Ukraine's electric utility prices are set to go up as the government aims to adopt the long-awaited electricity market law this fall.
The law will help bring the country’s energy sector in line with European Union market standards and is among a series of reforms expected to be implemented by the government in a bid to privatize the country’s ailing energy sector and attract foreign investors to the industry.
Prime Minister Volodymir Groysman told the Ukrainian Energy Conference in Kyiv on June 30 that the government considered it a priority and was working with Ukrainian members of parliament and factions of the Ukrainian parliament to ensure the legislation is passed.
“We understand that in fact it will be approved, which is a very positive signal from the Ukrainian parliament,” he said.
Groysman said work on improving the law on the National Commission for State Regulation of Energy and Public Utilities was also under way, which would allow the national regulator to become more independent.
Dmytro Vovk, head of the National Energy and Utilities Regulatory Commission of Ukraine, said among their priorities was switching from the outdated cost-plus system to the regulatory asset base tariff program, which is implemented across the European Union and U.S.
Vovk told the conference that the previous lack of discussion about tariffs had led to serious deterioration of the country’s energy infrastructure.
According to a report by consultants PwC, as part of the government’s commitment to reforming the industry and bringing tariffs to the “economically justified level,” heat and electricity tariffs are expected to rise by 26 percent in September to Hr 0.97 per kilowatt and a further 26 percent next March, to Hr 1.23 per kilowatt.
The anticipated legislative and industry changes have received the backing of U.S. Ambassador to Ukraine Geoffrey R. Pyatt, who praised the Ukrainian government for its reforms in the energy sector and encouraged it to continue with the transformation and privatization of the industry.
According to Pyatt, the biggest argument for privatization was not revenue but anti-corruption and efficiency.
“It’s getting the Ukrainian government out of areas that have been traditionally manipulated by different political and vested interests,” Pyatt said.
He added that privatization was the ideal mechanism to bring in new resources that would help raise standards, bring in new capital and new technology to boost efficiency.
“And there is no one better than international investors to bring Ukraine upgraded technology, bring your production facilities more modern management structures that will bring this country’s important energy sectors into the 21st century,” Pyatt said.”This process will also improve services to Ukrainian consumers.
“It will improve wages and benefits for those who work at these companies and it will increase opportunities over the long term.”
Citing Centrenergo as an example, Pyatt said three years ago American investor groups were looking at opportunities with the power generator and today discussions were still ongoing.
“But the point is that international interest clearly exists and it’s time, I would argue, to capitalize on that opportunity,” he said.
More than 20 foreign and a dozen local investors were represented at the conference on June 30 as the government prepares to sell its majority stakes in six electricity distribution companies, four combined heat and power facilities and a large coal-fired generation enterprise.
Government stakes in two of the distribution companies, including Ternopiloblenergo and Khmelnitskoblenergo are expected to be auctioned off for privatization in October, while state stakes in Mykolaivoblenergo and Kharkivoblenergo are due to be auctioned off in November with both sales expected to be closed by the end of the year.
State stakes in Zaporizhyaoblenergo and Cherkasyoblenergo are expected to be auctioned off in December 2016 with the closing period in January 2017.
Meanwhile state stakes in Khersonska and Odesa combined heat and power plants, which equate to 99 percent, are due to be sold by the end of October while Dniprodzerzhinska Combined Heat and Power Plant is expected to be sold for privatization by the end of the year.
Mykolaivska Combined Heat and Power Plant, which also has a 99 percent state stake, is expected to be sold by the end of January 2017.
Deloitte Advisory Senior Manager Joe Oliver told the Kyiv Post that the purpose of the conference was to engage investors in a conversation about investing in Ukraine and these companies and address their concerns.
“The two main concerns that they brought up were they want to see a more reformed electricity market and the electricity law that parliament is debating right now, that’s moving Ukraine’s energy market more towards EU’s Third Package legislation,” Oliver said. “Mistrust of the courts is an issue (and) the tariff structure is a concern.”
According to him, foreign investors were mistrustful of Ukraine’s courts and its legal system.
“That’s not something that the energy sector can reform or that’s going to come right away,” he said. “They are allowing international arbitration on this project, so if an investor comes in and they have a dispute and they feel like they’ve been treated unfairly… they can take it to an international court. They can take it somewhere where they feel like they’re going to get a fair objective hearing and that’s a good signal for the government to send.”
Oliver said he also wanted to assure investors that there were no backroom deals and the privatization process would be fair and transparent.
India Power’s representative in Ukraine Rostyslav Futalo, who attended the conference on June 30, said as potential foreign investors they would need a predictable and stable environment and a functioning judiciary system. He said Groysman and Pyatt’s presence at the conference and their direct verbal support of the reform process was a good sign.
“(But) it’s definitely not enough just to hear it, it’s important to see it throughout the process,” Futalo said.
