The electricity market is not for everyone


Source: Economichna Pravda

The changes will affect only large industrial consumers. The market will not function for the population and small businesses yet.

As part of its international commitments, Ukraine has to reform its energy sector in accordance with requirements of the Third Energy Package.

In April 2017, the Parliament adopted the Law “On Electricity Market”, the main articles of which became effective in early 2019.

The main change is that consumers will have the right to choose a service provider, so buyers will be able to enter into a contract with a seller of cheaper electricity. Given the competition, consumers will potentially have different options for choosing a tariff.

For example, if a person uses electricity only on the weekend in his/her summer house, a supplier may offer a lower tariff to deliver electricity on Saturday and Sunday. In agreement with a consumer, the supplier will also be able to remotely control the consumption, for example, to turn off the air conditioner. This is how this market works in the EU.

However, it is not realistic to implement these new rules in the domestic sector in Ukraine.

Firstly, our market is still being developed. At present, the oblenergos were divided into distribution system operators and electricity suppliers. The situation in the gas market, when oblgas companies were formally divided into network operators and suppliers, but nothing has changed for domestic consumers, is repeated.

Secondly, domestic consumers are subsidized by the industrial sector. The price of electricity for the population is 0.9-1.68 UAH per kWh, for businesses – 1.9-2.4 UAH per kWh. Independent traders (not oblenergos) will not be able to sell electricity to people at a reduced rate, because their costs are not compensated, and this is 30% of the market.

In the vast majority of European countries, domestic consumers pay more than industrial and commercial ones, because they have lower consumption, it is more difficult to work with them and they have more irregular consumption schedules. As for the enterprises, they operate on predictable and more regular consumption schedules, so the price is lower for them.

The EU thus partially stimulates its economy. In our country, social considerations prevail over economic logic.

Independent suppliers serving large customers have long been operating in Ukraine’s industrial sector. Sometimes, it is the companies affiliated with enterprises, which are consumers. They were created by the factories themselves to save on expenses, which are included in the feed-in tariffs of oblenergos. With high electricity consumption, even 1% savings provides a considerable impact. These suppliers will become the first traders on the market.

They have already started to “run” after large consumers to create a portfolio of customers for themselves. However, the market will not begin to work properly in the wholesale segment (generation segment) until July. So far, all suppliers are purchasing electricity on the wholesale market.

Starting from July 1, the market of bilateral agreements should begin operating, and suppliers with high consumption will be able to agree with generation companies on a more favorable price. However, there is a possibility that the price will increase out of control.

To avoid the crisis of payments and be ready for the market opening, it is necessary to abolish cross-subsidization and adjust tariffs for the industrial sector and domestic consumers by raising the price for the latter by 20-30% before implementing the changes.

Nobody knows how much tariffs will increase after the full opening of the electricity market. If we really open the market, the tariff may increase by 300-350% at certain hours. It is beyond survival for small and medium businesses.

The situation could be improved by importing electricity. In neighboring energy markets, electricity costs less than in Ukraine at certain hours of the day. Unfortunately, such imports are technically impossible at the stage of market implementation.

Will the government tell the electorate that it will increase tariffs not only for gas but also for electricity in the election year? We doubt it. It is rather obvious that tariffs for domestic consumers will remain unchanged in 2019.

To somehow compensate for the negative consequences, the Verkhovna Rada should approve a decision on providing services for domestic and small non-domestic consumers at a social rate and appoint a public supplier for this.

In the gas market, this function is assigned to Naftogaz and suppliers selected from oblgas companies. In the electricity market, a “special supplier” can play this role. In this case, it is necessary to oblige a certain generation company to sell electricity to this special supplier at a fixed social rate.

This means that, despite all the “reform”, the electricity market will not operate for small businesses and the population in the near future. However, this can be not a drawback but even a benefit under the existing circumstances.

The views expressed in this article reflect solely the author’s point of view and do not necessarily coincide with the position of the Delegation of the European Union to Ukraine.