Without PSO: scenarios of changing the electricity price for Ukrainians
How is electricity priced for household consumers, and what are the options of bringing its price to market level at lesser risk? The answers are provided in the study A Market without PSO: What Electricity Prices for Households Will Be, recently released by DiXi Group.
Two scenarios of the unfolding situation with prices
Presently, household consumers in Ukraine compensate only the half of the actual cost of production, transmission, distribution and supply of electricity they consume. The difference is compensated by producers, who end up with a significant profit shortfall. In addition, it seriously distorts the market, creates pricing and financial imbalances, gives wrong signals to market participants, and significantly worsens investment climate in the sector. This situation can be fixed only by market mechanisms.
DiXi Group experts analyzed the consequences of introducing market pricing of electricity for household consumers, and outlined in their study two scenarios of how the situation may develop. According to one of these scenarios, the government can reasonably expect to receive almost UAH 1.3 billion in additional budget revenue, and will be able to offset targeted subsidies after raising tariffs.
Scenario І, “Partial”: keeping the regulated tariff for households at 1.68 UAH/kWh for up to 500 kWh per month, with the consumption volume in excess of 500 kWh per month billed at the market price.
Scenario ІІ, “Full”: transition to market pricing for all consumer categories, regardless of consumption volume.
According to expert estimates, upon introduction of competitive pricing the electricity prices (including VAT) for households will amount, on average, to 3.27 UAH/kWh for consumers of Ukraine’s Integrated Power System and 3.50 UAH/kWh for consumers of Burshtynskyi Energy Island. Therefore, there are reasons to expect that the average electricity prices for the majority of Ukrainians will be close to the current price for non-household consumers of 2nd voltage class: 3.40 UAH/kWh (including VAT).
Market electricity prices for households will visibly vary from region to region because of the difference in electricity distribution tariffs for different distribution system operators.
According to estimates, the average monthly electricity bill for household consumers will increase as follows: according to Scenario І, it will rise by 5% for consumers without electric heating and by 50% for consumers with electric heating during the heating season; according to Scenario ІІ, the bill amount will almost double.
Phasing instead of “shock therapy”
According to our study, electricity prices for households should be brought to market level in phases, without resorting to “shock therapy”.
In the first phase, experts recommend to apply Scenario І, which must continue for at least one year. Based on its outcomes, a possible way of transition to Scenario II should be charted.
Implementation of Scenario ІІ should be synchronized with the dynamic of real income growth in Ukraine to avoid social tensions and accumulation of debts. At the same time, experts stressed upon the critical importance of informing consumers about the advantages of market pricing and the available methods of saving electricity and energy conservation.
According to estimates by analysts, budget expenditures on subsidies may increase, versus 2020, by approximately 17% under Scenario І and by 50% under Scenario ІІ. At the same time, these additional expenditures will be offset by tax revenues from electricity producers. Thus, the impact on the state budget under Scenario І may increase the deficit by approximately UAH 4.8 billion. Under Scenario ІІ, on the other hand, the balance of the state budget could be improved by approximately UAH 1.3 billion, because in this case, the budget’s tax revenues from power generating companies, which presently participate in the mechanism of placing special obligations (PSO) (Energoatom NNEGC, Ukrhydroenergo PrJSC), will significantly increase.
“An instant abolition of the PSO mechanism without compensations by subsidies from the state budget would make the debt owed by consumers, especially those who use electric heating, increasingly higher, because monthly bills of certain consumers could even exceed 6-7 thousand hryvnias in wintertime. Therefore, market pricing should be introduced in phases,” the head of study, Bohdan Serebrennikov, says. “The system of targeted subsidies should soften the social consequences of price growth, and that would necessitate a substantial increase in budget expenditures. At the same time, assessing the situation that would unfold after abolition of the PSO mechanism, we can see that additional subsidization-related expenditures can be offset by increasing tax revenues from electricity producers, because if PSO is abolished, the companies will increase their profits, and therefore, tax payments.”
The authors of this study firmly believe that introduction of market electricity prices for households will be an important step in development of a full-fledged electricity market according to European rules. It would liquidate price imbalances and cross-subsidization, thus producing a rehabilitating effect on the market.
This publication is made possible by the support of the American people through the United States Agency for International Development (USAID), withing the USAID Energy Sector Transparency Project implemented by DiXi Group.
The contents are the sole responsibility of the DiXi Group and do not necessarily reflect the views of USAID or the United States Government.