Ukraine to freeze power tariffs for 2014

In setting benchmarks for power, gas and coal tariffs for 2014, the Ukrainian government does not foresee any increase in wholesale electricity tariffs, the Interfax-Ukrayina news agency reported on Dec. 19, citing a statement by NERC (National Electricity Regulatory Commission) officials. Based on this, as well as Cabinet’s order to keep tariffs for natural monopolies non-increasing, the NERC decided not to apply a new, RAB-based, tariff regulation for domestic electricity distribution companies in 2014. Earlier, the RAB-based regulation was planned to be introduced for nine power distribution companies as of January 2014.

Alexander Paraschiy: The news looks discouraging for the whole Ukrainian energy sector, as stable wholesale electricity tariffs imply the government plans no growth for any of the cost components of electricity, including coal prices. Most likely, non-increasing tariffs for electricity will be warranted by an expected decrease in retail gas prices (about 7% of power is produced from gas in Ukraine), which is negative for domestic gas producers like JKX Oil&Gas (JKX LN), Serinus Energy (SEN PW) and Regal Petroleum (RPT LN).

But gas discounts could be inadequate for the electricity sector to keep its profits non-declining as other costs such as labor and materials are likely to grow further. Most likely, the battle for redistribution of tariffs will intensify between sector leaders, nuclear and coal-power producers. As in the previous years, coal-fired GenCos have a good chance to win this battle, which will result in the decline of nuclear power producers’ tariffs. Therefore, the regulation might be neutral for Ukrainian GenCos like Donbasenergo (DOEN UK), Centrenergo (CEEN UK) and the power plants of DTEK (DTEKUA).

Ukrainian coal producers are also likely to suffer from non-increasing power tariffs: coal prices in Ukraine (the government sets a price for state coal that is usually used by all sector players as a benchmark) will not increase, or even may fall in 2014. That conclusion is also supported by the fact that the government foresaw a compensation of losses of state-controlled coal mines at UAH 13.3 bln in 2014 (about the same amount as in 2013). That does not look encouraging for private miners, like Sadovaya (SGR PW) and Coal Energy (CLE PW).