Utility tariffs bubble to burst in Ukraine: What to expect in 2022?

Author : Olena Holubeva

Source : 112 Ukraine

The utility tariffs in Ukraine have long been running wild
22:45, 29 December 2021

Open source

Attempts to keep them at the existing levels are costing the Ukrainian economy more and more since the models of social tariffs are based not on systemic solutions, but on naked populism and directive wishes of the President's Office. In 2022, most of the "soap bubbles" may burst, which will inevitably lead to an increase in payments for gas, heat, hot and cold water. Among other things, there are all the prerequisites that the next year may not survive the "presidential discount" on electricity for the population.

Related: Ukraine's electricity consumption increased by 2,000 megawatts in three days, - Energy Minister

The president's office requires government agencies and state-owned companies to keep tariffs from increasing at any cost. In most cases, the requirements run counter to objective economic factors. Naftogaz has already begun to complain about the "social burden". Chairman of the Board Yuriy Vitrenko said that the gap between the market (2,2 USD / cubic meter) and the current price of natural gas for the population (about 0,3 USD / cubic meter) is so great that if it is kept for a long time, NJSC Naftogaz of Ukraine will lose the ability to cover it from their own resources. "We honestly say that if such prices remain, we, as a national company, will not be able to cover such a difference," he said. At yesterday's press conference, he made it clear that after April, when the term of the annual contracts for the population will come to an end, no one knows what the price will be in the new heating season.

Due to the rise in the price of gas, which is needed by regional gas companies to cover technological needs, distribution tariffs had to be increased at least 4 times, but this was not allowed. NKREKU approved a slight increase in gas delivery and even reduced tariffs for several regional gas companies. There are rumors on the market that, in order to avoid a record increase in the debt of regional gas companies for the gas selected for balancing, the authorities may oblige the GTS operator to sell the 1.3 billion cubic meters they need to regional gas companies. meters of gas for the HWP for a year at 0,28 USD per cubic meter. This is despite the fact that the market price of gas has already exceeded 60 UAH and is confidently approaching 2,4 USD / cubic meter. Such a decision directly threatens the loss of financial liquidity of the company that manages the main gas pipelines and is responsible for the transit of Russian gas. On the other hand, if the authorities do not find a way to provide regional gas companies with gas for 0,28 USD, their debt for gas taken from the system may exceed the historical 1,2 billion USD.

Related: Ukraine to limit gas price for bread production companies

Thermal operators openly say that the current tariffs are artificially constrained. They do not have the funds to invest in the renovation of networks and even lack funds to purchase gas, which is used to produce heat and hot water. Under the terms of the memorandum, according to which the heating companies agreed not to raise tariffs, Naftogaz sells gas to them for 0,27 USD. The volume of such gas is determined based on the so-called historical consumption of past periods. The Ukrteplokommunenergo Association has repeatedly stated that the gas allocated by the NJSC at a reduced price is not enough for heat supplying organizations.

The fact is that the volume of heat consumption by the population on certain days of the current year does not always coincide with last year's due to the weather. The lower the temperature, the higher the losses in the networks, and, accordingly, large volumes of gas are needed to generate heat. For example, last year in Kyiv on December 24, the air temperature was within 0 ... + 2, and today the frost is down to -12. Thermal companies are obliged to pay for gas over the limit at the market price (2,30 USD / cubic meter).

Related: Nord Stream 2 launch would lower gas prices in Europe, - Putin

Today, most of the bleeding fuel and energy complexes simply do not have the money to cover the difference in the cost of gas. In the cities, support budgets were cut, and some even budgets to subsidize their heating companies, but this is not enough. The Ukrteplokommunenergo Association warned that on New Year's holidays, most Ukrainians from different cities may be left without heat.

Vodokanals also complain about the inconsistency with the economically justified level of tariffs recently established by NEURC. They warned that the situation would have serious consequences in the near future.

Against this background, the "presidential discount" on electricity (0,067 USD per kW with consumption less than 250 kW per month), which is used by 80% of consumers, seemed unshakable. But it seems that this mechanism too may not withstand the pressure of objective economic factors. Already in the first quarter of 2022, a "debt hole" 0,7 billion USD is expected - funds that Energoatom and Ukrhydroenergo will not be able to compensate for electricity suppliers to the population. In this case, the latter face bankruptcy.

When the model, thanks to which the "presidential discount" on electricity became possible, was calculated, market prices of 0,06 USD / kW were taken as a reference point. At the same time, the weighted average prices in November at the DAM did not fall below UAH 3 kW. In October, they also held above the 0,73 USD / kW mark.

Related: Europe set record for extracting gas from storage

The situation will get more complicated next year. An increase in tariffs for the distribution of local agencies by 10-20% and an increase in the tariff of the operator of the backbone networks, Ukrenergo, will also affect the amount of compensation that should be covered by the suppliers Energoatom and Ukrhydroenergo - upward.

Ukrhydroenergo is already openly talking about the shortage of funds to cover the difference between the market price and the price for the population at the “presidential discount”. According to Bohdan Sukhetskiy, commercial director of Ukrhydroenergo PJSC, it will be especially acute in January - March 2022. The real costs of Ukrhydroenergo for PSO implementation are already significantly higher than the indicators planned for the company by the Ministry of Energy.

Energoatom has been silent on this issue so far, but the company can be understood. NAEK will remain silent until the last since it is he who today bears the main burden of obligations to ensure the discount. "It will probably take a couple of weeks from the moment when Energoatom stops fulfilling its obligations to pay the cost of the service until the default of electricity suppliers to the population," a large supplier says.

If this happens, household consumers who have lost their suppliers will fall on the operator of last resort and will buy electricity at its tariffs – 0,2 USD / kW, if the authorities do not set some special prices for the population at the PNP.

Suppliers say that even before October 1, ahead of the launch of the financial PSO model, suppliers and international consultants warned of possible risks. "There is no information who considered this mechanism to be ideal, suppliers have always pointed to the risks associated with price fluctuations in the market and cash gaps. Even USAID" consultants "who promoted the idea of ​​a financial PSO (replaced the commodity PSO from October 1, - ed.), talked about the need to achieve a list of conditions for the transition to this model. None of the conditions they voiced were met, and they switched to the financial PSO," the supplier's company says.

Answering a question from a correspondent, Energy Minister German Halushchenko found it difficult to say whether the current model of "social obligations" in the electricity market and, accordingly, the "presidential discount" PSO. "The current PSO really ends after the heating season, we will consider this issue closer to its end. With any models that continue further, a stable price will be guaranteed for vulnerable layers," Haluschenko said.

Related: Ukrainian nuclear power plants produce record amount of electricity per day

From the minister's words, the conclusion suggests itself that officials, even in the most hopeless situation and in spite of all objective factors, will continue tariff populism. But how they will manage, in particular, to keep the price of electricity for the population at a level almost two times lower than the market is still unclear. Obviously, the choice of tools is small. It is possible to raise the upper price caps in segments of the markets, but this will lead to another round of price increases for the industry. The state could also expand the range of companies that must compensate for PSO by placing obligations on private companies. True, the latter, unlike state-owned companies, can demand compensation for PSO from the state, which will amount to millions of dollars.

Related: Energy National Commission increases Ukrenergo's tariff for electricity transmission in 2022

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