“Surprisingly" ready for the heating season

“Surprisingly” ready for the heating season

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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.

As summer turns into autumn Ukraine traditionally shifts its attention to the state of its gas reserves and preparations for the winter. This is usually a tense period, with constant worries about Russia pressuring a Ukraine left vulnerable with low supplies.

Ukraine consumed 29.8 bcm in 2019, about half of it coming from own production, suggesting the country is well placed to cover its needs throughout the heating season (typically around 15 bcm)

“It’s almost strange, but we observe quite a positive picture,” noted Vadym Glamazdin, Development Director for the Federation of Employers of the Oil and Gas Industry.

Ukraine has a surplus, should anything happen to coal or other sources

This year, however, marks a break. Ukraine’s gas reserves stand at 28 billion cubic meters (bcm), gas transit operator Ukrtransgaz informed on September 29, the highest level in 10 years.

Glamazdin added that, in fact, “Ukraine has a surplus, should anything happen to coal or other sources”. It is surprising, but positive, he added.

Vadym Glamazdin

A new world for consumers

This positive picture for consumers is the joint results of years of hard work – notably to reduce consumption and increase own production – and a fair share of luck in the form of warmer weather, which noticeably reduced the need for heating since last year.

One of the big drivers, however, has been a push to build a professional market with liberalized prices for both industry and retail. The latter finally took place after a Public Service Obligation (PSO) to provide subsidized gas to households – which was supposed to lapse in 2017 but was endlessly extended – was finally removed this summer.

Experts note this was a fortunate moment to reform the market – warmer temperatures and the coronavirus-induced economic slowdown have driven down energy prices. As a result, there was no need for regulation.

increased competition would ensure a better level of quality and energy-content of the supplied gas

The big question now is how consumers will benefit from their new found freedom. Many believe customers are expected to migrate more actively during the heating season and not just in the pursuit of price.

Nataliya Katser-Buchkovska, an energy and investment advisor at the Ukrainian Institute for the Future, had previously predicted that increased competition would ensure a better level of quality and energy-content of the supplied gas, not to mention better and more convenient service.

At present, the market expects significant migration with new tariffs in November, as well as increasing competition – and perhaps bundled offers – for both electricity and gas supplies.

N. Katser-Buchkovska

Supplier of last resort in action

Importantly, consumers have additional freedom to pick suppliers as they do not have to be overly concerned with risks to supplies.

One of the big changes to come to Ukraine’s gas market in recent months is the creation of a supplier of last resort – a company that would step in to ensure uninterrupted delivery of gas to consumers should any of the market players fail.

After a lengthy process, Naftogaz of Ukraine Gas Supply Company LLC was selected to be this supplier, providing any company or consumer additional supplies at cost (i.e., with no margin).

The new system has already been tested out after more than 400 thousand households were automatically transferred following a crisis with Donetskoblgaz and Luhanskoblgaz.

“I know its election season and everyone is ready to start shouting slogans, but everything is much more orderly,” explained Maksym Rabinovych, Naftogaz’s Head of Retail and CEO of its Gas Supply Company (a part of the Naftogaz Group), adding there was no threat to the security of their supplies.

The failures of the Donbas-based gas supply firms means that consumers have 2 months to calmly find an alternative supplier, Rabinovych explained, a process that “takes three days.”

The most important thing is for users to actually find out about alternative suppliers

Maksym Rabinovych

The most important thing is for users to actually find out about alternative suppliers – many likely don’t yet know that they have already been transferred, Rabinovych noted.

Currently, as little as 20-25% of users are informed about new opportunities (including to change without there first being a crisis at their current supplier). To resolve this, suppliers need communicate more actively with customers.

Flawed funding puts local authorities on the hook

While Ukraine may be ready for the new heating season, the overall state of the sector can hardly be described as a resounding success, Deputy Minister for Communities and Territories Development of Ukraine Natalia Khotsianivska noted during a recent expert discussion on the Energy Inside webinar.

What is not covered by the central authorities ends up being covered by local ones. Sviatoslav Pavliuk, Executive Director of the Association of Energy Efficient Cities, explained that 80% of heat producers in Ukraine are subsidized by municipalities, as the tariffs do not cover their costs.

This has a devastating knock-on effect, as low tariffs and subsidises mean that local companies cannot offer higher salaries at a time when Ukrainian firms are fighting for workers with better options abroad.

The mayor of Zhytomyr Serhiy Sukhomlyn confirmed this worrying trend. “Entire teams of people went to work in Poland until their salaries were raised,” he claimed, adding that every year the Zhytomyr heating company receives up to UAH 50 million to compensate higher salaries.

The housing sector has been unprofitable for years and the state budget project doesn’t include a penny for it.

"The housing sector has been unprofitable for years and the state budget project doesn’t include a penny for it. Even though the Ministry of Regional Development prepared budget requests in a timely manner," Khotsianivska stressed.

Natalia Khotsianivska

Financing is, as usual, at the heart of the issue. The industry has been unprofitable for years and is only being kept together through the efforts of local authorities – and at the expense of local budgets.

“We budget low salaries into our utility tariffs, and then we lose employees. A recent example – the mayor of Voznesensk told me that they simply cannot find a janitor,” Pavliuk added.

Insufficient funding is not just a problem for the retention of people. Years of underfinancing have led to both an accumulation of debt and obsolete infrastructure that represents a threat for the country.

At present, experts note that heat losses on Ukrainian lines amount to nearly 19%. There is need for equipment modernization and wide-scale energy efficiency programs, currently undermined by underinvestment and a pass the parcel approach to covering costs.

We budget low salaries into our utility tariffs, and then we lose employees

Sviatoslav Pavliuk

Time for professionalism, and crisis management

One of the biggest challenges for Ukraine’s gas market, experts note, comes from the incessant politicization of the topic.

Whether it is domestically targeted populism around household tariffs, or the geopolitical games the sector is constantly pulled into, it is hard to find a moment to focus on professional management and decision-making.

Yet this is precisely what the market needs as it struggles from a series of financial and political challenges – and even criminal activity.

The Novoyavorivsk and Novyi Rozdil heating companies provide a case study in crisis management. Roman Zubyk, Executive Director of Naftogaz Teplo, which manages both power plants, noted the list of problems they are dealing with includes low payment discipline, endless litigation, and even looters.

“Over the past two months people have been cutting cables to transformer substations,” he complained, noting this almost put the start of the heating season at risk.

Payment discipline is also a major problem, as people in some areas have grown used to endless shirking of payments

Nonetheless, Zubyk noted, “we are ready to start the heating season on time (…) this is the biggest success.”

Payment discipline is also a major problem, as people in some areas have grown used to endless shirking of payments (not least because of an expectation that politicians will avoid measures that could damage their popularity).

“Novoyavorivsk and Novy Rozdil have about the same number of inhabitants, but the difference in sums accumulated is huge. Due to the political situation in Novoyavorivsk, people pay regularly, while in Novy Rozdil people seem to believe that paying for heat is not fashionable,” Zubyk complained.

He added that in Novoyavorivsk the political leadership was involved in spreading the message that it is “trendy” to be a responsible citizen and pay for utilities.

The biggest thing to sabotage such efforts, Pavliuk noted, was when national political leaders come out with statements that “our political faction is so great, we stand for low tariffs”, and then blame mayors on higher prices. “This has become a tradition,” he complained.

To ensure that such “success despite the odds” stories become commonplace, Ukraine needs to make the liberalization irreversible – rather than backtracking on reform, which can hurt the country’s image – and ensure the proper judicial and litigation measures for violators can be enforced.

This would unlock the financial resources and operational freedom – as in the case of Novoyavorivsk and Novyi Rozdil – to modernize Ukraine’s gas sector and build the future the country has so long waited for, and which is closer than ever.

Ukraine needs to make the liberalization irreversible – rather than backtracking on reform, which can hurt the country’s image

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