The Cabinet of Ministers has allowed nuclear power producer Energoatom to sell 5% of its energy in two-way deals with consumers.
Energoatom makes more than half of Ukraine’s electricity and had to sell 85% of it at low prices to state company Guaranteed Buyer, under a Public Service Obligation (PSO) to keep energy costs cheap. The cabinet’s May 20 decision lowered that obligation to 80%. The difference can be sold to companies through auctions.
The decision was made as part of the Anti-Crisis Energy Headquarters meeting, where officials and industry stakeholders have gathered over the past two months to try to solve major problems in Ukraine’s energy sector. The sector is in economic crisis, with plummeting demand and extreme debts to energy producers.
The Ministry of Energy wrote that this will improve Energoatom’s finances. The state nuclear company has seen big losses. Guaranteed Buyer currently owes Energoatom more than Hr 5 billion because of shrinking revenues and other state companies not paying their debt.
“This [decision] will improve the financial situation of state-owned enterprises,” stated Olga Buslavets, acting energy minister. “In addition, it will allow industrial enterprises with high electricity costs to gain access to long-term contracts at competitive prices.”
“For Energoatom, this means more income,” said Denys Sakva, an energy analyst at Dragon Capital.
However, Energoatom stated that 5% won’t make much of a difference. To solve the company’s problems, its analysts estimated that the PSO needs to be cut to 50%.
Analysts said that the Cabinet’s decision may result in higher energy costs for industrial consumers.
The Ministry of Energy intends for the largest industrial consumers to participate in these two-way deals. But some analysts said that the framework may end up unfairly benefiting certain consumers.
“That’s another question – who will make the deals, at which price? This is all untransparent and confusing,” said Oleksiy Feliv, a partner at the law firm Integrites.
Guaranteed Buyer
Ukraine’s energy market has four segments. From least to most expensive, these are as follows: bilateral deals with energy suppliers; a market to buy power for the following day; a market to buy power for the same day; and as a last resort, consumers can buy power on the so-called balancing market, mere minutes before they need it.
The Cabinet’s decision will also allow Guaranteed Buyer to sell energy through bilateral deals. Before, Guaranteed Buyer only sold energy on the day-ahead market.
Price restrictions on electricity sold by Guaranteed Buyer were also lifted.
Guaranteed Buyer and Energoatom dominate the day-ahead market and squeeze out other competitors, said ExPro consultancy analyst Dmytro Sydorov. The Cabinet’s decision moves some of the surplus of energy supply from the day-ahead to the bilateral markets, he said.
“You need to reduce supply to stabilize the market,” said Sydorov.
Some have criticized the move by saying that Guaranteed Buyer will be able to increase energy prices despite not being a true market player – its costs have to be covered by state grid operator Ukrenergo.
Criticism
The decision was also criticized by the European Union Energy Community secretariat for being taken without transparency, without the energy regulator, and without the Energy Community’s input. This makes it a breach of Ukrainian law and Ukraine’s obligation to the Energy Community treaty.
“The previous government was ignoring this provision and you are continuing with this,” Janez Kopac, the Energy Community Secretariat director wrote in a letter to Buslavets. “We incidentally noticed the draft PSO Act published publicly and substantially commented it. I sent you comments on 12 May. Your Ministry did not even reply and it ignored everything we said.”
The letter also criticized the large volume of energy being sold at the PSO today, writing that “holding auctions in these cases is meaningless because the winner of the purchase… is known in advance – the Guaranteed Buyer, and the price for sale is also known in advance.”
According to Kopac, allowing Guaranteed Buyer to buy large volumes of cheap electricity and allowing it to sell it at organized markets prevents the growth of competition.
He added that imposing big PSOs on the two state-owned companies “might amount to discrimination.” If the government wants to redistribute windfall profits, it might need to also look at private energy generators “that are expected to benefit extensively from the market opening.”
Petro Kotin, head of Energoatom, made a Facebook post in support.
“For our part, we support the proposals of the secretariat, and also hope that the current state of affairs will indeed be temporary,” he wrote.
The energy ministry responded that it shares the secretariat’s position and that its decision was a temporary step.
