Konstantin Ushchapovsky: "By the end of the year, all regional energy companies will be unbundled"

Konstantin Ushchapovsky: "By the end of the year, all regional energy companies will be unbundled"

The power market reform has reached its active stage. This year, the main part of subsidiary legislation will be passed, and all regional energy companies will be unbundled. Currently, only Ternopolenergo has declared its readiness to unbundle, and Kyivenergo has taken the first steps by creating DTEK Kyiv Electric Grids. Both the remaining market players and consumers have a very limited understanding of what awaits them later this year. In 2017, when the Law on the Electricity Market was being adopted, a market expert and advisor to minister Ihor Nasalyk, Konstantin Ushchapovsky, described in an interview with Energoreforma how unbundling (the division of regional energy companies) will be performed and what energy companies and their clients can expect.

Konstantin Ushchapovsky: "By the end of the year, all regional energy companies will be unbundled"

The power market reform has reached its active stage. This year, the main part of subsidiary legislation will be passed, and all regional energy companies will be unbundled. Currently, only Ternopolenergo has declared its readiness to unbundle, and Kyivenergo has taken the first steps by creating DTEK Kyiv Electric Grids. Both the remaining market players and consumers have a very limited understanding of what awaits them later this year. In 2017, when the Law on the Electricity Market was being adopted, a market expert and advisor to minister Ihor Nasalyk, Konstantin Ushchapovsky, described in an interview with Energoreforma how unbundling (the division of regional energy companies) will be performed and what energy companies and their clients can expect.

The power market reform has reached its active stage. This year, the main part of subsidiary legislation will be passed, and all regional energy companies will be unbundled. Currently, only Ternopolenergo has declared its readiness to unbundle, and Kyivenergo has taken the first steps by creating DTEK Kyiv Electric Grids. Both the remaining market players and consumers have a very limited understanding of what awaits them later this year. In 2017, when the Law on the Electricity Market was being adopted, a market expert and advisor to minister Ihor Nasalyk, Konstantin Ushchapovsky, described in an interview with Energoreforma how unbundling (the division of regional energy companies) will be performed and what energy companies and their clients can expect.

Unbundling, the division of regional energy companies, is always mentioned in any discussion of the progress of the power market reform. What does this mean in practice?

In 2017, the Law on the Electricity Market was adopted. It envisages radical changes to the structure of the power sector in 2018. All distribution companies (regional energy companies) that distribute and supply electricity to the majority of consumers in their respective regions will have to separate the distribution function from the supply (sale) of electricity by December 11, 2018. Thus, what has been until now a natural monopoly, the grids, will separate off a special company to operate distribution grids. This company will be involved only in the transmission of electricity. No trading. Only grid operations and the provision of equal access for all those who want to use these grids.

The other company will become an electricity supplier. There will be no difference between suppliers created on the basis of regional energy companies and the new companies that will certainly appear later on. All of them will offer us the same product: electricity. We will be able to choose from whom we buy.

Won't regional energy companies just change their signboards?

The signboard of a supplier company will not mean much. If someone wants to retain their historical name, Zhitomiroblenergo, for instance, they are free to do so. However, when, as before, everyone in your region depended on you, it was possible to feel quite confident. After the unbundling, you are not going to be alone in this market. It is highly possible that a more advanced company from a neighboring region will be the first to come to your area. Then a group of young entrepreneurs will create an appealing brand, invent a convenient service, and start to win over your clients.

What I'm trying to say here is that the main change in the power market is the creation of competition, and the creation of choice for consumers. If a regional energy company decides to simply replace the signboard without thorough, substantive work, it will very soon be displaced from the market.

What would prevent a traditional grid operator in a region from resisting other suppliers, given that it will remain a part of the same holding or state company?

The underlying principles of the law. A distribution grid operator provides equal access for all licensed suppliers. Failure to fulfill these requirements will result in fines, including from the Antimonopoly Committee, which no energy company wants to pay.

Is this to say that in January 2019, common consumers will already be able to chose their electricity supplier?

It would be great if new suppliers appeared by January. If you think about it pragmatically, it is clear that the market will develop gradually. European experience suggests that many such suppliers appear with time. There are more than 100 of them in most European countries.

What will be the tariff at which these suppliers supply electricity?

They will offer various tariff packages based on the specifics of particular consumers. This will be a free market where prices are defined by competition.

Couldn't it happen that no new electricity supplier companies appear, and the same sole supplier will set an extremely high price?

No. First of all, the right to chose is a right, not an obligation. If you don't want to change your supplier, during the first two years of the reform, regional energy companies will have to supply you with electricity at a tariff determined according to the method adopted by the regulator. This function is called "universal service supplier." This means that it will not be possible to inflate electricity prices.

Even in the most advanced EU countries, at the initial stages of the reform, the population behaved quite conservatively. Thus, we can predict that at the initial stage, the majority of Ukrainians will continue purchasing electricity from the universal service supplier, which will be established on the basis of the old regional energy company.

However, once appealing offers appear – with low prices, better conditions, convenient services, loyalty programs, special offers, and other measures typical for the retail sector – consumers will start to consider options and choose the electricity supplier that's best for them.

There was a time when there was only one Internet provider in a region. The level of service was not even discussed. Today, not everyone can remember the name of that provider. First of all, it changed a lot in order to retain customers. Second, alternative offers became available.

If some unknown Internet provider disappears, you can get by without Internet for a while. But what if something goes wrong with an electricity supplier?

Then you'll receive electricity from a supplier of last resort. Its tariff is also determined using the method approved by the regulator. Its function is to protect against such emergencies. Obviously, its tariff will be higher, but you will only be using its services until a contract with a new supplier is concluded. It is expected that this won't take longer than 1-2 weeks. During this term, supply will be guaranteed.

Kyivenergo has announced the establishment of a new company, Kyiv Electric Grids. This company will have to provide grid management, but starting in March, it will start to supply residents of Kyiv with electricity. Is this an example of the unbundling that you mentioned?

Kyivenergo's structure is more complex than that of other regional energy companies. So they were the first to start, and at this stage, they separated generation and left it to Kyivenergo. It's been explained that the new legal entity will combine the functions of supplier and grid operator from March to November. This means that during this time, nothing will change for consumers except for the name of the company. In December, as with all other regional energy companies, full unbundling will take place. Kyiv Electric Grids will become a distribution grid operator. Obviously, the supplier will be a newly established company.