Gas market: winners and losers
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Ukraine’s gas market is changing fast. This transformation will impact the price and services offered to ordinary consumers, the development of domestic production and the country’s future energy landscape.
A joint project by the Kyiv Post and the Federation of Employers of the Oil and Gas Industry addresses these and other issues with the help of some of the best experts in the field – to determine what the future of Ukrainian energy will look like.
A joint project by the Kyiv Post and the Federation of Employers of the Oil and Gas Industry addresses these and other issues with the help of some of the best experts in the field – to determine what the future of Ukrainian energy will look like.
This will be Ukraine’s first ever winter with a competitive retail gas market. What was once just theoretical ideas is finally being tested in real life. We can now say "we have a market". We are living in a new paradigm.
There are other problems, too. Consumers are poorly informed about their rights, suppliers are not eager to play by the rules, and some politicians are scheming how to reverse reforms and bring back the bad old ways.
People still don’t understand that gas doesn’t come from just nowhere, that you have to pay money for it
Still, experts believe Ukraine will be able to take full advantage of the changes – once the kinks are worked out and additional regulatory oversight put in place.
Vadym Glamazdin
For years regulated prices were source of corruption and created gaps in the national budget.
Serhiy Nagornyak
Reform, a long time coming
Ukraine’s gas market reform has been a long time coming. For years, the sector was a source of corruption and fuelled populist politics. Politicians promised “the nation” cheap gas, ignoring the resulting budget deficits (or dependence on Russian discounts, which came at a geopolitical price).
After years of fighting political logjams – the project was postponed close to a dozen times – the new rules entered into force on August 1 this year. From now on, customers can switch their gas suppliers using an identification code. Moreover, there is a supplier of last resort who can step in and ensure consumers have gas for 60 days should their current supplier fail.
When the new team took over, we understood that having a competitive gas market was a key ingredient that would allow Ukraine to remain on the map as an independent country.
Aliona Osmolovska
"To be successful" the launch of the gas market needs to be as gentle as possible, and not like the electricity market
Serhiy Nagornyak
Importantly, this option is available even to consumers with debts to their existing supplier – meaning that payments due cannot be used to prevent someone from switching. Though, naturally, switching does not remove the debt itself, which must be paid eventually, and suppliers can reject new, indebted customers.
The upside to the long years it took to launch the market reform was that a smooth implementation could be prepared – unlike for the electricity market, which experts believe was not properly prepared at its launch.
Regional suppliers undermining the rules
Yet the implementation of retail gas market rules cannot be called a resounding success – at least for now. The main reason seems to be that not everyone is on board with the new rules, particularly some regional gas supply companies that are unhappy with additional competition and are doing their best to keep customers in the dark.
Populism is in some ways an even bigger threat. There are some legislative initiatives in the parliament to make Naftogaz sell its gas below market prices to certain private companies, undermining the idea that state-owned companies should generate profit like private ones.
Ironically, one of the biggest problems on the market right now is huge debts accumulated precisely because of populist interventions (as well as poor planning and moral hazard on behalf of some companies). Some of these have exceeded a 100 billion hyrvnias (roughly $3.5 billion), experts note, and there is no mechanism to properly deal with them.
The lack of political responsibility is what drove up the debts in the first place, Glamazdin argued. “When deputies manage prices and everything is okay, they take responsibility,” he said. “When something goes wrong, they blame the government, forgetting that they are the ones who decide what the government does.”
We have to pay the real price for gas… The state can help consumers who need subsidies, but solvent sections of the population must pay market prices.
Market means market
Words like “market” and “reform” are popular in market discourse, but many don’t really understand what that means. In particular, some players have a problem with comprehending the idea that to profit, you also need to account for market risks, and the responsibilities this entails.
“We need to strengthen communication with consumers. It has to be systematic social work,” Babiy added. The regulator has been cracking down on such misbehaviour, although warnings and threats of fines are not always enough to secure compliance.
To have a real, competitive market, experts note, consumers need to know about their rights and have transparent terms, conditions, and prices. That isn’t always happening as many companies publish their prices with delays (especially those on the higher end).
The idea of what a market is also needs to be communicated to consumers. Only once the latter understand the power of switching will the numerous players and their offers (currently as many as 30 companies with 70 subscriptions) become more competitive.
The current situation means they must either take on those risks themselves or hand over responsibility for supplying consumers to competitors. But instead of working hard, noted Osmolovska, they are busy trying to find schemes to game the system.
“For the market to succeed, more consumers need to learn about the possibility of free choice of gas supplier,” Olga Babiy, member of the National Commission for State Regulation of Energy and Public Utilities, emphasized.
Gas suppliers are used to playing in conditions when they do not need to predict how much their customers will consume next month.
Aliona Osmolovska
“These companies are diligently lobbying for some creative non-market ways to get gas from Naftogaz. Because subscription is difficult for them. But subscription is a market condition. No market works in such sweet conditions that they would like to get,” Osmolovska summed it up.
Olga Babiy
For years when the consumer bought gas from the local gas company, everything was alright, but after a change of supplier, it suddenly turned out UAH 12,000 is required for reconnection
Tatyana Boyko
She explained that people who tried to switch suppliers would be presented with suspicious debts they had supposedly incurred for things “temperature coefficients.” But once OPORA got involved and started to question the debts, it turned out these were just recommendations for consumers, Boyko added.
“Like, they don’t have to pay the debts anymore,” she exclaimed.
Suspicious debts are not the only problem, as some regional gas companies through their related distribution system operators are simply shutting off consumers who have changed their gas supplier. Boyko cited a recent example in the town of Lubny, where a pipe was sealed due to an allegedly incorrect boiler connection.
Finally, those who fought past these various tactics found themselves struggling to find their identification codes – the numbers that are the basis for moving customers between gas suppliers. Some suppliers have failed to publish the code altogether, Boyko noted, while others have resorted to various tricks.
In addition to withholding information, some regional suppliers have also tried various underhanded tricks to keep consumers from switching. “Consumers have faced a lot of problems,” noted Tatyana Boyko, coordinator for housing and communal programs at civil network OPORA.
It will be possible to say with confidence that the market has developed when 80% of consumers change their supplier. Only then price will become a major factor for people to choose suppliers.
“Some regional gas companies print it vertically on the side of the bill, on the line of separation,” Boyko explained. “People just tear it off, so they can't find the code to change their supplier.”
Political risks
Experts agree the regulator has to step in to address systemic challenges that can derail gas market reform. This is normal, as any public service market requires some oversight to protect consumers. “I think this actually means the market is working,” Glamazdin commented.
But not everyone is comfortable relying on politicians to do their role. On the contrary, argued Nagornyak, some of them are against the reform. For years regulated prices were source of corruption and created gaps in the national budget.
“There are calls and rumours among some factions and groups to reconsider gas market reform,” Nagornyak warned.
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