Why Electricity in Ukraine Might Get Cheaper: What Changes Are Planned for the Electricity Market

Why Electricity in Ukraine Might Get Cheaper: What Changes Are Planned for the Electricity Market

Experts about reform07 December 2016

Experts are confident that the law will start working only after a few years, but the electricity market is functioning successfully in many EU countries

Why Electricity in Ukraine Might Get Cheaper: What Changes Are Planned for the Electricity Market

Experts are confident that the law will start working only after a few years, but the electricity market is functioning successfully in many EU countries.

The Verkhovna Rada passed the first reading of the bill on the electricity market last week. The Minister of Energy and Coal Mining Ihor Nasalyk said that the new document will enable the creation of a competitive market and lead to lower electricity tariffs in Ukraine.

Segodnya.ua learned what can change and how, and when consumers will feel the result of this "revolution" on the electricity market.

HOW THE ELECTRICITY MARKET OPERATES NOW

It's not totally correct to call the model currently operating in Ukraine a "market,"  according to experts. There are manufacturers of electricity – combined heat power plants (CHPPs), thermal, nuclear, and hydroelectric power plants, renewable sources of electricity ("green producers") – and a sole buyer: the state enterprise Energorynok. It's this last that sells electricity to industrial, business, and household consumers.

"We can't set our own tariff, we can't set our own output; we can only make suggestions. We can't decide for ourselves how many blocks we have. Everything is decided by authorized state agencies," Konstantin Zapaishchikov, advisor to the president of Energoatom said.

"We can't set our own tariff, we can't set our own output; we can only make suggestions. We can't decide for ourselves how many blocks we have. Everything is decided by authorized state agencies," Konstantin Zapaishchikov, advisor to the president of Energoatom, said.

Meanwhile, electricity generated by nuclear power plants is cheap, while the cost of producing it at CHPPs and green facilities is much higher. In essence, Ukrainians can buy electricity from only one supplier: an oblenergo. And there is no possibility of choosing a tariff; the National Energy and Utilities Regulatory Commission (NEURC) sets the rate.

The money that Ukrainians pay for electricity goes through the whole chain: oblenergo - Energorynok - energy producers. Electricity arrives through the same chain: producers - Energorynok - oblenergo - consumer. As a result,  Ministry of Energy officials have noted, there is no competition among manufacturers. They generate exactly as much electricity as Energorynok requests. In addition, there is one tariff for all Ukrainians.

"The current model is outdated. The problems of Energorynok stem from the fact that the state determines the volume of electricity production and sales, as well as purchase and sale prices, on an administrative basis. In the administrative model, there is a problem with the non-transparency of decisions and tariff-setting, as well as the accumulation of problems every year, such as the growth of Energorynok's debt. But in the liberal model, the parties to  energy contracts will determine volumes, terms, and prices by themselves. There will be clear responsibility between the parties," said Yuliya Nosulko, the head of DTEK's Regulatory Policy Department.

By the way, according to NEURC Resolution No. 220, the price of electricity in Ukraine is increasing in five stages. Until April of last year, a family that consumed 150 kWh of electricity per month bought 100 kWh at 45.6 kopecks per kilowatt, and another 50 kW at a price of 78.9 kopecks. Last September, a tariff was approved at the level of 78.9 kopecks for the consumption of more than 100 kW and 45.6 kopecks for the consumption of up to 100 kW, in March at 99 and 57, and in September at 71.4 and 129 kopecks.

The price increase will not stop here; in March 2017, if you consume more than 100 kWh, you'll pay 168 kopecks per kilowatt, and 90 kopecks up to 100 kWh. However, Ihor Nasalyk said, after the launch of the electricity market, tariffs may fall.

"Consumers will feel benefits, because they will become the main market entities. A consumer will have the right to choose. This is the essence of the law. [...] The consumer will no longer accept the price that's dictated to him. I want there to be 6-7 suppliers for the consumer to choose from, thereby creating competition," Nasalyk said.

CHANGE: WHAT, HOW, AND WHEN 

"Instead of the existing model, a model of direct market relations between market participants will be implemented. There will be a day-ahead segment, a segment of bilateral contracts, an intra-day market, a balancing market, a market of auxiliary services, a retail market," - Dmitry Marunich, the director of the Energy Research Institute, said.

Simultaneously, the markets of  electricity transportation and supply will be separated. Thus, oblenergos, which have their own grids, will earn by delivering electricity to consumers' homes, and trading companies will purchase electricity from different producers, plan a load schedule, and sell at different tariffs. As a result, Ukrainians will be able to choose at what tariff and from whom they buy electricity. Relatedly, a few years ago, Ukraine signed the Third Energy Package with the European Union, which envisages the creation of electricity market.

 In Poland, there are more than 100 electricity tariffs. Electricity markets are also successfully operating in other EU countries. "I lived in Germany for two months. I went to the office of the nearest energy company. They sent a special agent to my house to find out how much electricity we consume, and he suggested signing a contract with a certain tariff. There, you can choose what kind of electricity you will consume. If someone has gone green, he or she has the choice of buying only expensive energy generated using renewable sources. Windmills, for example. Some companies sell electricity 60% generated by nuclear power and 40% by TPPs. You can choose," Kyiv resident Maxim said.

The cost of electricity will also depend on the period for which the contract is concluded with the supplier. The longer the contract, the cheaper the price. When Ukrainians can choose from whom they buy electricity, suppliers will have an incentive to compete with each other and offer more favorable conditions – and the cost of electricity could decrease.

"In general, in normally operating markets, prices can both rise and fall. And, furthermore, real competition appears for the provision of services to the consumer. In addition to the usual supply of electricity, consumers are often offered service packages: the simultaneous supply of electricity, insurance, energy-saving equipment, energy audit services, etc.," said Yuliya Nosulko, the head of DTEK's Department for Regulatory Policy.

"In general, in normally operating markets, prices can both rise and fall. And in addition, real competition appears for the provision of services to the consumer," she said. 

If a producer itself sells electricity, Ukrainians will be able to buy energy directly from NPPs, TPPs, and HPPs. However, Nosulko noted, a normal practice of developed markets is that the population buys from competing suppliers, of which are many and which will try to offer consumers the most favorable terms and conditions.

Experts agree that the existing version of the Law on the Electricity Market needs to be supplemented. For instance, according to Dmitry Marunich, the document does not specify how the "fund for covering the imbalance," which will compensate for high costs of certain types of generation, will be formed. "There is alternative generation, thermal power plants. How will the difference in the cost of their production be covered? Those whose production is cheaper will have a competitive advantage," he said.

According to Ihor Nasalyk, technical details will be addressed later. "Based on the experience of reforming domestic electricity markets in the EU countries, which took more than 10 years, the introduction of a full-scale electricity market will require the opportunity for industry entities to prepare for and adapt to the new working conditions. [...] Therefore, the draft law provides for the introduction of a period (up to 24 months from the date the law takes effect) during which the necessary technical, organizational, economic, and regulatory prerequisites for the implementation and harmonious operation of the Ukrainian electricity market should be created," the explanatory note attached to the document reads.

Ukrainians will be able to choose a electricity supplier in just a few years."In a fairly optimistic scenario, implementation will take two years. This is related to the fact that the market model is changing dramatically: the development and installation of specialized software, comprehensive changes to the system of contracts, and staff training are required. And for companies like oblenergos, there are even stricter requirements: each has to split into a company that  deals only with the distribution of electricity and one that supplies it. This is one of the basic requirements of the reform, whose attainment should ensure competition in the supply market, a real battle for the consumer," Yuliya Nosulko said.