The head of the BRDO’s Energy sector Oleksiy Orzhel is speaking about a new law on electricity market and its impact on competition on the Ukrainian market.
The adopted draft law #4493 on electricity market of Ukraine looks like a market draft law, but is it possible to introduce efficient competition on the electricity market in today’s Ukrainian realities?
As for its form, we see the implementation of the third energy package. The creation of a new competitive market along with an increased amount of participants are announced to allow consumers to choose one or another electricity generator on the basis of the best price and quality of service.
The adoption of this draft law saved the sector from of the collapse of payments, which had to happen already on July 1, 2017. This date has been indicated in the current law #663 “On Main Principles of the Functioning of the Electricity Market” as a term to close down the SE “Energorynok”. The SE “Energorynok” purchases all electricity from all producers and averages the price reducing the impact of large prices, including the thermal generation, through the nuclear power generation. In the two years since 2013, when the law #663 was adopted, the competitive environment had to be created. But none of the requirements of the law have been met – the exchange didn’t started to work and there is no market of bilateral contracts, so with closing down the SE “Energorynok”, we would get a vacuum of relationships in the electrical energy sector. Having the date of its “last working day”, this enterprise have been already faced with the fact that it couldn’t attract the necessary credits for cash gaps between generation and consumers that threatens the energy security.
There were two options – either keeping the law #663 in force postponing the closing date, or adopting a new law. Politically, in terms of the form and content, it would be better to adopt a new law, especially as it meets all the requirements of the third energy package.
If the President signs the draft law #4493 on electricity market of Ukraine, the full implementation of the market will start on July 1, 2019. What do they need to do during these two years?
We should develop and implement all the secondary legislation, prepare codes of grids (Ukrenergo and Oblenergo), create additional legal entities that will perform calculations and, finally, launch the exchange and the interface of bilateral contracts. Also we need to purchase key assets and information systems, where both generating companies and consumers should register in.
In these two years, several areas of the market should be created. Generating companies are interested to find large consumers with a significant and predictable demand level and make bilateral contracts. And the energy for consumers who have unequal consumption schedules will be bought at the exchange, where prices will be set a day in advance. Theoretically, people may buy directly at the exchange, but it is difficult, therefore, they will deal mostly with traders (universal service providers).
So, theoretically, the more players are among suppliers, the lower the price is.
However, it won’t be less expensive than it is now. The experience of Europe where the start of power exchanges’ operation led to the growth of tariffs from 30 to 70 percent depending on the structure of each market and the consumption profile confirms this fact. But there are no countries where these reforms led to the reduction in tariffs in the early stages of implementation.
Returning to the “pre-exchange” level and even reducing in some situations took place only over three or four years, when more efficient generations entered the market.
Who will benefit from the new rules in Ukraine?
Positive developments in the first stage are possible only for large businesses. The sector of industry will get rid of the burden of cross-subsidization. Today, this is 45 billion hryvnas paid for the population by the economy and production. Theoretically, because of this, our industry sector can become more competitive on the world market. In addition, the largest production will start using direct contracts, that is, it can choose suppliers.
For example, the average tariff for the first voltage class is 1.49 hryvnas, and the tariff of the Energoatom National Nuclear Energy Generating Company is 48 kopecks (it is also necessary to add tariff components of the SE Energorynok, transportation and distribution costs, but the price under direct contracts will still be much lower than consumers have now).
By signing the direct contract with Energoatom regarding the tariffs of 60 kopecks, the enterprise will have significant savings
Small and medium business failed to come up with direct contracts and the generation is not interested in dealing with such a wide range of small consumers. It will buy energy at the exchange, but this energy will be more expensive than the large-scale industry will receive and pay for the trader’s services.
The population loses twice. According to the NKREKP’s decision, they should try to eliminate cross-subsidization during these two years, that is, to increase the price for the population to make it equal to the tariffs for the industry sector. This have been carried out for two years and the amount of subsidies was reduced from 30% in 2014 to 25.87% now, but it is still extremely large – 45.8 billion hryvnas. Thus, only the elimination of cross-subsidization will raise the tariffs for the population almost by one and a half or two times, and this is without counting the prime cost of electricity. In addition, starting from mid-2019 after launching the exchange, the next increase should be expected. While this reform led to the increase by 30-70% in stable Europe, experts will not give a forecast in our difficult situation.
How will they set the tariffs for the population that, in fact, pays once a month, but the exchange is setting the price every day?
Chances are high that the regional power distribution company (oblenergo) will provide services to the majority of the population in the same way as before. They will purchase at the exchange and average the price, but… there will be less energy, which is inexpensive, and more “space for maneuvers” to raise prices for generation that will satisfy the peak consumption on the market.
Besides, creating the exchange also requires investments. According to estimates, the cost of moving to a new market is about 600 million euros. End consumers also pay for this and obtain the increased price.
When should we expect new investors?
Not earlier than 5-6 years. This is because our rules should be in force at least three or five years to allow us having large companies entering our market. Will this law work or face with the same result as the previous law #663?
Investors want to see a stable system where the adopted rules are implemented. In addition, the energy production is a capital-intensive sector, in which the creation of new generations takes several years and returns will be available in seven to twelve years.
Another point: a new player enters the state oligopolistic market. The base power load is put onto the state (Energoatom, Ukrhidro and Tsentrenergo), while as for the marginal aspect, there is a large concentration of one particular player, the DTEK, which has 70% of the thermal generation market.
Moreover, both the DTEK and the state do not have investment expenses in the structure of their tariffs, since key assets have been established in Soviet times. They include the costs of fuels and maintenance as well as operating costs, and investors should add the return on investment into their tariffs.
It is hardly possible to compete in these two segments with the existing concentration and under such conditions.
What will we see in the coming years?
The renewable energy will be developed, because it is provided with state stimulation guarantees until 2030 by the adopted law. This is good since it stimulates the introduction of new fuel-free generation, which when entering the competitive market will eventually decrease the prices. Due to incentives, we will try to achieve the goal of 11% in renewable energy, while its share in the national generation volume is 1%.
The renewable energy will be developed, because it is provided with state stimulation guarantees until 2030 by the adopted law
When will the cost-cutting happen?
When new generations start to compete with the existing ones, when there are more players on the supply market and they are interested in a large number of participants with low consumption volumes. The energy regulator and the anti-monopoly committee play an essential role in achieving this goal, and this role is providing the competition instead of explaining higher prices for electricity with “market” mechanisms.
By Ivan Golovnya