Cabinet keeps to plan to launch electricity market in July, suggests capping prices

Ukraine’s Cabinet of Ministers approved on June 5
regulations aimed at enabling the planned launch of an electricity market on
July 1, local media reported. Among them, the Cabinet approved a mechanism to
impose public service obligations on state-controlled electricity producers,
including nuclear company Energoatom, hydro company Ukrhydroenergo and
coal-fired Centrenergo (CEEN UK), Interfax-Ukraine reported the same day.

The Ukrainian government will focus on two goals in
preparing for the new market launch, said on June 5 Prime Minister Volodymyr
Groysman, as reported by the liga.net news site. They are eliminating the
Rotterdam Plus approach and ensuring that electricity prices for households and
industry won’t increase. To implement the second goal, the government will
consider introducing price caps on the market, Groysman said, without providing
details on how this will work.

Recall, Ukraine’s new electricity market is scheduled
to be launched on July 1, according to law. Under its conditions, power
producers will be allowed to sell their electricity by bilateral contracts with
consumers, as well as on a day-ahead market, an intraday market and a balancing
market. This new model replaces the current system in which all power producers
are selling their electricity to a single buyer based on predetermined prices.

Alexander Paraschiy: With less
than month till the launch of the new market, there is little clarity about how
it will work. There is also no clarity about how the market will affect
producers and consumers. If the wholesale market will be fully liberalized but
prices for households will remain fixated, electricity prices for business
consumers may grow by 40%-50%, according to the estimates of the power sector
regulator. In turn, this will lead to accelerating consumer inflation, with
businesses passing their additional costs to consumers. However, if the Cabinet
and/or the regulator introduces price caps to prevent inflation, power
producers won’t enjoy any benefits from the new market (it will remain
over-regulated).

Moreover, in the worst case, such price caps might
lead to redistribution of profits to low-cost producers (like Energoatom) at
the expense of high-cost producers like DTEK Energy (DTEKUA), Centrenergo and
Donbasenergo (DOEN UK). In other words, DTEK Energy might end up suffering from
the new market launch rather than benefitting from it, as it had anticipated.

In light of all this risk, we still expect the
government won’t dare to launch the new market in July and agree to postpone
its launch for at least three months.