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56 I Eastern Europe bne May 2021
to the producers of renewable energy that have set up in the last few years. But the gas business transformation has gone a lot more smoothly.
The unbundling is complete but the one big piece still missing is a gas market exchange for trading contracts, says Makogon. “We have an exchange, but
it is not up to EU standards. However, there is already settlement and clearing of deals but more needs to be done.”
The old system was tightly controlled by a few players. Dmytro Firtash is probably the best known of the oligarchs who were big players in the gas business
and still controls companies that account for 80% of the delivery of gas to households.
He also set up a string of unnecessary intermediate trading companies to handle the transit of gas from Russia to Europe that skimmed billions of dollars off the top to enrich those in the top tier of the Ukrainian government as well
as Russian officials and the leaders of Gazprom. Those scams have been closed down many years ago, but the sector still suffers from some of these problems. However, the entry of hundreds of independent gas traders has been the key to the success of the reform.
“There are more than 900 companies working on our market. All the big European gas traders are here and 100 companies are involved in importing gas to Ukraine,” says Makogon. “European traders already account for tens of billions of cubic metres of gas imports
to Ukraine – it's a huge amount.”
The sheer number of players means that the old school corrupt deals are almost impossible to do any more. There are simply too many players offering
better deals.
Most of this gas trading is aimed at industrial customers, as the retail gas business has not been completely freed but is the focus of the current round
of reforms. Companies now have
a wide choice to potential suppliers and are paying rates that are set by an open market.
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Retail reforms
In August this year a new law will come into effect that will open the retail sector up to competition too. Consumers will be able to choose to buy their gas from any supplier they want and those that can’t afford to pay their utilities bill will get help from the government under the Public Services Obligation.
“The main goal of the reform is to lower prices for households. At the same time, for those that can’t afford gas there will be subsidies to help so that people can pay as much as they can and the state will help with the rest,’ says Makogon.
Paying for gas is a politically sensitive issue. The Soviets used to supply
gas, power and heating to the entire population for free and many still regard utilities as something the state should provide and not something they should pay for. The International Monetary Fund (IMF) insisted that the heavily subsidised domestic energy tariffs be increased to market rates, a demand
the Ukrainian government vigorously resisted for several years. However, the reform was eventually pushed through and remains highly unpopular; so unpopular that Zelenskiy’s government recently reduced the prices again “temporarily” due to the coronacrisis and unusually cold winter. Zelenskiy’s ratings in the polls has been flagging recently but the president has earned some brownie points from voters with this and other populist moves.
The introduction of competition in the retail market will also help finally kill off another scam that was used by oligarchs; heavily subsidised gas earmarked for residential customers was re-routed and sold to the oligarch-owned industrial assets, thereby reducing their costs and boosting their profits.
“Now retail and industrial prices are more of less the same,” says Makogon. “It is no longer possible to manipulate the market, as the difference is so small.”
Firtash is still in a dominant position on the retail market and what competition has been introduced into the retail business has helped, but GTSO says that
the price of gas for the consumer is still high, as the suppliers are not reducing their prices. It is hoped that throwing the market open to even more competition this year will make a bigger impact.
Naftogaz will help drive this process, as the national gas company is also expanding its retail operations, adding a retail sales arm to its operations. The company has already seen its share
of the residential gas supply market increase from 4% a few years ago to 12% now and its share continues to grow fast.
Ukraine’s power companies are also getting into the residential gas supply business.
“It will be easier for them, as they are already set up to do this business,” says Makogon. “They already have a business relation with the consumers, the local offices and all the payment and back office set-up they need to operate.”
Imported gas and Nord Stream 2
Russia is still sending a significant amount of gas through Ukraine to Europe, but Ukraine itself has cut imports of Russian gas for its own use to zero. Ukraine has not imported gas from Russia for more than three years and has turned to partners in Western Europe for the approximately
30 bcm of gas imports a year it needs.
The problem is that this gas is more expensive than the gas Ukraine could import from Russia, but in fact Ukraine would end up spending the same amount if it bought the gas directly from Russia.
“The problem is, there is only one Russian company to deal with,” says Makogon. “Why would Gazprom charge less when there is no one else to deal with on the Russian side? If they let the other Russian companies export gas there might be a chance to do a deal, but Gazprom has a monopoly on exports.”
Gazprom only accounts for about half of gas supplies on the domestic Russian market and has to compete with several other big players such as the state- owned Rosneft and the privately owned Lukoil at home so Russians also benefit from a competitive internal market. But