ICIS VIEW: Ukraine minister's gas price regulation proposal can undermine market reform

Author: Aura Sabadus

2021/01/12

LONDON (ICIS)--Throughout 2020 Ukraine was the undoubted poster child of Europe’s reforming gas markets.

It implemented EU rules and network codes, attracted new companies to use its storages, introduced new transmission services and took the bold step to deregulate a large and sensitive portion of the gas market covering households.

However, less than six months after liberalising this segment, the energy ministry now proposes to require state producer Ukrgasvydobuyvannya (UGV) to sell gas to vulnerable consumers at a regulated price.

The news took the market by surprise, with some companies even reportedly pulling out of trading amid growing uncertainty over the future of the market.

Acting energy minister Yuriy Vitrenko explained in a Facebook post on Monday that the measure was necessary to address market inefficiencies and said that if the new price was implemented, possibly as early as 1 February, it would be some 44% cheaper than current levels.

This may be good news to some consumers who may feel daunted by the latest rise in gas prices but a major setback for the market as a whole, opening up the door to corrupt practices and distortions.

Only a few years ago, Romania’s socialist government introduced similar measures , obliging local gas producers to sell gas to households at regulated tariffs.

The effects of the decision were damaging to the market and the economy. Trading liquidity on the BRM gas exchange nosedived from 71TWh in 2018, the year prior to the introduction of the measure to 36TWh in 2019 when the regulated tariffs were enforced.

As locally-produced gas was sold to households, suppliers were forced to import gas from neighbouring countries to respond to demand from other consumers in the industrial or commercial sector.

This meant that in the summer of 2019, Romania was paying close to €20.00/MWh for imported gas while prices on central and western European hubs were some €5-€6.00/MWh lower.

By the time the government liberalised the household sector in July 2020, the regulated tariff at which households were paying gas prices was €8.20/MWh higher than the free-market price paid by other consumers.

In essence, it meant that because of the regulated tariffs which were unchanged, all segments of the market were affected by the distortions caused by the subsidies.

As acting energy minister and a self-confessed reformer, Yuriy Vitrenko understands well the negative impact caused by subsidies as well as the potential damage that such a measure could inflict on Ukraine’s hard-won credentials as a trustworthy market.

It is for this reason that he and the energy ministry should abandon their regulation plans and work to implement measures that would target those who are in real need of support. Such measures could include allocating winter fuel allowances for vulnerable consumers as used in other European countries.

Regulating the household sector only six months after it was liberalised would distort the market, open the door to corrupt practices, send negative signals to investors and help the interests of Ukraine’s oligarchs who could benefit from such schemes.