Coronavirus and systemic imbalances of the electricity market

Today’s crisis in the electricity market is not just a concurrence of circumstances caused by a seasonal factor, when the volume of electricity generated from renewable sources increases, and by quarantine restrictions which resulted in a general economic downturn and a substantial decline in consumption. These factors vividly illustrated, and stretched almost to its limits, the vulnerability of the system in which Ukraine’s electricity market functions in its present form.

The market which exists today, with a large number of wholesale price caps, electricity imports from countries which aren’t members of the Energy Community, manual dispatch controls, nonmarket pricing for households, imprudent policy of supporting renewable energy, etc., is not the model of integrated, competitive markets which is being built in EU states and for which we strived when reforming our market. Right after the existing mechanism of placing special obligations (PSO) was launched, one could have assumed that the new electricity market will be a far cry from the competitive European model.

Of course, making a painless jump from point A to a fundamentally different point B is all but impossible, and therefore, a certain transitional period is needed. To be sure, considering the immaturity and high concentration of the domestic market, certain regulatory mechanisms aimed to ward off discriminatory practices or abuse of market powers on part of market participants are justifiable. But at the same time, the more “crutches” like that are created to prop up the market’s operation, the more vulnerable and unstable it becomes. This approach needs constant selective and situational intervention by the regulatory agency, TSO and the government. It makes the market unpredictable and weak. And when all that is compounded by the political factor of unequivocally keeping in place too low electricity prices for households, which haven’t changed since 1 March 2017, the situation becomes what it is now.

At the same time, despite visible financial imbalances in the electricity market, the government, staying in line with the President’s stance, is not going to initiate revision of prices for households yet. On the other hand, the proposal to liquidate Guaranteed Buyer SE and transfer its functions to Energoatom NNEGC became an unexpected government decision. This decision not only fails to solve systemic problems befalling the market but can destabilize it even more. According to an analysis by USAID’s Energy Security Project, this decision may result in market collapse and make it impossible to perform special obligations.

Under the circumstances, it is very important to start taking consistent steps toward normalization of the market mechanism. First of all, we need to complete, as soon as possible, the process of mediation between investors and the government and reach a compromise on the conditions of continuing functioning and government support to renewable energy. We also need to gradually bring the electricity price for households to the market level, because electricity is currently underpriced not only for economically vulnerable households but for the country’s entire population regardless of their income and ability to pay bills. Therefore, economically unjustifiable indirect subsidies are also provided to families with medium and high income, i.e., affluent households. Economically vulnerable consumers must be protected not by electricity underpricing but directly, i.e., via targeted monetized subsidies, which is a normal practice in EU states. Without resolving these two urgent issues, further operation of the electricity market is and will be in danger.

Bohdan SerebrennikovManager on consultancy and analytical services
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