Otto Waterlander, Chief Operating Officer (COO) of Naftogaz Group, Naftogaz Group Chief Transformation Officer

 

The heating season will soon be over, along with the decision of temporary gas price cap for the households. Here, at Naftogaz. We’re convinced, that a return to a full-fledged market brings only positive outcomes for the future. With the market instruments we will be able to protect people from seasonal price spikes, provide consumers with all the advantages of competition and protect vulnerable households. Here’s how it works:

After market liberalization in August 2020, Naftogaz Retail have launched a new and innovative offer for the Ukrainian households: a 12 months fixed price product. From April 2021 onwards, we plan to relaunch this product and add also 6 months and 24 months fixed price products, in addition to usual monthly ones. 

We in Naftogaz believe that the households are best off, making choices themselves. We also strongly believe that the market is the best way to ‘regulate’ prices over time. The era of central planning is behind us and when true competition exists, households benefit the most! 

Ukraine today is intensely debating gas-bills and prices for households. The rapid rise of market prices raised concerns about affordability in this Covid-19 stricken times. Thus the government installed a cap on the household prices for February-March of this year. While understandable, a return to market conditions is critical. We need to avoid further interventions as to avoid investors becoming hesitant to put their money into the Ukrainian gas market. 

When regulated prices were liberalized in August 2020, price increases were expected, because winter prices tend to always rise above summer ones. Furthermore, gas market prices in August were at a historic all-time low level. They could hardly get lower and consensus among market analysts was that prices will rise again. 

Yet, this government was brave enough to liberalize the retail market, abolishing PSO just before the winter season. 

While the price increase in winter came as predicted, it was exceptionally fast and steep because of the LNG market. The market where gas is liquified and shipped across the globe before it is piped to end consumers is more global than piped gas markets. Prices of LNG in the global market, especially Asia, rose to levels of about 4-5 times vs the Ukrainian market! Fortunately, Ukraine is not dependent on direct imports of LNG. But the result was still visible in the European market prices. For all those supporters of LNG imports in Ukraine: think twice! 

With fixed price products, households will be able to avoid unexpected market price changes in future. With fixed prices, Naftogaz (or competitors who follow our example!) will ‘insure’ households from daily changing prices in the gas market. 

Suppliers or investors can manage such risks on the market, if the government does not intervene. Then we can invest in sophisticated trading activities and make this work. What investors are looking for is stability in regulation. They in turn can insure the households next winter. 

An adverse effect of the market cap is that it has unfortunately temporarily eliminated competition. Suppliers who invested in the retail market, now see no new customers who switch from high priced suppliers. In particular, RGK group of suppliers had excessively high prices (up to 40% above Naftogaz prices!) last year and were losing customers quickly. As they supply 70% of households, they were suffering as expected from switching. This is how competition does its work! However, due to the price cap, switching has almost completely stopped! The effect of the price cap therefore is that the Retail monopolist who supplies 70% of households is now protected! Let the competition do its work. Do not protect suppliers, but allow them to compete and incentivise them in this way to be efficient, i.e. low cost!

What we have to do instead is to built the database in order to protect particularly vulnerable customers with subsidies where necessary for the next winter. Naftogaz is a big proponent of such database and will share its data. Naturally, the private data in such base should be fully protected, as stronfg as data of medical service clients E-Health

 Unfortunately, RGK Group will not cooperate. Moreover, we need to see unbundling of household supply from distribution. As all these activities are also with the same RGK group, they can (and we know they do) discourage customers from switching. We need a level-playing field. Naftogaz already unbundled the national transport of gas into the independent TSO (Gas Transport of Ukraine). Now Ukraine need to see the same step with the pipelines that connect the households and create independent DSO’s. This is necessary to bring the Ukrainian retail market in line witH the EU regulation. But importantly, this will help avoid a return in the future of such monopolist charging the price for the households 40% in excess, pocketing extra profits and giving the government no alternative than to regulate prices!