Electricity Market Reform: plan B


Source: Ekonomichna Pravda

What should be done to prevent the next attempt to reform the electricity generation market from being unsuccessful.

A year ago, the Verkhovna Rada adopted the Law “On the Electricity Market”.

However, another attempt to create a civilized market and harmonize Ukrainian legislation with the European one is unlikely to succeed.

The biggest drawback of our market is the ultra-high concentration, when 92% of electricity is generated by the five largest producers.

In fact, it is a state monopoly – Ukrhydroenergo, Energoatom, Tsentrenergo and the DTEK that controls about 80% of thermal generation.

This state of things allows the main players to manipulate prices, since the electricity cost for end consumers depends not only on the tariffs of particular producers, but also on the structure of the “energy mix”.

For example, if pricing principles in the market are changed in accordance with the requirements of the new law, the electricity price for consumers with irregular consumption schedules – small and medium-sized businesses, household consumers – will be the same as the price of the “most expensive” generation in the stock market segment.

As a result, prices for such consumers will increase at least by 30%. A positive aspect of such a price fluctuation could be the renewal of fixed assets of producers, since generation capacities are 80% worn out.

For example, in the world, the prime cost of electricity production for new nuclear power plants is 117 dollars per MWh, 60-140 dollars per MWh for coal based power plants and about 75 dollars per MWh for gas ones taking into account capital expenditures.

However, it is unlikely that there will be new power plants in Ukraine in the next 10-15 years, because a payment back period for such investments is more than 20 years. At the same time, importers as full-fledged competitors to the domestic generation also can not enter the market until a number of administrative, economic and technical barriers are removed.

Firstly, it is necessary to unite the Ukrainian energy system with the networks of European countries, ENTSO-E, or at least to create conditions to import through the Burshtynsky Island – a conventional territory, where electricity networks of the Burshtynsky TPP along with the adjacent electricity network and own consumers within the Transcarpathian, Ivano-Frankivsk and Lviv regions are located.

However, the success of such synchronization with the EU depends to a large extent on domestic electricity producers who are not interested in new competitors and can sabotage bringing their equipment into compliance with the ENTSO-E requirements.

Market players may also block making investments into new generation facilities by reducing their prices at the moment arises to underreport specified economic rates for such investments.

Especially – in case of establishing payments to “fix” old equipment for the existing players. These surcharges will be added not to their kWh/year supply tariffs, but to the transmission tariff creating the illusion of competitive electricity prices.

Given this, we should not expect a positive effect from the reform on the market. There are possibilities to reduce a severe impact on the economy from the rise in electricity prices, but they are politically unpopular and unlikely to be implemented.

Thus, the amount of subsidies to the population added to industrial tariffs for electricity in 2016 was $1.6 billion. If we remove this burden on businesses, electricity prices for non-residential consumers will increase by 10-12%, and for the population – almost twice. Neither the government nor the regulator will do this before the elections.

In addition, such a situation significantly reduces the investment attractiveness of Ukraine. One of its factors was the formula of “cheap labor plus a cheap energy resource”, which is now cancelled out by higher prices for electricity.

A number of consumers will take advantage of direct contracts with electricity producers. Most likely, it will be powerful industrial enterprises and electricity exporters, that is, those who can predict their load in the long run. All others will pay for consequences of the reform out of their pockets.

What is the way out? It is impossible to reform the electricity generation market just by implementing a European model. The domestic market has the special features that need to be taken into account.

In our realities, main prerequisites for the successful reform are to strengthen antimonopoly requirements for generation market participants, create opportunities for opening imports, and build a new generation and storage systems.

The competition will develop in the electricity market only if the ownership structure is changed. In Europe, there were precedents when vertically-integrated companies split according to the anti-monopoly legislation. In the domestic market, each NPP, TPP, HEP and PSPS could be stand-alone players.

Otherwise, in the context of limited state intervention, the sensitivity of the market to price fluctuations, schemes and abuses will increase significantly that will affect end consumers and discredit the European integration process.

The philosophy of energy consumption is changing faster than the state and large businesses are responding to. with every rise in prices, Ukrainian consumers will get closer to alternative generation, energy efficiency and “zero” consumption.

The future of the market lies with the promotion of energy self-sufficiency for the population and businesses.  The government is now encouraging to install solar panels in private houses. They have a fixed “green” tariff and a guaranteed buyer – an oblenergo that purchases excess electricity.

This approach should be also applied to legal entities that install electricity generation facilities of up to 500 kW. All excess electricity – production minus consumption – should be bought at a “green” tariff without additional regulatory burdens such as licenses and individual tariffs.