Ukraine power regulator warns on risks of electricity reform as of July

Ukraine’s National Electricity and Utility Regulatory
Commission reported on June 7 it sees many inefficiencies in the regulatory
framework of the new electricity market, which is scheduled to be launched on
July 1. According to regulator, the new market’s launch will lead to additional
costs to electricity consumers in an annual amount of UAH 37 bln (or about a
15% increase in the average electricity price, based on Concorde Capital
calculations). Among the core risks, it sees a threat to the financial
stability of power distribution operators and a bankruptcy threat to
electricity suppliers, as well as a threat of abuse by some of power suppliers.
It also highlights that it’s impossible to implement technically all the
mechanisms before October.

Ukraine’s new electricity market is scheduled to be
launched on July 1, according to current 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: By trying
to launch the new market, the government is still trying to keep electricity
prices for households fixed at a level deeply below costs to produce and
supply, which means somebody should cross-subsidize such low prices. It’s clear
that business consumers will have to cross-subsidize low household prices, but
a mechanism for such cross-subsidy under the new market, as designed by the
Cabinet, raises many questions among market participants and the sector
regulator.

As we highlighted before, among the key beneficiaries
of the new electricity market should be DTEK Energy (DTEKUA) and other power
producers, who will gain the ability to sell at least part of their electricity
at unregulated rates. For that reason, most producers are supporting the idea
of a timely start of the new market, even though Ukraine’s Western partners and
key promoters of the reform (including EU, IFC and EBRD) are insisting on the delay of its launch.

DTEK’s key fear is that if the market launch is
postponed, the risk emerges that it won’t happen at all. Primarily, this is because
the entourage of newly elected President Volodymyr Zelensky includes many
opponents of this reform because it will lead to a surge in electricity prices
for business consumers. As Zelensky’s party is highly likely to form the new
coalition in parliament after the elections (so far scheduled for July 21), it
can realistically accomplish cancelling the law on the new market.

However, in our view, the postponement of the new market
launch’s is the best option for the reform to be preserved. Otherwise, if the
reform (which is too raw) is launched in July, it could lead to poor
consequences for the market and therefore will add more arguments for its
opponents to cancel it in full, even though Ukraine’s Western partners are
insisting on its launch eventually.

All in all, we continue to expect the new market
launch will be postponed beyond July. Seeing such postponement as neutral for DTEK
Energy, we continue to treat its Eurobonds as among most attractive in
Ukrainian fixed income universe.