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

Author : Olena Holubeva

Source : 112 Ukraine

After the launch of the gas market, we will witness a grandiose battle for influence in the segment between the largest gas state-owned company Naftogaz Ukraine and a group of regional gas salers
11:00, 1 July 2020

A free gas market for the population, when people themselves could freely change suppliers, depending on their prices, services, and additional services, was supposed to start on May 1. However, the government loosed the period of preparation for this revolutionary step, having not resolved most of the issues without which the launch of a full-fledged market would have been impossible, and the transition was postponed to July 1

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But if the market does start, we will witness a grandiose battle for influence in the segment between the largest gas state-owned company Naftogaz Ukraine and a group of regional gas salers. At least ten more companies will enter the fight. One of the hottest battles will unfold in Kyiv - Kyivgaz and the energy supply company from DTEK’s orbit, YASNO, will compete for the customers.

The reduction in gas prices as a result of it will not happen. On the contrary, with the transition to a market model, they can grow to 150-225 USD per 1 thousand cubic meters.

Related: Ukraine may provide Poland with gas after end of contract with Russia

Gas market for the population

The idea of ​​a free gas market for the population is that the owners of individual houses, apartment buildings equipped with individual boilers, can choose a gas supplier with the most suitable conditions. In Europe, where the transition to market conditions took place a long time ago, such services can be purchased from companies that offer in one package also the supply of electricity, often telecommunication services. The point is that there are many such companies and they are strictly competing among themselves for the client, which helps to improve the quality of services and lower their prices (in order to keep customers, companies work with extremely low margins, offer discounts, bonuses). Over the past six years, the IMF and the World Bank have sought the Ukrainian authorities to abandon the existing gas supply system to the population and move to a free market. The importance of this step has been repeatedly emphasized in the secretariat of the Energy Community.

The next market launch deadline was scheduled for May 1. However, due to the fact that a number of issues without which a full-fledged functioning of the market would have been impossible remained unresolved, on April 25, the Cabinet of Ministers extended until July 1 the validity of special obligations (PSO) imposed on Naftogaz of Ukraine for the sale of natural gas at a special price, calculated by a fixed formula. The transition to a market model for thermal energy producers (energy companies) was postponed for a year - until May 1, 2021. Since the abandonment of PSO is one of the key conditions without which a transition to a full-fledged market is impossible, for the last week market participants and experts have been waiting for a decision from the government that would extend its effect for the category of the population for which it should be canceled. This would put an end to the transition to a market model for domestic consumers, in which suppliers could compete among themselves, and consumers choose their own and the best conditions for themselves.

De jure, the PSO system is canceled from July 1. Today it is impossible to renew the PSO. It will be extended. We all understand that the PSO will not be canceled from July 1. It will be extended for a month (until August 1), and everyone hopes that during this month the problems that exist will be solved at least partially. The main one is the determination of the supplier of last hope,” Valeriy Tarasyuk, the head of the National Commission for State Regulation of Energy and Public Utilities (NCSREPU), said this last week at the Energy club meeting. Ukraine will look embarrassing before the IMF, he said: “I don’t know if the memorandum with the IMF was published, but I’ll tell you that the condition is laid down in the IMF memorandum. It’s written in. And it looks like Ukraine is breaking the memorandum with the IMF and will justify ourselves the foundation, why we didn’t have time. We will explain that there were objective reasons... although to find objective reasons in a situation where a memorandum was signed 2-3 weeks ago and one of the provisions has not been fulfilled, it doesn’t look very good.”

Related: Average price for autogas still grows in Ukraine

In early June, the International Monetary Fund approved an 18-month stand by program for Ukraine for $ 5 billion. The first tranche amounted to $ 2.1 billion. In addition to launching a gas market for the population, the conditions for receiving money for Ukraine were the approval of the banking “anti-Kolomoisky law” and the law on the land market.

Market participants say they will not be surprised at the option in which the government initially allows the gas market for the population to start, and in the fall, closer to the local elections and the start of the heating season, will again abandon it, returning to the practice of PSO. The operators that entered the battle will remain not only with reserves of gas purchased for gas supplies, but also with infrastructure costs: software, customer service centers, and employees. Even for companies that have long been working in the field of supply to the public (in the PSO system), maintaining a well-established infrastructure cost at least 6 USD per 1,000 cubic meters of gas sold.

How to launch a full-fledged market?

The need for another postponement of the transition to a market model is due to the fact that despite the timeout taken in April for almost two months, the Cabinet of Ministers has not resolved most of the problematic issues, due to which the transition to the market was postponed from May 1 to July 1 for household consumers and was postponed for a year for district heating enterprises. The only thing that was done was that the regulator approved a new procedure for changing the gas supplier. Ukraine had no ban on changing the gas supplier, but the current procedure was complicated and confusing and took from 30 to 150 days. “Before the adoption of the changes, the process could last for months. With the new rules, you can change the supplier in at least three days,” commented Naftogaz head Andriy Kobolev on the decision of the NCSREPU.

Organizations that had been supplying gas to the population over the past few years were against too. “Consumers can freely go to other suppliers, but they, in turn, will not have any of the existing mechanisms for collecting debts,” said Artem Kompan, head of the board of the Association of Energy Suppliers, director of EGAZ LLC at the Energy Club meeting. The EGAZ team has been working in the natural gas supply market since 2013 under the RGK-Trading brand (it was part of the RGK company). Now EGAZ is a major trader who sells on the market both a resource of domestic mining enterprises and an import resource: it supplies gas to gas sales and other gas supply companies.

Related: Autogas prices continue to grow in Ukraine

The Association of Energy Resource Suppliers, led by Kompan (unites gas suppliers to the population working in the PSO system), participated in the discussion of draft law 3613, submitted by the ruling party, who are proposing to introduce the types of penalties for debtors for housing and communal services applicable to malicious non-payers of alimony. They offer not to let the debtors go abroad, to deprive them of a driver’s license, and also fine for large amounts. If the bill were passed, suppliers would have the opportunity to collect debts from the consumer, even if he changed the supplier to a new one. However, the bill was registered only in mid-June, and when it will be adopted (whether at all) is not yet clear. Kompan stressed the need for mechanisms for influencing debtors and real debt collection.

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Other suppliers also talk about the danger of a free transition to a new supplier amid the absence of real debt collection mechanisms. In particular, Volodymyr Shvedky, the Energy Trade Group CEO (a trader, gas supplier who has been working in the B2B segment since 2015, announced last week that he intends to enter the gas market for the population).

Related: Germany considers partial switching to hydrogen instead of Russian gas by 2030

No “last resort”

In the two months of the timeout taken in April, the government was not able to decide on the supplier of "last resort" - a company that would accept and supply gas to those consumers who for some reason were left without a supplier for 60 days. The company will sell gas to them with a premium, which, as a rule, is up to + 20% of the market price. This company is selected for the competition. June 12 acting Energy Minister Olga Buslavets assured that the competition would be announced within a week (June 15-21), but this never happened!

Neither Naftogaz nor private owners deny that they are interested in becoming suppliers of "last resort." Moreover, the latter says that they were ready to participate in the competition if a decision were made, to appoint not the all-Ukrainian operator, but to select the operator of "last resort" in the competition in each individual region.

Since the start of unbundling (in 2014), all gas suppliers have signed a service agreement with the consumers. Thus, a gas sales customer base was formed.

In connection with this situation, NCSREPU is in favor of the automatic transition of household consumers to overhead pipelines in the event of a supplier loss. "We, as a commission, advocate that the transition to a supplier of the “last resort” should be an unconditional procedure. We are now talking about consumer protection. To prevent a person from losing a supplier, for example, go bankrupt, and he should go give a request to go to the supplier of “last resort.” And only after that - three days later - will he have it,” NCSREPU head Valeriy Tarasyuk said.

While this important innovation is being discussed at the idea level, there are no concrete solutions to it either. It is also important that consumers do not understand why and how they should change their supplier.

Related: Russian gas transit through Ukraine almost halved

Who will fight for leadership in the gas market

“It is already clear that the largest operators in the market (if the authorities nevertheless decide to launch it) will be regional gas sales – both those included in the RGK group and others that have been working on the market for many years and have a proven strategy and customer base. Naftogaz is preparing to create serious competition to them, it has access to the Ukrgasvydobuvannya resource. DTEK, which owns regional energy and the universal service provider YASNO in Kyiv, can become a real potentially strong competitor in the market. Most likely, YASNO in the capital will be the most competitive for Kyivgaz. They will also be able to use synergy with the electricity supply business both in Kyiv and in the region (where they already have a central processing center network). All other players are destined for the fate of niche operators,” said Hennadiy Kobal, ExPro Ukraine consulting company head.

Gas sales also intend to sell gas to consumers on market conditions. A number of gas sales work with consumers, including using a network of Customer Service Centers (CSC) under the brand name 104.ua. The network will expand. 104.ua client spaces will be opened in new regions, in particular in Poltava and Kirovohrad (the city where Naftogaz has a single regional gas company). In general, the situation will look like this: traditional suppliers (who worked with the population in the PSO system), including gas sales, will try to keep their clientele, and new players will do everything possible to take as many customers as possible. The main reasons for consumer dissatisfaction (and the desire to change the supplier), as a rule, are dissatisfaction with the quality of gas (often this is a far-fetched reason, - the price and service of the company (queues in the CSC, feedback services, waiting time for operator response on the line).

No one expects that the process of changing gas suppliers will be dynamic, this is a rather inert segment. If the industrial market is much more mobile, then the gas market for the population is rather conservative,” President of the Association "Gas Traders of Ukraine" Andriy Mizovec said. He noted that he knows more than a dozen companies ready to enter the gas supply segment to the population.

Related: How crisis hit Russian oil and gas industry?

On the whole, the struggle for market shares in the segment of gas supplies to the population is expected to be very serious. For gas market participants, including Naftogaz and gas sales, this is a good opportunity to get additional gas sales in the context of a shrinking (due to Covid-19 and decreasing economic activity in general) segment of industrial consumers. In the B2B segment, marginality tends to zero due to incredibly fierce competition. In the segment for the volume of 3 billion cubic meters. 700 licensees are fighting, said Shvedky. With the opening of the market for industrial consumers, the share of Naftogaz, which was a historical monopolist, decreased significantly and in different periods fluctuated between 5-10%.

If the PSO is canceled, from July 1, household gas consumers (private houses and apartments that have a gas stove, gas boiler or heating boiler) will be involved in the gas market; this segment takes more than 10 billion cubic meters of gas per year, says Kobal.

By the value of this volume, those market participants who can manage to bite off a significant piece of the pie, with which this attractive segment can be increased, can increase their sales.

Gas prices for ordinary consumers

Market participants are unanimous in their opinion that now is the most successful period for opening a gas market for the population. Prices are at a 15-year low. Due to the warm winter and an excess of gas in underground gas storages, quotations of European exchanges do not exceed 60-80 euros per 1 thousand cubic meters.

At the same time, in Ukraine, due to the lack of a hub or a separate gas exchange (the creation of which was considered several years ago), there are no price benchmarks for gas. “The prices of the Ukrainian Energy Exchange do not fully reflect the situation. 80% of gas is sold in the messenger, by phone,” said Volodymyr Shvedky. The price reference can be Naftogaz gas prices. In June 2020, the wholesale price for households and heat producers (FEC), which is calculated using the Amsterdam + formula, amounted to UAH 2.14 per cubic meter (excluding VAT, gas sales margins, and gas transportation costs through main and distribution pipelines).

Related: US company wants to supply liquefied gas to Ukraine: 5.5 billion cubic meters annually for 20 years

At the same time, gas prices for the industry are determined at the level of 130 USD on a prepayment basis and 150 USD on the fact. “As for prices, the situation remains difficult. A week before the launch of the competitive market, there were no clear and comprehensible rules that would allow suppliers to predict the price a month before delivery. Suppliers still had to work on spot contracts, not being able to play a long one due to the fact that the situation remained uncertain, in particular, it was not clear whether PSO will be canceled from July 1, in what form it will operate from July 1,” Association of Energy Suppliers noted.

The increase will occur due to the fact that in the conditions of PSO, suppliers worked in conditions of a limited margin by the Cabinet, and with its cancellation, suppliers will be able to set it based on their own assessments of economic realities. In this case, the final price of gas will be affected not only by the purchase price of gas and associated expenses but also by the costs of organizing work with the public (software, a central processing center, salaries for employees who will be involved in paperwork and digital resources).

According to our expectations, suppliers will work with a margin of at least 7-10% economically, because everyone who enters this market tomorrow will need to invest for at least 3 years (in infrastructure for working with the population, - ed.) we would expect such a margin of 7-10%, but everything will depend on how the market model is formed,” Shvedky from the Energy Trade Group assured. The volumes that households buy are hundreds of times lower than the volumes that industrial facilities buy, and this explains the high cost of servicing this area, market participants say.

Related: Gas controversy and defense against Russia: Transformation of US-Germany relations

According to Mizovets, after the onset of the market, prices for the population will be at the level of prices for industry or even slightly higher - about 225 USD per 1 thousand cubic meters: “If there are no serious political upheavals, swings in the dollar exchange rate, there will be no prerequisites for a gas price increase for the coming season. But much will depend on the situation with the development of coronavirus, which will affect the volume of consumption by industry. My forecast: in case gas prices for households will go in the corridor 150-225 USD cubic meters.”

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