "import parity plus." If production exceeds consumption, then the formula will be correlated with the export parity,” Makogon said.

For this reason, in the coming heating season, gas prices in Ukraine, in theory, will be correlated with world prices, which will be felt by the population as well.

Naftogaz consistently adheres to the position that under the influence of the seasonal factor, in comparison with the current price, the price will rise slightly. At the same time, it will be lower than the gas price of the previous heating seasons. Today, gas prices are constrained by an excess of gas in underground storage facilities both in Europe (UGSs are 90% full), and in Ukraine: 23 billion cubic meters of gas have been accumulated in UGS facilities. m of gas, whereas for comparison, in 2019, 13.1 billion cubic meters were pumped into Ukrainian underground storage facilities. m of gas, 34% more than in 2018.

Related: Naftogaz becomes supplier of last resort in gas market

The prices of the gas supply company Naftogaz, which purchases the resource from the commercial division of Naftogaz for work with large industrial clients - the company Naftogaz Trading, are also formed taking into account import parity, Rabynovych assures. He assured that the company works with the commercial division on the same terms as other suppliers.

Until recently Naftogaz Trading was selling exclusively imported (reverse) gas in Ukraine, but recently a resource produced by another Naftogaz subsidiary, Ukrgazvydobuvannya, has also appeared in its portfolio. In this regard, a flurry of criticism from traders and private gas distributors fell on Naftogaz and its subsidiaries. They quite reasonably believe that taking into account the prime cost, the gas produced by the Ukrgazvydobuvannya (70% of the national production) can be much cheaper than imported gas. By selling this gas at the price of import parity, Naftogaz can not only receive large profits but also dump the population on the gas market. Given the lack of mechanisms that make the Ukrgazvydobuvannya gas sales process transparent, private market participants, apparently, reasonably believe that the state-owned company, at the expense of Ukrgazvydobuvannya gas, has the ability to reduce the price of the resource sold in the domestic segment by its subsidiary. Market participants fear that the company can lure away potential customers without investing heavily in marketing, playing solely with the price.

According to the Gas Traders of Ukraine Association, after the cancellation of PSO (for its implementation Ukrgazvydobuvannya was obliged to send 100% of the extracted resource), 6 billion cubic meters out of 14 billion cubic meters of Ukrgazvydobuvannya are released. Another 8 billion cubic meters (at least until May 2021), will be sold to heat producers of heating for high-rise buildings at a guaranteed price. For them, the PSO mechanism is still preserved.

Rabynovych also said that gas sales and traders can count on the same price conditions as the Gas Supply Company has when buying gas from Naftogaz Trading under an annual contract. If this condition is met, companies that are ready to trade gas in the segment of residential customers for the entire 12 months will have advantages, and not only during the heating season.

Rabynovych detailed the arguments by which Naftogaz apparently succeeds in persuading the authorities to put up with the current situation around the Ukrgazvydobuvannya gas. According to him, the prices of the Gas Supply Company help to keep the prices of private suppliers. "Now the gas supply company has a monthly price of 0,12 USD per 1 cubic meter, and gas sales in Kremenchuk offers gas at 0,15 USD per 1 cubic meter. All customers who live in Kremenchuk (using the cancellation of PSO and transition to the market), can change the supplier in 2 days to another one whose price is lower. Therefore, each supplier, when setting prices for a month, one hundred percent understands that if this is a non-market price, then in 3-6 months he will not have not a single client," Rabynovych said.

This might mean that Naftogaz intends to retain its position as a key player influencing the price situation in the household segment. The guarantees that it apparently gives the authorities that there will be no sharp rise in gas prices for the population is certainly a strong and influential argument.

Related: Ukraine’s Cabinet delays launch of gas market for population

A low price is good for consumers who can still enjoy low prices but bad for the development of competition from private traders. They are not interested in working in a segment with a minimum margin, or even at zero or at a loss.

Supplier of last resort

Naftogaz managed to significantly strengthen its position in the segment of gas for residential consumers also thanks to the status of Supplier of Last Resort (SLR). Only two companies were allowed to participate in the SLR tender - Naftogaz itself and the gas supply company Naftogaz of Ukraine. This was another reason for the criticism of Naftogaz from the participants. There were accusations that the competitive conditions were written out exclusively for the Naftogaz. In particular, the requirement that the bidder was obliged to have funds in his accounts for the purchase of gas (according to the Association of Gas Suppliers, 532 million USD) or a gas reserve in a volume not less than the highest monthly gas consumption by all Ukrainian consumers in during the heating season 2019-2020 (3.5 billion cubic meters of gas), only Naftogaz or its subsidiaries could match.

The private traders were ready to participate in the SLR tender if it had been decided not to appoint an all-Ukrainian operator, but to choose the operator of the "last resort" at the tender in each separate region.

Another complaint against Naftogaz was the trade mark-up of SLR, which is zero for the winner of the tender, the Gas Supply Company (Naftogaz itself entered the tender with a 5% mark-up). Based on the experience of other countries that have introduced a gas market for the population, market participants assured that the PIP should trade with a significant premium to the market price - at least + 20%. "Now SLR can take away all market consumers, offering them a price 20% lower than the market price," warned the president of the Association "Gas Traders of Ukraine" Andriy Mizovets in an interview with ExPro.

Taking into account the fact that the SLR price is calculated according to the formula, and the operator does not have a trade margin, for August its price was determined at 108 USD per 1,000 cubic meters with VAT, which is lower than the prices of the Ukrainian Energy Exchange, as well as the prices set by the Gas Supply Company within the framework of the "Monthly" and "Annual" tariffs.  

Related: Ukraine launches gas market from July 1: What does it mean for the population?

Market participants expressed fears that Naftogaz would use SLR as a tool to form its subscriber base. Access to it has become another major stumbling block in the process of launching the gas market in the household segment. Gas sales have the largest base today. They are not ready to share this data with Naftogaz or with private traders. Here a rather serious collision arose: there is a lack of legislative acts, the SLR does exist, but there is no tool with which he could quickly find a subscriber left without a supplier. For this reason, the National Commission for State Regulation of Energy and Public Utilities is now developing a normative act that should introduce an "automatic transition" procedure. With its help, a consumer who for some reason has lost a supplier (it went bankrupt, turned out to be an adventurer and run away, cut off the consumer from gas), will continue to receive gas and only from the payment will find out that now his supplier is SLR.

According to Rabynovych, the draft document regulating the automatic transition procedure may appear next week. It is not yet known how it will be discharged, but it can already be assumed that the reaction of gas sales to it will definitely be anxious: their worst expectations that Naftogaz will quickly take over their customers will become a reality.

Another reason for concern is the initiative at the legislative level to increase the maximum period of consumers' stay at the SLR. According to the current regulations, consumers without a supplier can buy gas from the SLR for a period limited to 60 days until a new supplier is found.

The market received further clear confirmation that Naftogaz is targeting a strong position in the residential gas segment. Soon, Naftogaz might well claim the status of a monopoly. But here we should not forget about one danger – due to the lack of competition, the company itself will dictate prices, and that is why they might increase.

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