Archive for June 23rd, 2018


Electrical storms (NKRECU)

June 23, 2018

It has been a long time since the blog wrote specifically about the NKRECU (National Commission for Energy Regulation and Utilities).  Indeed the last specific entry related to the concept of RAB (Regulatory Asset Based) tariff incentives for regional electricity providers, and pondering the benefits thereof should Ukraine pursue such a path – or not.

Suffice to say the RAB concept has yet to be adopted – but it has also yet to be dropped.

Clearly those involved in both the Ukrainian electricity and gas markets can see some serious benefits to adopting RAB if applying some creative asset accounting from the outset.  There are however potential political problems in allowing that to occur – which would undoubtedly be awkward should the concept go forward.  Thus RAB will continue to be a “subject of discussion” until politically expedient to introduce it.

In short, the question is whether to gift the energy barons – in particular Dmitry Firtash (gas) and Rinat Akhmetov (electricity) – prior to, or after the 2019 elections.  For as long as that question remains unanswered, the issue will remain “subject to discussion”.

Indeed, for as much as Ukraine has made solid legislative progress toward meeting the requirements of the EU Third Energy Package – particularly with respect to electricity (less so with regard to gas) – the domestic electricity marketplace remains almost entirely unaltered despite China buying up solar farms where and when it can, and a strongly rumoured joint venture between China and Rinat Akhmetov’s SCM/DTEK in solar energy in the near future.

There is something of an electrical storm brewing however.

On 27th December 2017, NKRECU adopted a number of decisions regulating the licensing conditions for the electricity market –  operators, producers, certified electricity buyers, and those conducting trading activities – all these decisions being necessary for launching a Ukraine new electricity market.

Those NKRECU decisions then required official publication in the Uriadovy Courier.  This did not happen, for reasons unknown, until 20th June 2018.

The NKRECU and the Ukrainian Association of Renewable Energy are now accusing the Uriadovy Courier of gross interference in its work and causing a multi-million losses within the renewable energy industry by delaying the publishing of the NKRECU adopted decisions.

Also in the same Uraidovy Courier publication of 20th June were published updated procedures for calculating compensation for electricity suppliers for delivery to the population (for single-zone and differentiated tariffs), as well as to other consumers under differentiated tariffs.  In addition, the procedure for calculating the compensation to Odesaoblenergo for the supply of electricity to the Young Guard camp was promulgated.  Again decisions taken by NKRECU long ago.

The question therefore is who benefits from the delays of the Uraidovy Courier publication?

The government, with the EU Third Energy package in mind, has decided to dilute the monopoly of regional supply companies with individual licensed sellers – or so goes the legislation and theory.  The idea is naturally to bring about competition and through market forces and thus drive down the costs to the consumer.

Time was therefore required for the current monopoly to insure its monopoly remained, whilst also being seen to adhere to the new legislation and regulations.  This has now been (more or less) accomplished – thus there will not be a drop in consumer prices – for the monopoly will be maintained while appearing to meet the legislative and regulatory requirements.

Having mentioned Rinat Akhmetov and DTEK at the beginning, it seems reasonable for the sake of consistency to use their model in explaining how the monopoly is maintained and why consumer prices will not drop – for no real electricity market place seems at all likely to appear.

In order to meet the basic requirements of the EU Third Energy Package and the requirements of the Ukrainian law “On the Electricity Market” it was necessary for the existing monopoly structures to separate the producers from the distributors and again from the consumer suppliers/end billing entities.

This takes time – for everything is subject to receiving a licence.

However, even if time stands still for no man, publication of NKRECU decisions can – at least for as long as it takes to line up all the monopoly-continuing ducks.

Using Kyiv as the DTEK/Akhmetov example, the citizens of Kyiv will no longer be billed by KyivEnergo (owned by Mr Akhmetov).  They will instead be billed by a newly licensed company called “Kyiv Energy Services LLC” owned by Mr Akhmetov.  This newly licensed customer supplier/billing entity will receive its electricity from a distributor called DTEK Electricity Grid.  DTEK is owned by Mr Akhmetov within his SCM empire.  DTEK Electricity Grid will receive is electricity from KyivEnergo owned by Mr Akhmetov – but to adhere to the EU Third Energy Package and the Ukrainian law “On the Electricity Market” it can no longer bundle together all the services under a single corporate entity as it does now.

And so it goes on throughout the empire.  Licenses for “Dneprovsky Energy Services LLC” and “Donetsk Energy Services LLC” were issued on the same day that “Kyiv Energy Servives LLC” received its license – all ultimately belonging to Mr Akhmetov.  The model for Kyiv will simply be replicated.

The letter of the law complied with, the spirit clearly not – for it in no way dilutes the electricity market and thus does not foster the competition that theoretically drives down consumer prices.  After all, having gone to all this trouble to maintain a monopoly, why would any part of the Akhmetov electricity empire sell to another distributor or supplier and create competition for itself?

To be fair to Mr Akhmetov, he is not alone in pursuing this model.  And to be fair to the monopoly/cartel that is the current Ukrainian electricity “market”, they are not blazing a nefarious trail where none have gone before.  This method is in fact the exact same method employed by the gas barons a few years earlier.

It can hardly be said that Dmitry Firtash has surrendered much (if any) of the domestic gas production, distribution or billing market place since the “On Gas Market” legislation came into force a few years ago.  The domestic Ukrainian gas market is not much more diluted today than it was in 2014.  All that has changed are the external suppliers to Ukraine, and perhaps slightly fewer nefarious gas schemes relating to import, VAT and resale spreads.

Yet it cannot be said that such shenanigans are all to be laid at the doors of the likes of Messrs Firtash and Akhmetov either, for the laws they comply with are hardly designed to make further market entry particularly easy when it comes to the actual supply to the public consumer – for to do that, there is a requirement to “fulfill special obligations” to get on a list of companies to which the Cabinet of Ministers will then grant such commercial abilities.

It also has to be duly noted, particularly with gas production. a more dispersed domestic and foreign licensing has occurred.  Perhaps Mr Firtash’s empire may lose a little market share when new drilling licenses bring results – but then again, when he owns approximately 65% or so of the distribution companies, perhaps his market share will actually increase?

Whatever the case there will be more electrical storms ahead, for the NKRECU belatedly published decisions don’t actually take effect until 2019 – and that leaves time for many more games.  Further the NKRECU and Uraidovy Courier problem remains far from settled.

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