THE REPORT: ELECTRICITY. MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES

20.05.2019

SUMMARY

  • The electricity market reforms provide for the establishment of separate market sectors (formal and informal) with the competition-based pricing, the separation of distribution companies from suppliers and the introduction of incentive-based tariff for the transmission and distribution system operators. The commencement of the new electricity market works is scheduled on 01.07.2019.

  • The electricity market reforms will have a positive effect on the macroeconomic situation in Ukraine. Due to the reforms introduced in 2019-2030, an additional GDP of USD 72.1 bln will be created. There will be additional state budget revenues from taxes in the amount of USD 12.1 bln, the population will additionally receive USD 17.7 bln of income.

  • For each year of delay of reforms Ukraine will lose on average USD 3.66 bln . of capital investments, USD 7.4 bln of GDP, USD 1.16 bln of the state budget revenues.

  • As a result of market reforms, the generating companies will be able to invest USD 29.8 bln in 2019-2030, which is 11.5 times more funds than without the reform being introduced. This will allow to finance the full introduction of new power units and prevent a deficit of baseload capacity, which without reform being introduced will occur after 2029. If the reform is not introduced, the state regulator's influence on pricing remains and the risks of untimely payments for electricity to producers remain. As a result of the transition to incentive-based tariff, the distribution and transmission system operators will be able to accumulate EUR 7.5 bln of investment resource, which is almost twice more than without reform being introduced. Due to an increase in investment volumes, losses in distribution grids are expected to decrease – from 8.6% in 2017 to 7.2% in 2030, in transmission grids – from 2.6% to 2.1%. In case the reforms are not introduced, the distribution companies hold the risks of deterioration of the grids and increase in consumer average interruption frequency index.

  • The introduction of reforms in synchronisation with ENTSO-E will increase the export of electricity by almost 5 times – from 5.6 billion kWh in 2017 to 25.0 billion kWh in 2030. Consequently, the surplus export earnings in 2019-2030 will make USD 6.7 bln. In case of failure to carry out synchronisation, the dependence on imports of electricity from the Russian Federation and Belarus remains at the time of crisis.

  • The absence of market reforms will lead to a greater load on TPPs – their capacity utilization index will increase from 20.9% in 2017 to 37.6% in 2030 (36.5% in case of reforms). As a result, the impact on the environment will be increased, which will not be minimized in the underfunding conditions for the environmental modernization programs.

  • The implementation of market pricing and incentive-based tariff will lead to a faster growth of tariffs for ultimate consumers during the first two years than without reform being introduced. We assume that the residential tariffs in 2019 will increase by 28% (from 1.40 UAH/kWh in 2018 to 1.78 UAH/kWh in 2019), and in 2020 – by another 84%. For industrial consumers, tariffs will increase in 2019 by 45% (from 1.80 UAH/kWh to 2.60 UAH/kWh) with a decrease of 5% in 2020. The industrial tariffs will be decreased due to cancellation of subsidized certificates. In the future, the tariff growth rates under the conditions of reform introduction will not exceed this figure without reform being introduced.