Marginal electricity prices may increase by 50% in October 2022

Ukrainian industrial companies emphasize that this may lead to production stoppages

On October 19, 2022, the National commission for state regulation in the fields of energy and utilities (NEURC) will consider a draft resolution on increasing the limit prices (price caps) for electricity on the day-ahead market (DAM), the intraday market (IDM) and the balancing market. The regulator’s website reports about it.

Currently, it is finally proposed to set the upper price caps on the day-ahead and intraday market at UAH 3,000/MWh for hours of minimum load and UAH 6,000/MWh for hours of maximum load.

Thus, the upper price caps on the DAM/IDM may increase by 50%.

In the previous proposal (draft resolution dated October 5, 2022), it was proposed to set the limit prices for DAM/IDM at the level of UAH 2,476/MWh and UAH 4,952/MWh at night and day, respectively. Current prices are UAH 2,000/MWh and 4,000 MWh, respectively.

Industry

Industrial enterprises have already emphasized that the increase in the marginal prices for DAM, IDM and on the balancing market may very likely lead to shutdowns of energy-intensive production.

In particular, as Interfax-Ukraine noted, the following statements were made by top managers of ferroalloy enterprises on October 12 during a public discussion of the draft decision at the NEURC (the draft decision of October 5. – Ed.). So, it was said that the Nikopol ferroalloy plant, the Marganets and Pokrovsk mining and processing plants will temporarily stop production from November due to increased costs – mainly as a result of the expected increase in the marginal prices for electricity. Oleg Kachko, deputy chairman of the Zaporizhzhia Ferroalloy Plant’s (ZFP) board of finance, also spoke about the possibility of a forced shutdown due to an increase in price caps.

Last week, the Ukrainian Federation of Employers (UFE) called on the Ministry of Energy to maintain the maximum prices for electricity at the current level. As it is stated in the appeal, the UFE understands the problems in the country’s energy sector due to the strikes of the Russians, but considers such an increase in marginal prices unfounded and dangerous for the Ukrainian economy. The appeal, in particular, emphasizes that the rise in electricity prices will destroy the economic feasibility of the enterprises’ work, which will lead to a catastrophic drop in production (including strategically important for the defense sector), a significant decrease in tax revenues (with the conditions of a deficit budget), a drop in foreign exchange revenues ( in conditions of devaluation of the national currency), massive layoffs.

Expert opinions

According to the chief analyst of GMK Center Andriy Tarasenko, the Ukrainian energy industry is now under attack from the Russian occupiers. Due to damage to energy infrastructure facilities, the structure of electricity generation changes, there is a high probability of outages. In such a situation, an increase in electricity prices is possible, and, of course, it will be very painful for the Ukrainian industry.

As Ihor Guzhva, the chairman of CMD-Ukraine’s board, told for GMK Center, for the industry, in particular the steel industry, the decision to increase the maximum prices for electricity will have extremely negative consequences. Thus, from November 1, due to the probable increase in price caps, the Nikopol Ferroalloy Plant, Pokrovsk and Marganetsk Minings may stop. In general, the increase in the cost of electricity will significantly increase the cost of Ukrainian industrial products, including steel products.

“There will be more such stoppages in the future. It is not only about exporters, who will become less competitive on foreign markets, but also about products for domestic consumption, for example, products of the food industry, machine building, and the energy equipment sector. Those businesses that will continue to operate will be forced to raise prices. Utility payments will also increase. This will further spin the flywheel of inflation, which, according to forecasts, may exceed the expected 30%,” the expert noted.

Also, Ihor Guzhva notes, that the increase in the cost of electricity will become a problem for more than 3,000 enterprises that work for the mobilization needs of the Ukrainian economy, because the increase in tariffs will also hit them. At the same time, these enterprises, institutions and organizations provide for the needs of the Armed Forces, military formations, and critical areas of the front. Accordingly, the increase in the price of electricity will lead to an increase in the level of unemployment by an additional 3-5% and a decrease in the purchasing power of the population.

According to the expert, the regulator has not yet made a final decision, and it is unclear whether the NEURC will listen to the warnings of industrialists – perhaps the producers are knocking on the wrong door.

“Any increase in marginal prices for electricity is actually killing Ukrainian industry,” Ihor Guzhva is convinced.

The head of CMD-Ukraine’s board believes that there must be grounds for revising tariffs, and the balance of producers and consumers’ interests must also be observed.

“As far as I know, consumers propose to leave the price caps unchanged, that is, at the current level. Accordingly, at the political level, it is necessary to articulate the issue of maintaining the status quo in terms of tariffs, i.e. maintaining them at the current level, at least for the period of martial law and at least for three years after that (for the recovery period),” the expert summarizes.

As GMK Center reported earlier, Europe are trying to protect household consumers and industry from the sharp rise in energy prices. The governments of the EU member states presented plans for measures to overcome the energy crisis in September.