Picking the supplier of last resort
One of the most important – but also most contentious – elements involved in setting up a truly competitive market is selecting a so-called supplier of last resort (also referred to as SLR).
The idea is relatively simple. Customers who decide to switch their gas providers need to know they will not be left out in the cold during the transition. Ukraine’s legislation sets out a timeframe of up to 60 days during which consumers are supplied by the supplier of last resort if their regular supplier fails on its obligations.
In order to ensure that the supplier of last resort is able to both withstand a national crisis the selection process emphasized the requirement of being able to leverage 3.5 billion cubic meters in reserves of gas – or slightly more than a month’s worth of supplies.
This matters because the supplier of last resort also acts as a form of insurance for the market – should Ukraine experience a nationwide shock due to, for example, a cut to supplies, as well as a crisis at a systemically important distributor.
According to Mykhailo Honchar, President of the Centre for Global Studies "Strategy XXI", Naftogaz is the only player than can back this claim up with “real reserves”. All the other bidders have just “virtual reserves,” meaning contracts or pledges that they can call upon.
Nonetheless, the final stage of the process came down to price, as competitors had to submit a cost formula that would offer the best possible deal to consumers.
Naftogaz is the only player than can back this claim up with
Maksym Rabinovych, Naftogaz’s Head of Retail and CEO of its Gas Supply Company (a part of the Naftogaz group), explained the selection process: “Those participants who went through pre selection were supposed provide their price for being a supplier of last resort.”
“The cost formula was based on the hub costs, that is NCG [NetConnect Germany, one of Germany’s two main gas hubs], the spread – the cost to transport from border to border, and thirdly the mark-up. While the hub and spread where the same for everyone, the fight was about the mark-up,” he explained during the Energy Thursday webinar.
“Who gives the lowest mark-up, becomes of the supplier of last resort,” he noted. “We gave a mark-up of 0%.”
While the hub and spread where the same for everyone, the fight was about the mark-up