Ukraine has been implementing a large-scale gas market reform since October 2015. During this time, a competitive market for industrial consumers with the right of free choice of supplier was introduced, diversification of natural gas imports took place, and the difference in prices for domestic and non-residential consumers was significantly reduced.
A formal division of the areas of natural gas transportation on the domestic market and its supply (distribution) to end users took place as well. However, the sensitivity of introduction of a unified approach to the formation of the price of natural gas for all categories of the population due to the low income of a large number of citizens impedes the process of the reform, which in turn undermines free competition, maintains the practice of non-transparent relationships at the market as a result of regulated and lower than regulated natural gas prices and impedes the formation of a distribution market with real competition between many suppliers.
The core problems of the industry
The difficult economic situation, caused by the destruction of economic ties between enterprises in different regions and the difficult process of restoration of the national economy, is one of the major restraining factors in establishing gas price formation in unified pricing order.
Although the increase of the regulated price in recent years has led to an increase in interest in energy conservation and a significant reduction in consumption volumes; for individual participants in the natural gas market, the consequence was a collapse of financial performance due to reduction of operating activity while the infrastructure maintenance work remained the same against the background of the cost of goods and services and the minimum wage increase.
The slow growth of the national economy in the current and following years, as predicted, as well as a number of election campaigns, do not contribute to completing the process of equalizing prices in the near future.
According to the results of the visit of the International Monetary Fund mission to Ukraine in September 2018, an agreement on the gradual increase of regulated prices to the level of import parity over the next few years was reached.
At the same time, Ukraine should introduce incentives for growth of economic activity and level of incomes of citizens while simultaneously reforming the system of subsidies through monetization of state aid for the financially vulnerable groups of the population, where in turn each such consumer should be included in the single national register.
At the same time, the parallel direction of the state policy is to stimulate citizens to save energy by means of winterization of houses, use of more energy-efficient household appliances and changes of energy consumption habits.
Delays in introduction of a distribution tariff based on the actual cost of providing services, ensuring the return of incurred costs by suppliers, predictability for consumers in the context of calculating future payments, the absence of discrimination and the simplicity and transparency of the tariff formula.
At present there is a significant disproportion in the volume of payments depending on the seasonal fluctuations of consumption, first of all from the side of the population and utility companies.
It is caused by a formulaic approach which is based on the actual energy consumption, as a result of which the operator of the gas transmission system and distribution companies receive huge gaps between seasonal peaks and failures in the consumed volumes of natural gas and, accordingly, in working capital, which they can operate (see picture).
At the same time, enterprises should ensure the financing of constant expenses at the same level, primarily for remuneration and accounting, as well as carrying out scheduled repair and maintenance works of the transportation infrastructure.
Meanwhile, it is very important at this stage to find out the order of calculation of production and transportation costs in the structure of the tariff to prevent abuses on behalf of unscrupulous distribution companies and create the preconditions for the gradual increase of their energy efficiency.
In accordance with the updated order of formation of the price for distribution services, it is assumed that the tariff is divided into two components. Within the first, distribution services will be paid on the basis of the joined capacity, and the second will reflect the actual volumes of the delivered resource. This approach is planned to be implemented in several stages over the next three years. By April 1, 2019, the tariff formation formula based on the actual distribution services will be applicable, and each subsequent year, a new model of price formation will be introduced until they are brought to a single level between domestic and non-residential consumers (approximately from April 1, 2023).
The presence of a significant number of unresolved debt cases between distribution companies and the operator of the gas transmission systems, which arose at different times for a number of reasons of objective and subjective nature.
In Ukraine, according to the decree of the Cabinet of Ministers of Ukraine No.187 (as amended and supplemented) the procedure for the formation of a regulated price for certain categories of consumers from April 1, 2017 until October 1, 2018, (for utility companies and households is 5930.4 UAH per one thousand cubic meters) in accordance with special supply duties assigned to the state-owned company “Naftogaz Ukrainy”.
It is forbidden to stop the supply of natural gas to utility companies in accordance with the decree of the Cabinet of Ministers of Ukraine No. 322 as of April 29, 2016, subject to the following conditions: the producer of thermal energy is not in debt to “Naftogaz Ukrainy” (excluding penalties), it conducts current gas payments; the capacity of the utility company in completing transactions for the supply of natural gas under the signed agreements is not less than 90%; the utility company provided “Naftogaz Ukrainy” with a schedule for paying off its arrears in equal installments by January 1, 2021 (approved with the executive body of the local council), as well as the utility company conducts current payments for gas.
This problem can be minimized after the introduction of consumer subsidy monetization and the establishment of a single formula approach to the price of natural gas for all categories of consumers.
The introduction of the mechanism of balancing of gas transportation networks on the basis of monthly reconciliation was carried out after the approval of the Gas Transportation System Code on September 30, 2015, by the Resolution of the National Commission for State Regulation of Energy and Public Utilities No. 2493. This document contained a number of issues, in particular, the concept of national gas balance was excluded, which was previously within the competence of “Naftogaz Ukrainy”, instead, the notion of imbalance with significant gaps of responsibility for various reasons for the use of natural gas exceeding the declared volumes as a result of which debts for balancing services increased to more than 25 billion UAH in the following years.
The deficient Gas Transportation System Code is an obstacle to further steps in reforming the gas market in Ukraine, in particular, the introduction of daily balancing, which would allow responding more quickly to the differences between declared and actual volumes of natural gas use. The national regulator of the energy sector and key players at the market – Ukrtransgaz and regional gas distribution companies continue working on this issue. The preparation of the technological capability and software of the market participants, as well as the synchronization of work at all levels is taking place gradually.
The practice of some participants in the gas market needs to be improved due to outdated approaches to monopoly suppliers. This work shall to a large extent be performed by the National Commission for State Regulation of Energy and Public Utilities by means of studying the results of various companies and developing a balanced approach to tariff formation, which would include the attractiveness of the distribution sector for private companies, where the “Regional Gas Company” is currently the largest player. It can also create conditions for minimizing abuse and shadow gas sales.
“Regional Gas Company” LLC specializes in management consulting in the gas distribution sector. The “Regional Gas Company” unites gas distribution companies to solve complex problems that will improve servicing of gas consumers, modernize the industry and introduce modern standards of work. The project’s participants provide gas to more than 8 million Ukrainian families and 60 thousand industrial enterprises and organizations. The “Regional Gas Company” started its work in 2010 and already unites more than 20 gas distributing companies, among which there are: PJSC “Kyivoblgaz”, PJSC “Lvivgaz”, PJSC “Dneprogas”, PJSC “Volyngaz”, etc. Reference: https://104.ua
An important issue is the completion of the process of establishing energy consumption accounting for all categories of consumers, where currently the least cover group are apartment-block buildings with a centralized heating system and the use of gas for cooking in accordance with the normative average monthly figures of the Cabinet of Ministers of Ukraine Resolution No. 203 of March 23, 2016 (as amended and supplemented). At present, according to the relevant regulations, from 500 million to 1 billion cubic meters of gas is accounted, with estimates ranging, which leaves considerable room for abuse at the expense of the difference between the actual consumption and paid-up volumes of natural gas, even at regulated prices.
In addition to the above-mentioned problems in the sector, the dangerous trend that is rapidly spreading among regional gas distribution companies is the loss of professional stock due to the noncompetitive labor market remuneration of employees of technical and repair and maintenance services. Specialists in this sphere of services are massively resigning, with the prospect of significantly better employment in other sectors, in particular, taking into account new opportunities in the context of the Association Agreement with the EU and growing preferential conditions in certain member states of the community.
As a result, regional gas distribution companies are at crossroads: either they need to substantially revise the level of their employees’ remuneration and optimize costs for other areas, or decide to leave this type of business and sell it to competitors among Ukrainian or European players.
The question about the state of the gas distribution networks arises in such circumstances. The cost of their maintenance is minimal. Avoiding the impending crisis in the industry is possible by establishing on behalf of Ukrainian regulator an objective tariff for gas distribution or a gradual planned reduction of gas distribution networks.
The experience of Georgia, which in the second half of 2000s, through the establishment of market rules in this sector, has taken its own gas distribution branch out of crisis, testifies that the Ukrainian market of natural gas distribution can become transparent and attractive to the investor.
