Why Ukrainians shouldn't trust authorities' hyped promises about reducing utility tariffs

Author : Olena Holubeva

Source : 112 Ukraine

We have found out how the authorities intend to ensure the gas price – 0,25 USD / cubic meter, promised by President Zelensky and announced by PM Shmyhal
23:09, 15 January 2021


We have found out how the authorities intend to ensure the gas price – 0,25 USD / cubic meter, promised by President Zelensky and announced by PM Shmyhal. A government decree could be issued with wording that would allow Naftogaz to lure away a significant number of gas sales customers and independent gas suppliers and earn huge profits.

For ordinary Ukrainians, this is rather a temporary compromise than a victory – the transition to Naftogaz would not guarantee them a price lower than the market price in the next heating season.

Far from poor people living in expensive cottages and country estates with autonomous heating will most likely benefit from gas prices of 0,25 USD / cubic meter. Heating bills for their homes will drop significantly.

A long story of the increase

At yesterday's government meeting, which took place against the backdrop of massive protests against high gas prices that have swept almost all of Ukraine, raging for a week, Prime Minister Shmygal said that “it is proposed to introduce state regulation of gas prices for the period of quarantine restrictions or until the end of the heating season." The Cabinet did not make any specific decisions, did not approve the documents – this is just a statement of the Prime Minister and the maximum price he announced of 0,25 USD / cubic meter for the specified period. The statement on the website of the Cabinet of Ministers clarifies that the head of government "instructed the Ministry of Energy, the Ministry of Economic Development and Trade, the Ministry of Justice and other central executive bodies to urgently prepare a draft resolution on the introduction of state regulation of gas prices for the period of the quarantine restrictions or until the end of the heating season." The specific time frame for when the decree will appear has not yet been announced.

Related: Ukraine's govt proposes ways to reduce gas tariffs for population

The president also announced that he was involved in the talks on the gas price, saying that gas prices were decreasing on the initiative of the head of state. The decision to reduce the gas price to below the market level, which will help reduce the cost of gas in payments to the population by more than 30% in February 2021, was allegedly made after a long meeting of experts in the field of economics, electricity and gas energy in the Office of the President.

However, "minus 30%" the representatives of the Ukrainian authorities counted from the price level of more than 0,36 USD / cubic meter, at which, according to Shmygal, "some regional gas companies are selling gas today." For the sake of fairness, it should be noted that only one supplier, Lvivenergozbut, offers gas for 0,38 USD in January.

At the same time, literally two days before the promise of the president and the prime minister about the price of 0,25 USD / cubic meter for the population of the acting Energy Minister Yuriy Vitrenko announced a mechanism that could reduce the price of gas for the population to UAH 5356 per thousand cubic meters, which is 44% less than the weighted average price in January. It was about fixing such a price for a year.

Naftogaz as the main supplier

Today, when prices at gas hubs in Europe are breaking records, not a single private gas supplier could really provide the price even for 0,25 USD / cubic meter, market participants say. "Despite the fact that the price in Europe has rolled back a little, in Ukraine, it remains quite high: in the wholesale traders' trade in gas at around 300 USD per 1,000 cubic meters," Hennadiy Kobal, Founder and Director, ExPro Consulting, says. "The announced price of 6.99 UAH / cubic meter is significantly lower than the market price: now the industry buys gas at a price of about 0,3 USD / cubic meter," Andriy Mizovets, president of the Gas Traders of Ukraine Association, adds.

Under current conditions, the price can fall below the market price in Ukraine only due to the resource of the state Ukrgasvydobuvannya enterprise, which accounts for about 70% of the total production of blue fuel in Ukraine. Last year, the company produced 14.15 billion cubic meters, while private gas producing companies – only 4.9 billion cubic meters.

Related: Protests incited by gas price hike grip Ukraine: Would they escalate into new Maidan?

According to Vitrenko’s variant, it was assumed that Naftogaz would provide all gas suppliers to the population with the resource of Ukrgazvydobuvannya, and they would sell gas at a price below the market price. In fact, it was a question of returning to the PSO practice in the form in which it existed before the introduction of the gas market for the population in August last year. A significant difference was that at that time only Naftogaz and gas sales companies were involved in the segment of gas supplies to the population, which bought gas from it at a fixed PSO price. Their right to do so was enshrined in a Cabinet resolution.

According to, the authorities have decided not to bother with solving a difficult problem and leave the resource of Ukrgazvydobuvannya in the hands of Naftogaz. In exchange, it will provide gas supplies to the population at a price of 0,25 USD / cubic meter. If this particular mechanism will be incorporated in the draft resolution announced by Shmyhal, then, most likely, by the decision of the Cabinet of Ministers, a maximum price for household consumers will be established, above which gas cannot be sold - the very same 0,25 USD / cubic meter. Suppliers who fail to meet this price will not be able to, accordingly, confirm the nominations to consumers and, in accordance with market rules, they will go to the supplier of last resort. PPN is now represented by Naftogaz.

Consumers do not have to wait for the transfer to the PIP but immediately switch to the Naftogaz supplier. Naftogaz of Ukraine (operating in the segment of gas supplies to the population) is ready to provide natural gas to household consumers within the framework of the Monthly tariff plan at a regulated price of 0,25 USD per cubic meter. m until the end of the quarantine or heating season.

"In the current realities, none of the independent suppliers will be able to give a price of 0,25 USD per cubic meter. Gas sales companies will also not be able to provide such a price, therefore, customers will go from them to a supplier from whom it will be possible to buy gas at such a non-market price," Mizovets notes.

Naftogaz will be able not only to significantly increase its client base but also to make excellent money.

Related: U.S. prepares new sanctions against Nord Stream 2 gas pipeline

"The profit from the sale of 4 billion at 0,21 USD is definitely higher than the sale of 1 billion cubic meters at 0,28 USD," Kobal said. He noted that the price of 0,25 USD per cubic meter is not that low. In reality, the price was only returned to the level in December, when more than half of the suppliers offered gas in the range of 0,21 USD / cubic meter.  “What kind of price reduction can we talk about if in the summer the gas was 0,11 USD? And now it seems to have been reduced - and it will be 0,25 USD," Kobal asks. According to him, it cannot be ruled out that the price of 0,25 USD / cubic meter, taking into account the expensive delivery, will result in massive non-payments.

Thus, Naftogaz gets all the profits. Residential consumers receive only a temporary compromise.

“It cannot be ruled out that in the near future, market prices for gas will naturally rollback. In Europe on January 13, after a rapid rise in prices, gas has already fallen in price by more than 20%, and it is difficult to predict how the situation will develop further. It is possible that prices will fall up to 0,25 USD / cubic meter and it turns out that there was no need for state regulation," Mizovets said.

At the same time, no one can give guarantees that the price for them will be lower than the market price in the next heating season, Kobal adds to the clients whom Naftogaz will be able to pick up as a result of switching to its trader or from PON. “You really need to understand that the current decision is temporary. This is a forced step, Naftogaz, like other suppliers, will not work at a loss,” he told.

What will happen to the gas market and other suppliers? Most likely, they will endure everything more or less painlessly and after a short break, they will return to work. “It is of great importance what the term of the decree will be in the final version. At first, the option of setting a fixed price for a year was considered, now we are talking only about the lockdown period or the entire heating season. gas for the population will not be as significant as they could be in the case of fixed prices and a boundary trade markup for a year," says Kobal.

Related: Gas prices for Ukraine's population to be reduced by 30%

And if prices in Europe normalize, then the forced break in work for private gas suppliers will end even before the end of the heating season.

Convincing threat

In the current situation, with the help of manipulations and promises, the authorities managed to shift the focus of Ukrainians' attention from real problems to imaginary ones, to distract from real threats, experts warn.

A decrease in gas prices does not mean a decrease in heat prices or the elimination of preconditions for an increase in tariffs for heating and hot water in apartment buildings. In the draft regulations, which were developed to minimize the consequences of a sharp increase in gas prices for the population, there was not a word about a decrease in the price of gas for thermal workers, Kobal notes.

The price at which Naftogaz sells gas to thermal workers is tied to a formula that takes into account price changes at the TTF hub. Taking into account the changes taking place in November, Naftogaz sold gas to thermal workers at 192 USD per 1,000 cubic meters (excluding VAT and the cost of transporting gas through trunk and distribution pipelines), in December the price increased to 217 USD 1,000 cubic meters. "If prices on European hubs do not roll back and Naftogaz continues to raise PSO prices for heat workers, then Ukrainians will see a significant increase in tariffs for heat and hot water even before the end of the current heating season," says Kobal. According to him, given the current PSO prices, the tariffs are not already bursting at the seams and cannot withstand the pressure of gas prices, remaining at the same level.

Related: IMF worried due to Ukraine's intention to cut gas tariffs for population, - Finance Minister

It should be noted that now it has become much easier to raise tariffs for heat and hot water. If earlier the National Commission for State Regulation of Energy and Public Utilities approved the tariffs for the majority of thermal workers, then this year the Cabinet of Ministers initiated the process of transferring powers to the localities.

"If we are talking about an average family living in an apartment, then - yes, at a price of 0,25 USD / cubic meter, they will pay 0,36-0,72 USD less for the gas they burn in their burners in the kitchen, but from the announced reduction in the price of gas, their payments for heat and hot water will not decrease! Who will save them from the daunting sums in payments for heat and hot water?" said Mizovets, noting that all this will become obvious when payments for January and February come, because if gas suppliers publish prices for the month preceding the month of delivery, then heat suppliers pay for gas actually retroactively.

And those who will really benefit from the decision on the gas price of 0,25 USD per cubic meter are far from poor people living in houses with autonomous heating, Mizovets says. “In my opinion, this is very far from a sincere concern for the population. Of course, poor people, including pensioners, also live in houses with autonomous heating, but where the state’s concern is to provide reliable social protection if the income of these people does not allow them to pay they should receive subsidies for heating their premises," he stressed.

Among other things, the government has not yet made any statements regarding the cancellation of the decision to launch the heat market from May 1, which, in fact, will mean the abolition of the gas PSO for thermal workers, Kobal recalls. Thus, in the next heating season, the heating price will be calculated in accordance with the market price for gas, and this will mean an increase in tariffs!

Related: Ukraine, IMF negotiated on gas price, PM claims necessity to find middle ground

The problem of households using electric heating to heat their homes also remains unresolved. For them, the amount of bills will increase 2-3 times. At yesterday's meeting, Shmygal instructed the responsible departments to introduce a mechanism to subsidize such users, but, as in the case of the gas price reduction, there are no deadlines or an understanding of the mechanisms by which money will be generated for this expense item.


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