What is currently happening on the Ukrainian energy market

The current model of the Ukrainian energy market has already accumulated a sufficient number of critical problems, which have been exacerbated by the consequences of full-scale aggression. Further ignoring these problems in the context of the war could lead to catastrophic consequences for the energy sector and the entire Ukrainian economy.

GMK Center presents the main points of the speech by Ukrainian MP Oleksiy Kucherenko at the round table “Ukraine’s electricity market: challenges for industry and the iron and steel complex”.

Financing issues

The new electricity market model was launched on June 1, 2019. The market effectively started from scratch, which made it possible to conduct an analysis without the influence of previous mistakes. The problematic aspects of the model became apparent immediately, even in peacetime. It is clear that the war has left its mark, but today the key issue is not very clear.

After the introduction of the new electricity market model on June 1, 2019, significant additional funds entered the energy system compared to the previous model. However, a key question arises: where is this money going? If it goes to modernization, investment, and network development, this is a positive result. If not, the situation is problematic.

In the old model, there was control over the targeted use of funds, but now it has been effectively lost. This cannot satisfy society and business. The energy sector needs to understand the financial situation, budgets, and solvency of all categories of consumers. Unfortunately, today the energy lobby is much stronger, and the voice of consumers is almost inaudible, even when decisions are made to increase the NEURC’s price caps. However, the largest electricity consumers are already beginning to join forces to protect their interests.

The role of the NEURC

The National Energy and Utilities Regulatory Commission (NEURC) has effectively come under the influence of the energy sector, although it should be an economic regulator, not a tool of the energy companies. Today, this does not work in the interests of consumers. It is important for the economy to review the mechanism for the formation, control, reporting, and accountability of the regulator to ensure the complete independence of the NEURC. The regulator must be as institutionally independent as possible from both energy companies and consumers.

Electricity price structure

Different countries have different prices. When comparing prices that differ by two, three, or five times, it is necessary to analyse the structure, taxes, local balances, network, and logistics costs. The final price for industrial consumers in Ukraine consists of two parts:

1. The unregulated segment – the price of electricity itself.
2. The regulated segment – tariffs for transmission and distribution (NPC Ukrenergo and distribution system operators).

The unregulated segment is dominated by one player, Energoatom, which controls over 50% of the market. It is not advisable to eliminate its monopoly, but it needs to be regulated as a dominant market participant in accordance with European practices. Transparency regarding costs, investment programs, and fair distribution of electricity is needed to avoid speculation by other players.

This is easy to do: the Antimonopoly Committee recognizes the dominant position and decides on an adequate system of state regulation of this monopoly. This benefits everyone, including energy companies.

In the regulated segment, attention should be paid first and foremost to the tariff setting of transmission system operators — this is key for large players. You pay for the green tariff and additional services, but for some reason, there is no adequate position on the NEURC.

It is important that the tariffs of transmission and distribution system operators are used to modernize infrastructure. Currently, most of the funds go to operating expenses and salaries, rather than network upgrades, which creates long-term risks for the reliability of energy supply.

Problems with PSO and cross-subsidization

I am categorically opposed to the current PSO model. The PSO model and the myth of cross-subsidization of the population have existed for over 25 years. Raising tariffs for the population does not reduce the burden on the budget, but rather increases it — this is the paradox. This indicates that both the market and the PSO mechanism are poorly structured. The PSO burden on the energy sector amounts to UAH 157 billion — an astronomical sum that weighs on the system.