Prisoners of energy monopoly. It is time to change the model to keep consumers


The retail electricity market is one of the complicated economic macrosystems in Ukraine. It affects each consumer. Every day we feel the monopoly impact of energy systems and can not refuse their services. Even if we are not satisfied. What should be done to implement the reform of this outdated system and keep technologies developing with consumers’ needs?

Recently, the Verkhovna Rada has adopted the Law “On Electricity Market”. We need a whole package of regulatory acts to make it properly functioning. As for existing regulations – they can not be called effective. We have analyzed the regulatory environment of the retail energy market. The results are presented in the Green Paper.

These results are disappointing. The effectiveness of state regulation of the market is extremely low. It is impossible to achieve the goals declared by the state in 96% of cases.

Basic principles as the basis of creating an efficient market are:

  • protected consumers, quality products and services,
  • modern and reliable energy sector,
  • high competition and efficient natural monopoly,
  • Stable financial market behavior.

Our state regulation is not able to implement any of them. We selected the criteria to assess the effectiveness for each 19 areas of business processes on the market. This is not abstract words and slogans, but real figures and indicators.

Consumer rights? We see increased tariffs instead of the increased quality of services. As for the development and safety of the energy sector – there is no qualitative replacement of fixed assets, despite the significant depreciation of networks and constantly growing tariffs. Losses in Ukrainian electricity networks are twice as many as similar indicators in European countries. The load curve irregularity is increasing.

As for the impact on areas where competition may appear. The retail market includes electricity distribution and supply services. Distribution – this is the networks of oblenergos, they are natural monopolies. It is useless to build the same poles near them. However, the supply can be a competitive service. It is necessary to provide the effective state regulation that will allow any trader to obtain access to the market. The main thing is meeting certification requirements. By using the natural monopoly infrastructure, traders can provide services for consumers. Figuratively speaking, they can be more effective just having one computer than natural monopolies with large user service centers. It is important that consumers have the right to choose a supplier, and the price should be set by agreement of the parties. Another service is electricity metering. Both the oblenergo and the third party can install and read electric meters. These services with small prices are components of the supply market. And it is possible and necessary to create the competition on this market.

Natural monopolies should be profitable, function properly and develop.  It depends on tariff setting and the regulator plays a crucial role in this context. This institution was established precisely because the electricity market is a market of natural monopolies. Unfortunately, this regulation is often ineffective – tariffs grow and the quality of service remains the same. The situation is hopeless: as of the end of 2016, the debt for electricity consumed increased by 2.5 times for four years and now it is 26.8 billion hryvnas.

Poor quality services are a clear indicator of the inefficiency of natural monopolies. One of the solutions to this problem is providing the incentive regulation. But there is an objective factor – growing tariffs. Therefore, people’s trust in the regulator and its independence from the influence of oblenergo owners is the most essential pre-condition to change the regulatory model. In these circumstances, a critical task of the regulator is the necessary control over the efficient use of funds obtained under new conditions by oblenergos. Unfortunately, the regulation is still not enough transparent and independent. As a result – we only talk about incentive tariffs while they have already proven to be effective in the world.

There is a lose-lose situation: we “eat” a small reserve that we had due to depreciated fixed assets. But every attempt to implement reforms is seen as “pushing” the interests of oligarchs.

Consumers change with the tariff increase. They become more efficient and disciplined. Basic stuff – to replace conventional lamps with energy-saving ones and use energy-efficient appliances. Even simply turn off the light when you do not need it. All this may have a significant financial effect for both households and businesses.

As a result, inefficient monopolies sell less energy, but fixed costs remain the same. The “best” consumers become prisoners of still worse monopolies. They pay more for worse services. The more autonomous consumers become, the more expensive the services of centralized energy system will be.

Own sources of energy – a global trend

This will be advantageous for both businesses and households.

If natural monopolies do not change their business model in the nearest future, they will lose their consumers. They will refuse their services because of the price.

We will offer this option in the White Paper (it will be created based on the results of discussing the problems outlined in the Green Paper with business and professional association representatives): the SME should use their own energy and sell surpluses to a single network at incentive rates. Small and medium business takes 100% in many sectors. We are talking not about a single creation of facilities, but about the development of a new system, which is based on a fundamentally different logic, from the bottom upwards. The losses when supplying energy from points generating electricity to consumers will be lowered. Over time, this will reduce the production cost of Ukrainian producers.

Although the energy from renewable sources is not the most affordable option now, but the cost of its production is rapidly approaching the price of traditional energy. The time when these prices intersect is inevitably nearing.

The distributed energy and construction of networks, when it is possible to manage the demand using the latest technology, when consumers are active participants of the retail market, but not bit players with no choice – all these factors are global trends.

Changing the market structure is inevitable

In recent years, the electricity consumption is decreasing.

Large businesses consume less and less due to decline in the economy. The electricity consumption by population has been slightly increasing, but now it is relatively stable.

We predict that the consumption growth may occur as a result of replacing other types of energy resources with electrical energy by consumers or due to new major consumers in the market. For example, promoting the extensive use of electric heating and increasing a number of electric cars and other electric vehicles.

The agricultural sector uses its own resources (biogas plants, solar, wind) more actively and it moves from gas to electricity to heat poultry and cattle. In such a way, there is a mixed model: produce by themselves, but consumes energy from the central network at economical tariffs (multi-zonal meters, night consumption).

Ukraine is changing along with the world, but it quickly moves to other models of customer-network relations. The regulatory framework should be updated. The state is faced with several tasks: to provide the effective stimulation of natural monopolies, and where possible – to create opportunities for competition in the market.

It is necessary to introduce secondary legislation that would not create barriers but extend the choice for consumers. For example, the increase of tariff options. Now distribution companies provide consumers with only three options: a single tariff, day/night or zonal tariff (peak/intermediate/night tariff). There are 10 tariff options proposed in the world. If I pay in advance for three months, this is a great plus for traders. They propose lower tariffs. If I need consumption volumes in a certain time of day and do not consume at another point of time – traders also can propose better tariff conditions.

It is necessary to propose an easy entry of new players to the market, clear and transparent responsibility of market participants and no abuses by monopolies at the level of regulatory proposals. All this – to increase a number of traders and options for consumers.

It is in the interests of Ukraine to encourage small and medium businesses to produce electricity and sell the surplus to the network. It is necessary to revise and optimize a system of state support and provide a simplified procedure of selling electricity by these producers at incentive prices legislatively.