Drop the hummer: the gas market opening in Ukraine

The gas market is planned to be opened for the population on July 1. This step towards the gas market liberalization is the next stage in the Third Energy Package (a set of European Union directives in the field of gas and electricity) requirements fulfilling to boost competition in the markets. So from now, consumers will be free to choose their gas supplier.

The capacity of the gas market for the population now comprises more than 12.5 million consumers (which is equivalent to the consumption of 8 billion cubic meters per year). One expected that in the first heating season, the monopolists will lose from 5% to 10% of the market. In 3-5 years, this number can increase to 30%.

Today, 100% of the client portfolio is formed by a supplier-monopolist, which controlled the prices within the special responsibilities. The monopoly companies have created an infrastructure to serve individuals, which might have already paid off. Other companies, entering this market, will have to create an offer that will be better in both price and quality.

Vladimir Shvedky, CEO of energy provider ETG.UA.

The gas market in Ukraine continues to be import-dependent, so domestic pricing is tied to import parity. Thus, the final price consists of the fuel cost at European hubs, the tariff for transportation across the EU, the fee for entry into the gas transmission system of Ukraine and a supplier’s margin. We do not expect any fundamental changes in this formula, and during the next 2-3 years, the country will not move to the export parity.

Due to a 20-year minimum of natural gas prices reach on European exchanges, the price with all tariffs and VAT within the country is at the level of 100 euros. So we can say that investment projects for new fields and wells become far less attractive. Based on this, we should not expect the rapid development of domestic gas production during the next few years. During the 3-5 years’ perspective, we remain an EU-dependent consumer still.

Currently, many changes take place in the regulatory policy regarding the development and production of gas in Ukraine. With the procedure simplification and the increase of licensing tenders’ transparency investors’ interest will be increased. But the price of gas has no prospects to grow in the coming year, which affects negatively the decision to invest in such a business. The payback will not be the same as in previous years.

Companies currently engaged in gas production in Ukraine have revised their investment plans or will adjust them soon. The development pace of new reservoirs will inevitably fall, which negatively affects the overall production balance by commercial companies in 2020-2021.

Andriy Myzovets, Chairman of the Gas Traders Association of Ukraine

The simplicity of changing the supplier for the consumer is the key toward a successful transition to market pricing in the households and municipal segment. If a change of supplier takes more than 100 days, then all our hopes and expectations and efforts will be in vain.

Does the consumer know today that tectonic changes take place in the natural gas market? Does he know that he will receive gas under market conditions soon? There should be a fairly serious information campaign on this issue by both the regulator, the Cabinet of Ministers of Ukraine and suppliers. It is the detailed and comprehensive informing of the population that will give a serious impetus to this market establishment and further development according to the European model.

The second question, regarding the supplier of last resort – its absence is a huge obstacle to the market establishment, there will be a collapse without it.

The third issue is a data hub or data bank, a consumer database introduction. This will simplify life, especially for consumers. Because the main thing is not what the participants discuss, but the possibility to turn to the consumer and ask whether it is easy for him to perceive the transition from one supplier to another, whether he understands the traders’ price opportunities and a payment. So the introduction of this will be the main driver of the consumer market.

As for the gas sale by the state company Ukrgazvydobuvannia through the stock exchange, this problem is not ripe, it is overripe. This resource must have been launched on the market for a long time ago, it must have been evaluated adequately in terms of price for a long time ago. This will be the additional support both for the company in terms of their resources assessment and for the abuse and price changes absence.

Currently, there are very favourable price conditions for the imposition of special responsibilities refusal and the transition to market pricing in the population segment. For the consumer, these changes will not be a shock for consumers, if a serious information campaign and the caveats mentioned above go-live.

Marina Gritsyshyna, the law firm’s Sayenko Kharenko advisor

Ukraine has made significant progress in the gas market liberalizing recently. A lot has already been done, but a lot remains to be done. The most significant recent changes in the gas market include the daily balancing introduction in March 2019. As a result, Ukraine’s gas market became more transparent and competitive, and these changes are important for further integration into the EU gas market. But the most important event for the gas market was the unbundling (reorganization process) completion and the certification of the gas transmission system operator – LLC “GTS Operator of Ukraine”.

Ukraine has significant prospects due to the underground gas storage facilities use, especially taking into account the high level of gas storage facilities filling in EU countries. According to the National Commission of Energy and Utilities Regulation, there are 12 underground gas storage facilities in Ukraine, which are sufficient to meet Ukraine’s needs, and also to ensure the gas supply and transit through Ukraine. Therefore, thanks to the access to gas storage facilities under the Short-haul service introduction, European traders can deliver gas at reduced rates through the territory of Ukraine and store it in the customs warehouse for 1095 days.

However, there are many issues regarding further reforming of the gas market besides the positive changes. In particular, the most important issues which have to be addressed include the following:

Gas transmission system operator’s independence

At the end of May 2020, 47 people’s deputies appealed to the Constitutional Court of Ukraine regarding the unconstitutionality of the law on unbundling Naftogaz and the separation of the GTS (gas transmission system). These actions threaten the gas transmission system operator’s further independence and may harm the further liberalization of the Ukrainian gas market.

The imbalances payment

During recent months, the GDN operators (Oblastgases) debt for negative imbalances to the GTS Operator has increased, while the level of settlements amounts only to 33%. The debts accumulation may harm the GTS Operator financial stability. A possible solution to the problem is to set distribution tariffs at the appropriate level. However, despite these problems, the National Commission considers cancelling the tariff increase next phase, which has outraged the Energy Community. Moreover, the further increase in distribution tariffs abolition may lead to further debts accumulation increase by GDT operators, which may influence negatively the whole market.

Therefore, the Ukrainian gas market needs further reforming. Tariff issues remain the most difficult, especially if they are increased. At the same time, everyone waits for the retail market opening from July 1, 2020, as one of the major steps for further liberalization. Despite certain problems, the Ukrainian gas market gets more transparent, competitive and more interesting for EU traders.

Natalia Tolub