Ukrainian blackout, or costs for electricity after July 1

16-05-2019

Starting July 1, a new electricity market should start working. This can trigger uncontrolled price increases actually leaving consumers without electricity. Soon, the newly elected president will take the oath of office. And in a month, he will face with a serious “challenge”.

Hundreds of thousands of consumers can find themselves without electricity. There are some reasons why this is not a joke.

Now you as a consumer can not choose from which company to buy electricity – from the NNEGC Energoatom or DTEK. That is, there is no competition in the market.

In this context, producers can potentially set the price they want under the “don’t want – don’t buy it” principle.

Therefore, the electricity price is controlled by an independent state regulator – the National Commission for State Regulation of Energy and Public Utilities (NKREKP).

Starting from July 1, the new electricity market should start working, and this implies determining the market-based electricity price.

This means that the NKREKP’s price regulation functions will be terminated. And this can trigger an uncontrollable price increase actually leaving consumers without electricity.

Under the optimistic scenario, prices will grow by 30% considering the current level at the time of market introduction only by changing pricing approaches.

Under the pessimistic scenario, they will grow by 250%, given the oligopolistic market structure, low demand elasticity and experience of implementing a similar market model in post-socialist countries.

The implementation of this scenario will make many people living on the edge of survival.

Why do we think prices will rise?

1) The oligopolistic structure of the energy generation market: the total share of the five largest entities is over 90%, including about 56% of the Energoatom’s share, 30% of the DTEK’s share, 7% of the Ukrhydroenergo’s share, 4% of the Tsentrenergo’s share and slightly less than 2% of the Donbasenergo’s share.

At the same time, the import that could provide competition for domestic producers is not possible for technical reasons.

2) The domination in terms of regulation power capacity – DTEK owns 70% of the total TPP capacity, namely, these power plants provide a balance of electricity production volumes with available demand.

3) Monopolists have incentives to increase the price due to the stable demand for electricity as an essential commodity.

4) A lack of real limitations and effective tools for consumer protection.

And you know what? In the first days/weeks/months of the new market operation, energy companies will see how elastic the demand is by raising the price.

Since both domestic consumers and small non-domestic customers usually pay for electricity on an ex post facto basis, they will most likely not be observing what happens to wholesale prices in the first month of market operation. But they will receive huge bills at the end of the month.

These amounts can be so large that consumers will refuse to pay. There will be hundreds of thousands of such consumers, so debts for electricity can be really measured in billions.

Taking into account already accumulated debts in the amount of 35 billion hryvnias on the market, the prospects of rolling blackouts and electricity shortages look very realistic.

Why did it happen?

This is because a key element of the new market should be the competition that keeps power-producing companies from establishing too high prices and stimulates electricity providers to combine cheap electricity (long-term contracts) with the expensive one (daily and intra-day purchases).

The state just needed to create fair rules of the game and ensure that suppliers or power-producing companies do not arrange things with each other.

It could be done in any of the following ways:

– remove the existing oligopoly, in particular by splitting up large power-producing companies;

– bring new strong players, in particular by opening an appropriate import and providing integration with the European energy system;

– create a powerful antimonopoly body and an independent regulator that could adequately respond to the violation of competition.

However, none of them has been implemented.

In fact, at the time of launching the new market, our achievements can be summed up as follows:

1) two power-producing companies (DTEK and Energoatom) that will control the market under the weak antimonopoly legislation;

2) no mechanisms to control and punish market players for abuses;

3) an increased risk of industry collapse with corresponding consequences for the country’s economy.

Definitely, I support the liberalization of the electricity market, but given the above, I have a number of questions.

Does any of the responsible authorities and officials know how much the electricity will cost in a day, a month and a year in each of the market segments after July 1? If so, why do consumers still know nothing about it?

What is to be done to ensure the protected competition in all market segments as of July 1?

How should consumers who will be charged much more than they pay now protect themselves?

Source: Ekonomichna Pravda

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