Fixed Gas Price: One Step Forward and Two Steps Back

January 15, 2021

1. Which one step forward?

Starting from August 2020, each gas supplier individually sets the gas price for residential consumers, whereas the latter were given the opportunity to choose the company with the most favorable offer.

This was called the "opening of the gas market".

In fact, this is only the first step towards liberalization, and here is why (see main statements below).

1.1. Licensed gas supply companies did not get equal access to all their own gas. It is appropriate to recall that, for example, in 2019, the annual resource of the state company Ukrgazvydobuvannia was 14.9 billion cubic meters, which is by 0.8 billion cubic meters more than the total natural gas consumption by residential consumers and district heating (DH). 

1.2. The price of gas for DH that produce heat for the residential consumers has remained fixed and is calculated according to the formula "European Hub +". It should be noted that in reality, in terms of PSO, heat generating companies mainly use the gas produced by Ukrgazvydobuvannya.

1.3. Residential consumers faced difficulties (perhaps created by some) when switching from one supplier to another that has a better offer (in particular, due to the dominant position, having access to 67% of the domestically produced gas). In addition, most residential consumers were not sufficiently informed (according to the survey conducted by Razumkov Centre three times from August to December 2020). There are several reasons to that, including vague responsibilities of the public authorities for the information support of the reform and the intentional concealment of publicly available data by individual suppliers.

1.4. The market was opened in conditions when the issue of debt (without the sources of repayment) remained unresolved. 

1.5. Lack of constructive dialogue among stakeholders due to the reluctance (everyone's motives were different) to introduce a real natural gas market. Here it is important to note that we are talking about a market environment where there is a single exchange indicator that shapes a price corridor for truly fair competition. 


2. Which two steps back?

Yesterday's decision to set a fixed gas price for residential consumers is political in nature and will have consequences, and here is why (main statements below).

2.1. The announced fixed price (UAH6.99/cubic meter) has no clear economic justification. For example, using "Hub Zero" formula approach to the gas produced by Ukrgazvydobuvannya (as well as a separate amount of reserves in storage), which will actually be used to cover the demand by residential consumers and DH will give a much lower price of UAH6.55/cubic meter (see calculation model in the first comment). The "Hub minus" approach, which has been talked about a lot by the authorities, if calculated, will produce a much lower price.

2.2. It does not address the problem of accumulating the total debt on the natural gas market (already more than UAH125 billion), which in the future will result in the increase in the gas delivery tariff. Gas DSOs will not be able to purchase gas for their own needs at the price of UAH5.8/cubic meter, which is included in the delivery tariff. Therefore, natural gas will cost these market participants about twice as much.

2.3. Strategically, it does not address the problem of energy poverty (the ability of citizens to maintain the proper temperature in their homes without discriminating against their needs for food and basic necessities), by blocking investment incentives for their own production and blocking the implementation of energy efficiency measures, etc. That is, addressing issues that are of critical importance to the industry will be postponed, as they used to say, for later.

2.4. It creates corruption risks in terms of manipulating gas volumes intended for PSO (fixed price) and commercial consumers (wholesale market price).

2.5. It contradicts Ukraine's international obligations to liberalize the gas market, in particular, to the European Union and the International Monetary Fund.


3. What was really worth doing?

First of all, the main stakeholders had to intensify their desire to dismantle the market distortions (see paragraph 1) and do something else.

3.1. To oblige Ukrgazvydobuvannya to sell all of its gas through the exchange, for equal access of all suppliers.

3.2. To oblige all gas supply companies to publish their forecast prices.

3.3. To ensure the completion of unbundling between DSOs and regional gas selling companies. To create data hub on the basis of the regulator (database of all end users), and also to enhance the quality of licensing control.

3.4. Finally, address energy poverty issues by increasing funding for energy efficiency measures and monetization of subsidies.

3.5. and much more ...

Maksym Bielawski

Leading Expert, Energy Programmes


Born in 1986 in Zhytomyr oblast

Education:

Zhytomyr State Technological University (2008)

Ph.D in Technical Science (2010)

Ivano-Frankivsk National Technical University of Oil and Gas (2012)

Author of 17 patents and 100 scientific works

Work Experience:

2008 – 2011 — Operator of Gas Infrastructure Units, Controller of Gas Transmission System in Rivne Division of PJSC "Ukrtransgas"

2011 – 2017 — Leading Engineer, Deputy Head of Press-Service, Head of Public Relation Department of PJSC "Ukrtransgas"

2017 – 2018 — HR Director of PJSC "Maine Gas Pipelines of Ukraine", Advisor to the Minister of Energy and Coal Industry of Ukraine

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