The monopolized electricity market reform will lead to higher prices and worsening of the industry’s situation

10-04-2018

According to the new Law on the Electricity Market, Ukraine has to change a model of the electricity market in accordance with the requirements of the EU Third Energy Package by July 1, 2019. Its implementation should imply the free market pricing, reducing the state’s influence, competition and possibilities to sell electricity under bilateral agreements. However, in the current market conditions in Ukraine, the reform may lead to a significant deterioration of the industry’s situation and threatens to discredit the process of European integration.

Government, business and public representatives discussed the ways of solving market problems  during the Roundtable “Risks and barriers to the generation market reform” on April 10. The event was arranged by the BRDO Office with the support of EU4Business\FORBIZ and the MEDT as part of the Public Dialogue #PRODialogue.

406 entities have electricity production licenses in the Ukrainian market, but a share of the 5 largest players is 92% of the total volume of the wholesale electricity market (WEM). The state controls almost all market operations distorting the market model and making the competitive development impossible. The market concentration can be decreased by importing and building new capacities. However, neither the state producing 67% of electricity nor the private sector is interested in new strong players.

Moving to a free market under high concentration is a very risky step. Due to changing in pricing mechanisms, a final electricity price for business will increase by at least 30%, and that is not even taking into account inflation and other factors that will affect tariffs for end users, in particular, the introduction of RAB regulation. Cancelling the cross-subsidization will allow to reduce a price shock, but this will lead to a twofold increase in prices for the population,” the BRDO’s Energy Sector Head Oleksiy Orzhel says.

Importers as true competitors of the domestic energy generation can not enter the market until a series of administrative, economic and technical barriers are removed. In particular, it is necessary to synchronize stock exchanges, create conditions for import into the Burshtynsky Island and combine the UES of Ukraine with the ENTSO-E. The latter requires to upgrade generating capacities, 80% of which are worn-out, and comply with European technical requirements and environmental standards, and hence – to make significant investments.

Ukraine has chosen the path of European development, therefore, it has to fulfill its obligations  as part of the energy sector reform. There are many objective problems in the sector, however, it is possible to build a competitive market only if a full package of necessary steps is implemented. In particular, developing  effective regulatory acts for the electricity market, improving an energy regulator and the Antimonopoly Committee to target the needs of consumers, as well as creating conditions for export-import exchange,” Johannes Baur, Head of the Department of assistance programs “Energy, transport, and environment” of the EU Delegation to Ukraine believes.

In the current situation, new large producers are hardly enter the market, since a payback period of such investments is more than 20 years. Moreover, the existing energy generation industry is not interested in competitors and can offer lower prices as the moment arises and, therefore, block the entry of new actors into the market. Especially, in case of extra charges to increase environmental sustainability, cover the debts of the “previous” market, etc. established for them. Such surcharges will be included in the energy transmission tariffs and, in the end, covered by consumers, creating the illusion of competitive electricity prices for day ahead and intra-day markets.

The First Deputy Minister of Economic Development and Trade of Ukraine Maksim Nefyodov stressed the need for a balanced approach: “The electricity market reform is a priority given its determining influence on the business environment in the country. Our task is not just a matter of implementing the Third Energy Package that will lead to negative consequences, but implementing mechanisms for the competitive development of the sector. There should be a joint, comprehensive work of all responsible government bodies.”

According to BRDO, the positive effect of the implementation of the Third Energy Package in Ukraine can be achieved only if:

  • antimonopoly requirements for energy generation market participants are increased;
  • opportunities to open imports and build new private thermal electric power plants are created;
  •  cross-subsidization between different categories of consumers is cancelled.

 Otherwise, with limited state intervention, the market sensitiveness to price fluctuations and abuses is increased, and this will affect ultimate consumers.

 

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