NJSC Naftogaz increased gas price by 45% but why you shouldn't rush and purchase gas for future use and long-term just yet
Vladimir Shvedky, CEO of ETG.UA, an independent energy provider.
Not many private consumers know that the natural gas market has been opened for the public
A month of freedom in the market that was closed for 25 years is very little to speak about consumer awareness about the possibilities that have opened for them. I believe that not more than 1% of the population know about opening of the gas market. The reasons include low season and absence of information, as the new players are only starting to introduce “education/awareness” programs on the possibility of switching the supplier for the public.
It is still early to talk about substantial changes in the operation of this market segment or interesting offers of the players. I believe that the majority of the suppliers planning to emerge on this market are in the position, when they have to prepare their models to work effectively with consumers within the shortest possible time prior to the beginning of the heating season, just as we are.
Price competition is surging
Free market of natural gas supplies to the public is open and we are observing competition. It is a positive factor; this was the purpose of the market reform. NJSC Naftogaz of Ukraine has entered the segment of gas sale to the private consumers. The company’s plans to win over a share of private consumers are forcing the suppliers, which currently control 98% portfolio of this market, feel competition and form their loyal price offers. The consumers, however, do not need to hurry to make a decision and we’ll tell you why.
A new PSO or how NJSC Naftogaz of Ukraine is enjoying monopoly on Ukrainian gas
NJSC Naftogaz has made its offer of gas prices for the public, having proposed to fix it for a year in advance. Its analysis indicates that the company substantially increased its prices merely a month into the operation on the free market. Specifically, in the beginning of August, the company offered gas at UAH 3,200 per 1,000 m3, while in the end of August, Naftogaz announced its September price at UAH 4,700 per 1,000 m3, up by over 45%. So, it turns out that the gas that the state-owned company produced in Ukraine, which was sold in August at UAH 3,200, is now offered for us at UAH 4,700 for no apparent reason for an increase. The production costs have not changed much over the specified period.
The monopoly for cheap domestic gas resource and 45% price increase in less than a month provides for a highly profitable business. We believe Naftogaz’s margin from the sales of gas to the public with this kind of pricing policy will exceed 20%. Meanwhile, having the resources it has, the company could have been selling gas to the private consumers at much lower prices.
At the same time, other operating suppliers form the price following the so-called “purchase plus” principle. This is economically reasonable, as they purchase gas on the market. Its price includes the expenses for servicing, dispatching, covering imbalances and payment risks. And this pricing model is transparent and understandable.
The current pricing model of NJSC Naftogaz is unpredictable, non-transparent, while the prices are overstated for no apparent reason. This spurs the market players to speak about emergence of some new Public Service Obligations (PSO) and a shift away from the principles of fair competition by this player, as the national company is using natural monopoly for cheap resource, Ukrainian gas extracted by Ukrgazvydobuvannya, to compete with the current suppliers.
No premises for further price increase
The energy prices on global exchanges are at a 20-year low. Natural gas in Ukraine is sold under “import parity+” conditions. It is tied to exchange quotations of the European Union. We believe there are currently no premises for substantial escalation of prices for natural gas during the winter period due to the following reasons:
- overproduction of natural gas is still observed in the world;
- natural gas stocks in the EU reservoirs are at 80% capacity, which is a high indicator;
- Underground gas storage reservoirs are at over 80% capacity. It is expected that by the beginning of the heating season, this indicator will increase to 95%. This factor can hold the prices at the level of today’s quotations.
Gas prices for natural gas in Europe increased, but not for long
Over the past several weeks, we have observed increase of natural gas prices on European exchanges by over 20%. This aggressive price escalation is due to the transfer of the majority of energy generation in Europe from coal and other sources to gas, which was spurred by the global drop in gas prices. Price decrease and high temperatures in the EU stimulate energy consumption and, accordingly natural gas consumption for production of 1 kW of electricity. We expect that the prices for natural gas in EU stabilize and return to the level of the previous periods as early as September.
Why August prices in Ukraine were lower than import prices
Gas price in Ukraine in August formed at the level of UAH 4,500-4,600 per 1,000 m3. At that, the prices on "import parity+" conditions were slightly higher at UAH 4,800-4,900 per 1,000 m3. This means that during a certain period, Ukrainian gas was sold at a lower price than imported gas, which gave the suppliers an opportunity to form prices for consumers lower than "import parity+" indicators.
Why it is not advisable to fix gas prices for a lengthy period?
As there are now offers for private consumers on the market to purchase gas a year in advance at fixed prices, let me voice my opinion on the matter.
First. We do not recommend households to undertake risks and sign the so-called ‘long’ contracts with a fixed price in the coming heating season. The situation with global consumption is complicates and there is a probability of a new quarantine being introduced. If it is introduced, we will observe reduction of natural gas consumption in the EU, which will cause the prices to remain at the current level. So, there is no sense in paying extra.
Second. We believe this offer is ill-timed. The buyers are not ready to hedge price increase through fixing it during summer, as the buyers do not feel or understand the risks the supplier is putting on them. These kinds of offers will be more popular during the second-third year of market operation, which the choice of suppliers and price offers will be an informed one.
Our company is forming the price of the resource for private individual mostly every month, before the 25th, as is required by the market rules, as well as a possibility to purchase a specific volume for the period and use it as required. We have planned all activities in this segment of work for the beginning of the heating season, when choice of the supplier and loyal price will be relevant for the buyers.
When can gas reserves in Ukraine become indicative for Europe?
Due to high reserves of gas in the underground reservoirs, we expect a rather high supply of gas inside the country this season. It would have had a very positive effect on the prices for private consumers had Ukraine had internal indicatives, its own functional gas hub, where the players would be able to form domestic price from the existing demand and supply.
With the gas reserves available in the reservoirs today, Ukraine could have become a liquid natural gas source in the EU. Unfortunately, in the past five years neither the national company nor the Energy Ministry of Ukraine have done the necessary work for the gas hub and internal indicative price to appear in Ukraine.
Creation of a gas exchange would have allowed the players inside the country to have a baseline in the form of the continuous supply and demand and also indicative prices and market quotations. NJSC Naftogaz has the possibilities and instruments to become a domestic market benchmark, and the company is still expected to introduce the changes that would be highly useful for the market.
Advice for the buyers
The following factors that I described could maintain the natural gas prices at the current level or lead to their decrease: unpredictability of the epidemiological situation, low predictability of natural gas production and consumption balance in the world. Therefore, we would advise the consumers not to hurry to undertake the risks for natural gas price increase.
We believe that in the current situation, it is more advisable to purchase gas at prices, formed for the following month. We recommend those willing to change their supplier to exercise their right to free choice. However, you need to be very careful and analyze the suppliers, as if they were banking institutions. Do not chase the low price, but consider other criteria as well, for example how long the supplier has been operating on the market, how many active clients the supplier has, the reputation on the market and in mass media and what services it offers and whether they are convenient. May you choose the best!