Why unification of the electricity distribution tariff is a disastrous decision for the industry

The plans of the National Energy and Utilities Regulatory Commission (NEURC) to unify the electricity distribution tariff came as a complete surprise to all large Ukrainian businesses.

We see that all recent decisions that significantly affect big business have been made by officials without any discussion or assessment of the impact on the overall situation in the country. What can this decision mean for the mining and metals sector and the country as a whole?

Economic (mis)justification

No one thought that the government would unify the electricity distribution tariff because this step is very illogical. Currently, there are two classes that are divided depending on the level of electricity consumption. There are clear economic reasons for the existence of different classes.

Large consumers use high-voltage electricity, which requires less infrastructure, is cheaper, and has much lower losses in the grid. For other consumers (households, social facilities, small businesses), however, the process of reducing the voltage requires more power equipment and leads to significant technological losses of electricity. In addition, large mining and metals companies maintain their own energy infrastructure (transformers, substations and high-voltage lines) and pay for the resulting electricity losses.

Therefore, the current plans of the NEURC are unfair and lack any economic sense. In the European Union, whose practices and regulations our country is adopting, the number of tariff classes for electricity distribution services, depending on the voltage level, usually exceeds three. In the context of European integration processes, Ukraine should improve the system of classifying consumers by voltage class rather than unify its tariff policy.

Consequences of unification

An increase in the distribution tariff, which could increase by 5 times, will result in large enterprises paying twice – for the maintenance of their existing energy infrastructure and partially for the general infrastructure and losses in the distribution system operators’ networks, which they do not actually use. According to our estimates, mining and metals companies alone will have to pay an additional UAH 10 billion a year. For the entire economy, this is about UAH 26 billion annually.

This will not only increase the operating costs of large enterprises, but will also negatively affect the competitiveness of products. Many of our companies are already operating on the edge of profitability due to the war and expensive logistics, and with the new costs and rising production costs, their products may lose their export markets.

The abolition of classification will encourage further production cuts or even complete shutdowns, which will lead to a decrease in tax and foreign exchange revenues, which are critical in a time of war. In addition, the state of the iron and steel industry directly affects the development of construction, machine building, railway and port infrastructure, as well as the defense industry.

Another consequence of such a decision for the economy could be an increase in industrial inflation, as production costs will rise and producers will pass on additional costs to the end consumer. Domestic prices for steel products, construction materials, and mineral fertilizers could rise significantly.

Of course, we understand the motivation behind this decision – to take even more money from industrial consumers. However, the government’s appetite here goes beyond what is acceptable. At the end of May, the government guaranteed stable energy supply only to those companies that would buy expensive imported electricity in the amount of at least 80% of their consumption. Steelmakers, with their continuous production cycle, simply have no other choice, although rising electricity costs are pushing them to the brink of survival. If you add to this the impact of the unified distribution tariff, it can finally kill any attempt to produce something.

Therefore, in order to avoid negative consequences for the industry and the national economy, Ukrmetallurgprom appeals to the NEURC to prevent the unification of tariffs for electricity distribution services.