Parliament votes for power market changes

Ukraine’s parliament approved on Nov. 20 the first reading a law, “On the principles of operating the electrical energy market,” moving closer to adopting reform on Ukraine’s power market. The approved draft, which requires another vote, stipulates a transition from a pooling model of the electricity market to a liberalized market of bilateral contracts. The changes would allow producers and consumers to set a spot energy price, thus diminishing a regulator’s pricing power. On the other hand, the regulator’s role will remain important in setting tariffs for nuclear plants, hydro-electric stations and combined heat and power plants. The law would also create a special fund that will be used to compensate producers and suppliers for their losses from low-regulated power tariffs (e.g. tariffs for residential consumers). The law might be adopted in its final reading in the coming months.

Alexander Paraschiy: The main, and perhaps only, winner of the “reform” will be thermal generation companies (GenCos) – the subsidiaries of DTEK (DTEKUA), as well as Centrenergo (CEEN UK) and Dniproenergo (DNEN UK) – which will be immune from any regulator’s attempt to cap their tariffs. Thermal GenCos tariffs, set de jure on the free market, are in fact strictly limited by regulators to prevent increasing burdens for industrial consumers. Industries pay about 25% more for electricity than necessary because they are forced to subsidize low residential tariffs for electricity, which cover less than 1/3 of producers’ and suppliers’ costs and are at the root of the problems confronted by the Ukrainian power market. The electricity market “reform” does not solve the problem of low residential tariffs – it just shifts the burden of cross subsidization from thermal GenCos to hydro and nuclear power producers. Moreover, the burden will only intensify for industrial consumers since the legislation will prevent capping tariffs for thermal GenCos, thus only increasing average power prices in Ukraine.