Tariff hikes will deal a critical blow to Ukrainian industry and lead to the closure of many enterprises
The largest natural state monopolies have initiated a sharp increase in tariffs for 2025: some have already been approved, others are in the plans. They are partially assisted in this by the regulator – the National Commission for State Regulation in the Spheres of Energy and Public Utilities (NEURC). Formally, the body should be independent, but as practice shows, it does not check the economic arguments for increasing financial pressure on consumers.
Business insists: tariffs should be economically justified, their increase should be discussed with consumers, the economic state of the industry should be taken into account, and we should start by improving the efficiency of state monopolies.
Electricity transmission tariffs
In mid-December, the NEURC raised Ukrenergo’s tariff for electricity transmission by almost 30% to UAH 686/MWh (excluding VAT) from January 1, 2025. And this is amid the fact that the price of electricity for business in Ukraine for 2024 has increased significantly. According to the Federation of Employers of Ukraine (FEU), this increase will lead to an increase in industry costs by more than UAH 27 billion.
“Metinvest Group is deeply disappointed with the decision of the NEURC to increase the electricity transmission tariff. This decision of the regulator will negatively affect all sectors of the Ukrainian economy, especially those that provide Ukrainian exports, industrialists producing goods. Once again we are forced to state that the interests of the state monopoly and especially its management were put above the interests of white business, which forms the budget of Ukraine,” the company’s press service told GMK Center.
According to the head of the Federation of Steelmakers, Serhiy Bilenkiy, after the increase in the transmission tariff, the costs of the industry will increase by UAH 1.6 billion per year, and about 30% of the iron snd steel enterprises are already stopped. ArcelorMittal Kryvyi Rih in a comment to the agency Interfax-Ukraine noted that this will lead to negative production consequences and along the chain to the reduction of VAT on imports of raw materials about 100-150 million UAH per month and a decrease in foreign exchange earnings by $50-100 million.
In its turn, Interpipe reminds that the NEURC has been raising this tariff for several years in a row with the same justification: to help Ukrenergo pay subsidies to green electricity producers. However, the problem of cross-subsidization and debts in the Ukrainian energy sector is so chronic and systemic that, as experience shows, it cannot be solved by a mechanical tariff increase.
Gas transportation tariffs
The NEURC has tentatively approved the increase of tariff for gas transportation services in 2025 from 124.16 to 502.50 UAH per thousand cubic meters, i.e. 4 times. This tariff hike will increase the costs of gas production companies alone by UAH 7 bln annually, with state-owned companies suffering the most.
“Interpipe negatively assesses the proposal of the NEURC to increase the tariff for natural gas transportation more than 4 times. As a justification for such an explosive growth, the regulator cited its obligation to set this tariff for 5 years, i.e. for the period of 2025-2029, taking into account its filling during this period and the projected inflation rate. Thus, we can state the non-transparency of calculations and formation of this tariff”, GMK Center told in the press service of the company.
In addition, the excessively high rate of return of the Ukrainian GTS Operator at the level of 18.05% is absolutely unacceptable in the conditions of martial law.
Tariffs for rail freight transportation
Ukrainian Railways (UZ) proposes to the Ministry of Regional Development to index freight transportation tariffs by 37%. As a result, UZ plans to receive an additional UAH 26 bln of business revenues. The decision on indexation still has to be approved by the Cabinet of Ministers.
According to UZ estimates, the logistics component in the cost of cargoes will increase for iron ore by approximately 2.7%, for coal and ferrous metals – up to 1%. At the same time, the industry expects a much more significant absolute effect: the additional costs of logistics costs of steel industry will amount to 8-10 billion UAH, and at ArcelorMittal Kryvyi Rih alone – more than 1.4 billion UAH per year.
“A 37% tariff increase will eliminate petroleum products from UZ’s transportation nomenclature definitively. Gasoline tankers are more than enough, their number has quadrupled since 2021”, adds the director of consulting group ‘A-95’ Sergiy Kuyun.
Additionally, the probable return in 2025 to the issue of convergence of tariff classes may lead to an even greater increase in the costs of shippers.
Water supply tariffs
On top of that, the NEURC is planning to increase water tariffs for businesses: in this case, the costs for centralized water supply may increase on average by more than 25% and for water disposal by more than 10%. This may have a strong impact on industries that use significant volumes of water in their technological processes. This applies to mining and processing steel plants, mining enterprises, chemical and other industries.
“This tariff increase is absolutely unacceptable in the current conditions, when many enterprises are already facing financial difficulties due to previous tariff increases,” the National Association of the Extractive Industries of Ukraine (NAEIU) said.
Other financial burden on business
The Cabinet of Ministers has tightened the mandatory criteria for reservation. In particular, the criterion was established as the accrued average salary of employees for the last calendar quarter is not lower than the minimum wage multiplied by a coefficient of 2.5 (for the IV quarter of 2024 – 20 thousand UAH). Therefore, businesses now need to tighten the salary level so that all employees who need to be reserved (including low-skilled workers, without whom the plant does not work) pass the criteria for reserving.
Another reason for rising business costs is the increase in fuel excise taxes effective January 1, 2025. Excise duty on gasoline will increase to €271.7 per 1,000 liters, diesel to €215.7 and liquefied gas to €173. This process began on September 1, at which time the cost of fuel jumped by 6% in one month. The final level of increase in 2028 will be: gasoline – €359 per 1000 liters, diesel – €330.
Impact of tariff increases on the economy and iron and steel industry
Already, the entire industry and steel sector are facing difficult times due to production cuts, operating at a loss, difficulties with raw materials, logistical constraints and lower product prices. Additional financial burden in the form of tariff increases will lead to negative economic consequences, among them:
- Increase in production costs and cost of production. The increase in tariffs has a direct impact on the final cost of products.
- Loss of competitiveness in world markets. This will inevitably lead to a reduction in exports, which will further deteriorate the external position of Ukrainian products against the background of increased protectionism and low prices for some export goods.
- Reduction of production or even complete shutdown of enterprises. This is a logical consequence of the prohibitive growth of production costs and loss of competitiveness on export markets. Enterprises of the industry cannot operate at a loss or on the verge of profitability for a long time.
- Reduction of budget revenues and foreign exchange earnings in the country. Reduction of economic activity of industrial enterprises will affect the entire Ukrainian economy.
- Inflation growth. Producers will inevitably shift their costs to the end consumer, raising their prices. Thus, not only businesses, but every Ukrainian will pay more.
- Reduction of jobs and funding for communities. Steel enterprises are town-forming for a part of local budgets. Their tax revenues and direct expenditures partially finance local social infrastructure. Reduction of production will lead to deterioration of the financial situation and forced reduction of social expenditures, and cumulatively this may lead to increased social instability in the country.
If all decisions to increase tariffs are taken, it may lead to an increase in business costs by more than 60 billion UAH – which is the already estimated increase in costs. The real growth of financial pressure will be even higher.
“The increase in tariffs will lead to negative consequences for both producers and consumers of steel products, as the former will be forced to significantly increase prices in order to cut losses, while the latter will have to find additional funding to purchase the necessary products. The situation will be especially aggravated for exporters, who will simply become uncompetitive, which, in turn, will lead to a reduction in production up to its complete shutdown. So such a decision will result in multi-billion dollar losses, not only for a particular industry, but also for the country as a whole,” Oleksandr Kalenkov, president of Ukrmetalurgprom, told GMK Center.
General business offers
Business insists on several key points that must be adhered to by the authorities in the current conditions.
- Economic justification for increasing any tariffs.
It is extremely important for business that all tariffs have objective economic reasoning. Unfortunately, it is unclear to what extent the NEURC is independent in making its own decisions and to what extent these decisions are justified. First of all, we are talking about the tariff for electricity dispatch (operational and technological) management services and the tariff for electricity transmission. Thus, the NEURC has budgeted UAH 11.4 billion for the purchase of auxiliary dispatching services for 2025, while objective calculations show that these costs will not exceed UAH 4 billion.
- Preliminary consultations with businesses.
“Experts point out to NEURC the need to hold a broad discussion with business representatives, specialized associations and experts to avoid unnecessary burden on enterprises in this difficult period,” NAEIU emphasize.
- Increasing the efficiency of state monopolies.
Instead of optimizing costs and reducing losses, state monopolists prefer to compensate for their inefficiency at the expense of business.
“Regarding the transmission of electricity, the cost of its purchase to compensate for technological costs in 2025 is expected to be set at UAH 14.3 billion, which is 12% higher than in the current year (UAH 12.3 billion) – expert assessment suggests that the volume of technological costs can be significantly reduced,” says the president of Ukrmetalurgprom.
- Take into account the economic state of the industry.
“It is necessary to take into account economic realities, as the growth of tariffs in these hard times may become an unsustainable burden for the production business and significantly aggravate the socio-economic situation in the country,” the FEU said.
Big problems for steel industry
The overall situation for the Ukrainian steel industry is quite unfavorable. If the period of low prices continues, if preferential trade with the EU is canceled from the second half of 2025 and if Pokrovsk’s coking coal reserves are lost, the industry risks falling into a “perfect storm”. In this case, Ukraine’s MMCs will face a significant decline in steelmaking – comparable to the dynamics of production decline in 2022 after the start of the full-scale invasion of the Russian Federation.
If we summarize the effect of all types of already adopted and announced increases in tariffs of natural monopolies from 2025, we will get the cumulative effect of a stone rolling down the mountain and crushing everything and everyone in its path.
“All such actions will cause a critical blow to the national industrial complex. In general, it seems that state monopolists and the leadership of a number of ministries and departments live for today and do not think about the future at all – everything looks as if they are trying to get some bonuses or finance unreasonable expenditure items with the sole purpose of lining their own pockets as much as possible. And they do not care at all how all this will affect Ukraine’s industry and economy,” Oleksandr Kalenkov summarizes.
