Ukraine, EU stakeholders raise concerns over gas market regulation proposals

Author: Aura Sabadus

2021/01/12

LONDON (ICIS)--Ukrainian and foreign gas stakeholders have criticised proposals by the energy ministry to regulate a segment of the gas market less than six months after it was liberalised.

According to a draft document seen by ICIS, the cabinet of ministers of Ukraine (CMU) proposes to require Ukrgasvydobuvannya (UGV), the production arm of incumbent Naftogaz, to ensure the sale of its own produced volumes to vulnerable consumers at a price determined by a formula.

In a post published on Facebook on 11 January, acting energy minister Yuriy Vitrenko said the measure was needed in order to address underlying market inefficiencies.

The document introduces a definition of vulnerable consumers as a segment of the population who would be affected by fluctuations in market prices, has a low level of solvency or may have difficulty in accessing the Internet to make informed decisions on switching suppliers.

Proposals do not specify what percentage of the population would be included in this category but several market sources interviewed by ICIS said the definition could extend to all 12.4 million households in Ukraine.

This means that, if proposals are adopted, some 7 billion cubic meters (bcm) which are currently sold to households on a free-market basis would be regulated from 1 February.

They would be supplied based on a price formula determined as the arithmetic mean of front year German NCG hub prices published by the Powernext/EEX exchange in November 2020 minus transportation costs.

According to Vitrenko’s Facebook post, the new price would be around Ukraine hryvnia (UAH) 5,356/thousand standard cubic metres (kscm) (€14.80/MWh), or 44% lower than current market levels.

A trader from a European company said the measure would be a “huge step back, reversing the market to corrupt practices and regulated tariffs.”

REFORM SETBACK

If adopted, proposals would reverse the liberalisation of this market segment in August 2020, when 7bcm which had been sold by UGV to Naftogaz and then to suppliers for deliveries to households entered the free market.

The draft document has unleashed a wave of criticism and there were reports on Monday that some companies had stopped trading on the Ukrainian market amid uncertainty over the future of the gas sector.

CORRUPTION FEARS

Firstly, participants note that proposals could open the door to corrupt practices, which Ukraine has long been struggling to stamp out.

A source explained that UGV is currently required to sell some 7 bcm of gas as part of a public service obligation (PSO) to district heating companies. These volumes are sold at a regulated tariff and there were plans to remove the PSO entirely from 1 May 2021 as part of Ukraine’s commitments to the International Monetary Fund (IMF) to fully liberalise the gas sector.

Naftogaz has also pledged to sell some 15% of its production to the exchange UEEX as a means to help create liquidity on the bourse.

The source said if the government were to order it to sell volumes to suppliers for deliveries to households this would leave UGV unable to cover all demand from its production.

“In that case UGV would have to choose whom it would sell to. This would open the door to corruption,” the source said.

The view was echoed by a European source: “When you introduce different criteria – ifs and whens – you create corruption,” the second source said.

The source said Ukraine had vulnerable consumers in the disputed eastern Lugansk and Donetsk provinces who may not be able to switch suppliers either because they were assigned to the supplier of last resort or because they do not have access to the Internet in order to make competent market choices.

“I partially understand why they [the ministry of energy] are looking to introduce this measure but this is not the proper way to address the problems they have,” the source said.

MARKET DISTORTIONS

Secondly, the first source said proposals were also introducing escrow accounts where funds coming from consumers would be split so that UGV securely receives its corresponding share of payments.

The source said such a measure could be easily cancelled by suppliers in court since it goes against current legislation. Moreover, such accounts would not solve the issue of non-payment or non-existent household customers. The proposal does not provide for any prepayment or a guarantee.

The arrangement would create cashflow problems for UGV. The company would be unable to verify if its buyers have in fact supplied the discounted gas to legitimate vulnerable consumers.