TOP-12 Questions and Answers About the Natural Gas Market

March 03, 2021

Maksym Bielawsky, the leading expert of energy programs at the Razumkov Center, provided answers to the TOP-12 questions about current model of Ukraine’s natural gas market.


— What does the phrase “fair tariff” mean?

First of all, he offers to define the terminology. A tariff — is a fee, set by the Regulator (regulating body) or another body (for example, a local government) for a service provided by a natural monopoly. For instance, gas distribution, heat production and supply. Price — is the cost of the resource. The fixed price or floating-fixed price of gas is set by the Cabinet of Ministers of Ukraine in its resolution, which is entitled to impose special obligation on the gas market. Therefore, returning to a fair tariff — it is a consensus that must simultaneously ensure the unprofitable operation of the natural monopoly and the consumer’s ability to pay the established tariff.

If we talk about a fair price, then it can only be determined by the market.

— How is gas tariff and gas distribution tariff formed in Ukraine?

Today the gas price is fixed. Personally I haven’t encountered the calculation methodology, so I cannot say anything more in this regard. The only thing I can say is that according to the calculations of the Razumkov center the maximum price should not be 6.99 UAH/cubic meter, but 6.55 UAH/cubic meter, if to apply the principle of the “European hub without transportation” formula. And now, with regard to gas delivery services, they are provided by gas distribution network operators, to which National Energy and Utilities Regulatory Commission (in Ukrainian NKREKP) sets a tariff for distribution on a cost plus basis. The structure of the distribution tariff includes production costs, losses of natural gas, wage fund, financing of reconstruction and modernization of critical infrastructure, as well as the percentage of profitability. The employees of gas distribution network operators perform diagnostics, operation, as well as a complex of gas-hazardous and fire works at critical structure facilities 24/7 for stable and safe delivery of natural gas to the houses of Ukrainians.

Systemic understatement of gas distribution tariffs (economically unjustified by the Regulator) has led to the high degree of network deterioration, lack of information on the critical infrastructure state, insufficient staffing and the outflow of the qualified specialists due to low wages. Obviously, such situation affects the accident rate of the system.

— What impact on the tariff does the binding to the European hub have?

The impact can only be on a fixed-floating gas price. Why a fixed-floating price — because the fixed price changes, in particular, after the change of quotations on the selected European hub. This is the case with the formula “European hub without transportation”. If we consider the formula “European hub plus transportation”, then the change in cost of booking the capacity of pipeline crossings is taken into account.

— Do we need an energy exchange and what for?

In 25 European countries, the market competition is ensured by means of gas hubs. The most liquid trading area is TTF[1] in the Netherlands. Hubs in France, Belgium, Germany, Austria, the Czech Republic, Spain, and Italy are showing significant progress in hedging [2]. Rapid development of spot trade is inherent in such countries as Poland, Hungary, Denmark and Sweden. Hubs in the Baltic States, Slovakia, Romania, Slovenia, Croatia and Greece are at the infancy stage.

Ukraine has a favorable geographical location, has sufficient natural gas resources, and operates a gas transmission system with sufficient technical capacity, which is also the most extensive network in Europe. Everything mentioned above, creates the preconditions for the organization of the hub on the basis of the national gas transport infrastructure, provided that the tasks of the external and internal levels are fulfilled.

A gas hub is commonly referred to as a point of sales where buyers and sellers exchange the ownership of the goods. Such transactions take place through the conclusion of financial (futures) and/or commercial agreements (physical supply) within one trading area on the exchange.

The guidelines of the process of organizing a gas hub in Ukraine should be the following: deregulation of gas prices; transfer of reception-transfer points from the western to the eastern border; standardization of trade rules [3]; ensuring transparence of pricing and the market size; setting price indices; hedging and organization of futures trading; long-term forecasts.

A feature of national trade zone may be the use of block-chain technologies for trade operations. Thus, the Ukrainian national gas hub has prospects to become multifunctional, meaning not only physical, but also transit and benchmarking. After organization of the hub, in accordance with European practice, it is appropriate to apply import parity in order to reduce currency and price risks, which will increase the liquidity of national trading space. Therefore, the organization of gas hub in Ukraine will have economic and political advantages.

Deployment of the hub in Ukraine will allow: to complete European integration commitments through the integration of domestic infrastructure into the European gas market; to open additional formats of economic cooperation with Turkey and Azerbaijan, as well as to create an alternative to the Russian trade space in the Black Sea region. The latter aspect will provide Ukraine with additional tool to influence the policy of the Russian Federation, in particular, in matters of de-occupation of the Autonomous Republic Crimea and certain regions of Donetsk and Luhansk regions.Thus, the logical conclusion of a full-fledged opening of the natural gas market should be the organization of a gas hub, which will open opportunities for Ukraine, both in the economical and in the political domaine.

— Energy units in payments for gas and their impact on the tariff.

For several years, the gas transmission network operator has been accounting the gas in energy units, that is the calorific value of gas: the amount of energy released during the combustion of one cubic meter.
Gas distribution operators also provide relevant information in their bills, but the price is not tied to calories. This will happen when the final integration of the Ukrainian gas market with the European one will have been completed, in particular in terms of metering systems and devices. It is expected that after the full transition of commercial accounting to energy units, the price and tariffs will decrease due to increased measurement accuracy.

— What is the difference between the indicators that affect the price of gas for household consumers in Europe and Ukraine?

The price of gas in Ukraine is now fixed, until August 1, 2020 it was fixed-floating. In EU countries, the price of gas for household consumers is offered by supply companies, and their commercial offers are in corridor of a single indicative price on the gas hub.

— Does the tariff reduce the gas of own production (is its cost price known)?

The cost of gas of own production is known, it can be calculated by anyone independently. To make such calculations you need to take the financial statements of the gas company and conduct one mathematical operation: to divide all company’s expenses by the volume of production and get the cost price. If to talk about the cost of the largest state gas company “Ukrgazvydobunannya”, it equals on the average 2600 UAH per thousand cubic meters.

Regarding the question of whether it reduces. According to the current model, no, it doesn’t reduce.


Due to the following:

1. Some licensed gas supply companies have not been given equal access to the gas of their own production. Here it is appropriate to recall that the annual resource of the state company Ukrgazvydobunannya”, for instance, in 2019 was 14,9 billion cubic meters which is 0,8 billion cubic meters more that the total consumption of natural gas by household consumers and district heating providers.

2. The gas price for district heating providers that produce heat for the population has remained fixed and is calculated according to the formula “European Hub+”. It should be noted here that, in fact, in the conditions of PSO, gas is mainly used by heat generating enterprises from the resource of Ukrgazvydobyvannya.

3. The consumer has encountered difficulties (perhaps created by someone), when switching to another supplier, who has a more favorable offer (due to dominant position, in particular, the only one who has access to 67% of domestic gas). In addition, most consumers were not sufficiently informed (according to the Razumkov Centre’s sociological researches, which were conducted three times from August to December 2020). There are several reasons, in particular, the diffused responsibility of public authorities for the information support of the reform and deliberate information withholding by individual suppliers.

4. The market was opened in condition when the issue of debt coverage (without sources of coverage) was unsolved.

5. Lack of a constructive dialogue among stakeholders due to reluctance (everyone’s motives were different) to introduce a real natural gas market.

Here it is important to mention that we are talking about a market environment where there is a single exchange indicator that forms a price corridor for truly fair competition.


In order to take it into account, it is necessary to do the following:

1. To oblige Ukrgazvydobuvannya to sell all its resources through the exchange for equal access of all suppliers.

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

3. To ensure the completion of unbundling between regional gas companies and regional gas selling companies. To create a data hub (a database of all end customers)on the basis of a regulator, as well as to improve the quality of licensing control.

4. Finally, to address the problem of energy poverty by increasing funding for energy efficiency measures and monetizing subsidies.


— Is the tariff clear for population or whether it is supposed to be clear? Two gas bills or one?

In my opinion, in general, consumers do not have enough information about prices and tariffs. Two bills — are the element of the European model of the gas market, which our state was obliged to fulfill after the signing of the Association Agreement between Ukraine and the EU.

— Tariff fluctuations: can they be limited on the free market?

European practice provides for the establishment of price restrictions, but they are aimed to constrain a steep increase in price in case of force majeure. For instance, price increase in the midst of a rapid drop of supply due to an accident at the infrastructure.

Seasonal price fluctuations in EU countries are covered by special commercial offers and social programs for unprotected consumers.

— What will manual control turn into? What would have happened if the intervention had not taken place?

Any manual operation, namely cross-subsidization, is a conservation of problems and a basis for the growth of debt and, consequently, the loss of working capital by system-forming enterprises.

From a political point of view, the manual operation will not increase society’s perception of government. Our sociological researches indicate that the society was most concerned about unfair tariff policies in general. According to the results of the year 2020, 81% of respondents (more than in the first comment) stated that situation was worsening concerning this issue. Therefore, an increase in government support is possible only under the condition that the tariff regulator would be controlled in its activities at the large-scale.

— What is the situation with the population’s calculations for gas and gas distribution? And what might it be after the heating season is over?

The total debt (the amount of unpaid charges) of 14 million 881 thousand households registered in the country for all types of utility payments amounted to UAH 56.1 billion (in 2019 the total debt amounted to UAH 52.1 billion). As of beginning of November 2020, debt for gas is UAH 22.4 billion; for the supply of thermal energy and hot water — UAH 16.7 billion, for centralized water supply and sewerage – UAH 5.7 billion, for the management of an apartment building — UAH 5.1 billion, for the supply and distribution of electricity — UAH 5.1 billion, for services for household waste — UAH 1.1 billion.

The very fact of having such debts suggests that the price model is anti-market and doesn’t meet effective demand.

— How to prevent a tariff crisis and mass protests?

First of all, it is necessary to introduce an appropriate system of informing household consumers. Lack of information creates myths, and unscrupulous politicians can take advantage of this.

[1] TTF indices have a significant impact on other trading operations of other EU hubs

[2] Hedging is the insurance of various assets against adverse changes in the market situation. This process is to acquire the ability to carry out a transaction with the asset in the future on pre-established terms.

[3] The main segment of the market should be the format of “bilateral agreements”, which will allow the gas producers to conclude the agreements directly with the consumer.

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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