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Gas Prices Have Been Unfrozen. What’s Next? 

25 September 2020Світлана ОЛІЙНИК, спеціально для “Української енергетики”

Experts predict that natural gas in winter will not cost more than UAH 7 per cubic meter

Gas Prices Have Been Unfrozen. What’s Next? 

Almost two months have passed since the launch of the natural gas market for household consumers in Ukraine. The first changes, the main of which was the opportunity for consumers to choose the supplier of natural gas and thus influence the amount in the bill, took place. However, how exactly the prices had changed, and which of the consumers turned out to be right: those who hoped for lower tariffs due to competition, or those who said that the opening of the market would lead to higher fuel prices? What prices to expect during the heating season?


New Gas Market - Different Prices


Although the Law on the Natural Gas Market was adopted in 2015, its launch for household consumers has been postponed several times.

“Reforming the natural gas market in our country began five years ago,” Oksana Kryvenko, a member of the NEPURC said. “From October 1, 2015, we had an open market for non-household consumers, except for municipal heating companies. To protect the population, public service obligations were imposed on suppliers and NJSC Naftogaz of Ukraine to ensure the volume of natural gas and its supply at a certain price.”

Now we have finally reached the stage of opening the market to the public. For the consumer, this means, according to Oksana Kryvenko, first of all, expanding the range of suppliers and the opportunity to choose the one that offers the best price, more convenient terms of payment or use of natural gas, as well as interesting new products from the list.

“Many more suppliers today can offer their services to the consumer, and such competition should help reduce the cost of natural gas,” she said.

According to the representative of the NEPURC, the main thing is that as a result of market opening there should be competition, i.e. all suppliers will fight for the consumer by providing him with better and cheaper services, improving customer service.

To imagine what we will get, we can look at the experience of European countries.

“Most Europeans are convinced that the EU’s task is to overcome energy poverty, to provide more affordable and competitive prices through the choice of energy and suppliers by consumers,” Roman Nitsovych, research director at Dixi Group Think Tank said.  “Speaking of contracts and products, we say that there are different types of commercial offers in the EU. They may differ in price (variable, fixed, dynamic, combined), services (discounts, “green” offers, etc.). Contracts with a fixed price or a variable price that can change, for example, each month, dominate”.


Price is Not the Only Criterion for Choosing a Supplier


According to a survey by the Association of Energy Suppliers, almost half of Ukrainian consumers (47% out of 12.5 million) would like to receive an affordable and transparent price as a result of the gas market reform.

“Why does the consumer want to change the supplier? First of all, because he wants to change the price,” Artem Kompan, Board Chairman of the Association of Energy Suppliers, said.

How to choose the most optimal price for yourself? Of course, the best option would be to see the rating of suppliers, but there isn’t any. The NEPURC promises that it will appear soon. For now, you can go to the Regulator’s website, view the full register of all licensed natural gas suppliers (about 300) and visit their Internet pages with price offers.

“However, a more convenient way is Energy Online mobile application developed by the NEPURC together with DiXi Group Think Tank, which has been operating for two years,” Oksana Kryvenko says. “It allows selecting the region of supply and seeing all the price offers of suppliers. You can choose a supplier by comparison”.

Tariffs of various companies for September for the distribution of natural gas were in the range of UAH 4.5-7 per cubic meter (including VAT). The cost of delivery ranged from UAH 0.336 to 2.952 per cubic meter (including VAT). However, so that attractive tariffs do not become a trap, experts and market experts advise to pay attention not only to the price.

”To begin with, I would advise consumers to go to the supplier’s website, to understand how seriously it treats informing consumers and working with them, that is, what communication channels are available, how well the information is presented,” Roman Nitsovych says. “And only after that you should look at commercial offers - how flexible, clear and profitable they are. We at Dixi Group have released a brochure explaining the procedure for selecting a supplier, and now we have launched Gasoteka service, similar to those that exist in Europe, in a test mode. The functionality is quite simple - just specify your current tariff or contract, how many cubic meters of gas you consume each year, and you will be shown a table with an approximate estimate of the monthly payment and possible savings that you can achieve by changing suppliers. This service is currently operating in a test mode and we are happy to receive feedback”.

“It is very important that the customer understands how reliable the supplier is,” Maksym Rabinovych emphasized during the Launch of the Retail Gas Market: What Consumers Should Expect? webinar. “This is a question for the market and the Regulator, because we understand that getting a supply license now is a very easy way to get on the list of suppliers. The customer must also understand that the reliability of the supplier depends significantly on whether it has the resources to supply”.

The expert advises to take into account the European experience, when some suppliers had a table and a chair, they collected money and then disappeared. To avoid falling into the trap, there should be a supplier rating or a reliability rating that can be viewed by consumers.

Another important factor in the choice, according to Director of Gas Supply Company Naftogaz of Ukraine Maksym Rabinovych, is how the supplier will cooperate with the customer and what customer experience the consumer will gain. Will they work with him through online, offline communications, how will they explain the various nuances of the market, how will the supplier let its customer go (because we understand that the customer can return to the supplier). To understand this, you should go to the supplier’s website.

“What would I single out for myself as a consumer? Of course, I would go to the website and see how open the provider is, that is, what information about financial statements, financial condition, resources (where they come from) is on the website. On the other hand, it is necessary to evaluate the work with consumers - the extent to which the supplier provides and updates real information about itself, its team. The history and customer portfolio are also very important - whether the supplier is able to work with a certain number of customers,” Oleksandr Ovdiienko, Chief Gas Expert of USAID Energy Security Project, says.


Why, Despite the Competition of Suppliers, the Gas Price is Rising


Even before the launch of the gas market, consumers were most interested in what the prices would be. Some predicted that after the opening of the market, gas prices in Ukraine would be higher than in Europe. At the same time, there were statements that competition would inevitably lead to lower tariffs. Especially in the conditions of cheap world gas prices. For example, Chairman of the Board of the Naftogaz Group Andriy Koboliev initially said that the price of gas for the population in the heating season of 2020-2021 might be 20-30% lower than last year. However, in reality, Naftogaz raised the price for September by 45% - up to UAH 4.7 per 1 cubic meter (excluding delivery costs). The company explained this by rising prices at European hubs.

“After the deepest failure in recent years, the price of gas has risen - this is a global seasonal history for the European and Ukrainian gas markets. Even PSO at one time did not stop seasonal changes: in the summer the price falls, in the winter – grows,” Andrii Koboliev wrote on the page in a social network.

However, according to Volodymyr Shvedkyi, CEO of ETG.UA, the monopoly on cheap domestic gas resources and the price jump of 45% (up to UAH 4,700 per 1 tcm) indicate that Naftogaz’s margin on retail sales will exceed 20 %. He is convinced that the company’s prices are too high and that it can sell gas to consumers much cheaper. A representative of a competing gas supplier even called the mechanism “PSO in a new way” and believes that this indicates abandoning the principles of fair competition.

“Our price increase was not gradual,” Andrii Myzovets, President of Gas Traders of Ukraine Association said. “If you take the current price and the one that was in the spring, the difference is 2.5 times. However, this is a market and you need to get used to it. It seems to me that we just need to reduce the degree of politicization of the gas issue, explain to people that, indeed, the price of the resource is seasonal, that our prices are clearly correlated with what is on Western stock exchanges.” And to make it clear to the consumer, the expert offers to demonstrate the schedule of Ukrainian prices and prices at European hubs.


What Will Happen Next to Gas Prices


What prices to expect next and how should consumers act to be able to pay for gas in winter without problems? Let’s resort to the European experience.

“Retail prices for households in Europe are quite high on average. On average, they are twice as high as the prices for industry,” Roman Nitsovych says.

In addition, according to the expert, they are influenced by the seasonal factor, so there is the so-called “winter” (more expensive) and “summer” (cheaper) gas. Still a significant part of the markets of European countries has one or another type of price regulation. In particular, as of 2018, in eight EU countries, this regulation concerned the actual regulation of final prices or prices for certain categories of consumers.

“Those markets where the price deregulation has occurred earlier give consumers more opportunities to save when changing suppliers. Markets where price regulation exists have, to a greater or lesser extent, fewer such opportunities for consumers. Of course, in such markets, there are fewer suppliers, fewer conversions and fewer opportunities to save,” Roman Nitsovych adds.

He noted that dynamic prices are now encouraged at the EU level, i.e. those that directly depend on the market situation, on daily price fluctuations. But such a practice is not common at present. In regulated markets, there is a single price offer from a supplier, and in deregulated markets, the number of offers per supplier varies on average from 2 to 4.

At the same time, Roman Nitsovych notes that the possibility of saving depends not only and not so much on the market situation. The purchase of gas by Western companies in the wholesale market usually takes up a small part of the final price (on average - half). Other components of prices are tariffs for transportation and distribution (delivery), as well as taxes (for example, fossil energy, VAT).

“If we look at the Ukrainian case, more than 70% is actually the price of gas in the wholesale market. This means that we are more dependent on fluctuations in this market than other countries, where the share of taxes and other components in the price is larger,” the expert adds.

“Given today’s forecasts and the cost of forward contracts, we can clearly say that now there is a tendency to increase the price,” Artem Kompan says. “However, 30% of consumers receive subsidies. The state still cares about low-income citizens, providing them with support”.

“It is impossible to insure against price fluctuations forever,” Oksana Kryvenko is convinced. “However, the supplier, having thought out a business plan for its work and work with consumers, can offer a stable price to the customer, say, for a year, and cover those fluctuations in natural gas purchases with its margin in each period, if any”.

“If there are no serious currency jumps in the country, the prices for the final consumer in winter will not exceed UAH 6-7 per cubic meter,” Andrii Myzovets is convinced. “Increasing the number of suppliers will lead to the fact that we will not have price manipulations. Even if two or three big players conspire, we will always be able to choose a cheaper product due to competition. During the year, the number of companies that will offer gas will grow, respectively, the population will be able to compare their activities with the help of Gasoteka or other services”.

According to Prime Minister Denys Shmyhal, the price of gas in winter depends on what happens in the market. So far, the head of Government has announced only his forecast for gas tariffs for the population in October: UAH 4,700-5,000 per tcm.

“This is the lowest price in the last five years, in fact, the lowest price level since independence. This is a free market where people can choose a supplier. There is competition that lowers the price. Of course, there is a seasonal effect on prices. In winter, gas, of course, is more expensive, and we will pay more for it,” he said in an interview with Ukraine 24 TV channel.


Problems Hampering the Gas Market


Specialists and experts expect positive changes due to the launch of the gas market for the population, but point to many problems that prevent this. First of all, the lack of consumer awareness about market launch, consumer misunderstanding of the distribution into regional gas companies (oblgazes) and gas supply companies (gazzbuts).

“It’s one company for people,” Maksym Rabinovych says. “This is a big problem because it will be quite difficult for new suppliers, especially independent ones, to break into this market.” To change the situation, in his opinion, a powerful information campaign is needed.

He is also convinced that the positive consequences of launching a market for consumers today largely depend on the regulatory environment.

 “We say that we have a standard contract, but today it does not allow us to offer any commercial products or allows doing it in a very wrong, complicated way for the customer,” Maksym Rabinovich said. “The issue should be resolved with the Regulator. Today, many also say that there is no responsibility of regional gas companies for gas metering, therefore every new supplier is at risk - it could go bankrupt within a month. And it’s also a matter of the regulatory environment and a sense of confidence of the supplier entering the market.

I hope that soon there will be no such problems as the regulatory aspect, as the issue of interaction between supplying companies, regional gas companies, as thermal coefficients that can be played with, as a competitive advantage, to scare customers.”

“We have to remove all regulatory and legal shortcomings, bottlenecks in order to have a stable basis for the development and functioning of other elements,” Oleksandr Ovdiienko says. “All production companies either supply natural gas themselves or have affiliated supply companies. All this somewhat distorts the free wholesale market and free pricing.”

The huge debt for natural gas supply and distribution services is another big problem pointed out by the expert. As of August 1, it amounted to UAH 21 billion.

“This is a painful element that pushes market participants away from active entry, especially when it is possible to start the change procedure, even with debts,” Oleksandr Ovdiienko says. “And if market trends continue, if there is a significant increase in prices, then we may face the problem of gas availability for consumers. This will lead to a reduced solvency, payment discipline and, consequently, possibly to an increase in disconnection at the initiative of suppliers, which will affect security of supply. In this case, the burden on the supplier of last resort is likely to increase.”

The expert points to limited transparency in the market. According to him, today more than 90% of contracts are direct, i.e. closed, which are not monitored or published. “Even volumes and prices are closed to everyone,” he said. He also draws attention to the fact that designated suppliers (those separated from gas distribution companies) now dominate due to limited competition. “The unfair advantages of these suppliers over independent ones are their access to data registers,” Oleksandr Ovdiienko says.

He does not rule out that events in the gas market may go according to both positive and negative scenarios. In case of a negative one, Naftogaz may be able to use its advantage in the wholesale market. This means the existence of unequal wholesale prices and distorted competition between DSOs and designated suppliers.

“All this can lead to a significant increase in margins and higher gas prices for consumers,” the expert adds. “Excessive prices and insufficient or late payment of subsidies can force suppliers to submit many applications for disconnecting consumers. This threatens with non-payment and increase in energy prices for consumers. Such a scenario could lead to very serious failures in the whole system.”

Most experts interviewed by Ukrainian Energy believe that the price of gas will rise in winter, just as it does in the world, but we will not see the peak values of previous years. At the same time, they hope that as there are more and more suppliers in the market, competition will affect the price in the direction of its reduction.

Svitlana OLIINYK, specially for Ukrayinska Energetyka


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