Residents across Ukraine felt the impact on March 1st—another hike in residential electricity rates. It caused a stir, even though it had been planned a year ago (Resolution No. 220 of the National Energy and Utilities Regulatory Commission of Ukraine, dated February 26, 2015). The regulator announced five such "electric shocks" in total. The March one was only the third; we still have two more to experience—September 1st of this year and March 1st of next year. As always in such cases, the Presidential Administration, the Cabinet of Ministers, and the national energy regulator remained silent about the reasons for the electricity rate hikes, leaving it to experts and journalists to investigate.
Residents across Ukraine felt the impact on March 1st—another hike in residential electricity rates. It caused a stir, even though it had been planned a year ago (Resolution No. 220 of the National Energy and Utilities Regulatory Commission of Ukraine, dated February 26, 2015). The regulator announced five such "electric shocks" in total. The March one was only the third; we still have two more to experience—September 1st of this year and March 1st of next year. As always in such cases, the Presidential Administration, the Cabinet of Ministers, and the national energy regulator remained silent about the reasons for the electricity rate hikes, leaving it to experts and journalists to investigate.
Who raised the "tension"?
There's a widespread belief that raising all types of utility tariffs is a demand from the IMF. A detailed examination of various online versions of the relevant Cabinet of Ministers' Memorandum with the IMF has revealed that it doesn't contain a categorical demand to raise tariffs. It does contain another fundamental provision: narrowing the gaps between tariffs and their cost-recovery levels. The latter is often translated as the vague term "cross-subsidization," although it simply means "recovery of production costs." In this case, what's meant is that the same product is sold at different prices to different categories of consumers—households and businesses—and the price reduction for some consumers is offset by the price increase for others.
Why is this bad? For two reasons. First, having two prices encourages sellers to simply pass the "cheap" product on to the public, while actually selling it to businesses at a higher price. Second, businesses aren't stupid either—they'll still pass the inflated price on to those same people. It's a vicious circle! However, the winner is always the one who sells or produces a product at two prices, whether it's electricity, heat, or gas.
The answer to the question: “Who is demanding an increase in tariffs?” is contained in the official explanations of the National Commission for the Regulation of Energy and Utilities and was given a year ago, during the first increase in electricity tariffs: “On paragraph 2. Phased elimination of over-subsidization and increase in prices for natural gas and electrical energy in Section XII Coalition land, laid down by the participants of the coalition of parliamentary factions of the Supreme Council of Ukraine VIII Clique” (letter dated March 11, 2015 No. 2212/17.2/61-15).
So it turns out our dear people's deputies were the ones who slipped this "taser" to their voters! The IMF read it, took note, and is now demanding that the coalition fulfill its obligations.
But it's not that simple. There are two ways to close the price gap: by raising prices for households or, as you've guessed, by lowering prices for businesses! But this is precisely what heat and electricity producers don't want to do, because they'll lose profits as a result of lower prices! Then they'll have to resort to cutting costs, modernizing production, and generally lowering the cost of their products, or... losing money.
What path did the National Commission for State Regulation of Energy and Public Utilities (NKREKU) take? In the love triangle of "people, monopolist, and government," the government fell in love with the monopolist, and together they disliked the people...
Is there a light at the end of the tunnel, an electric one?
Of course! It's just kind of murky...
It would be logical to assume that, starting March 1, 2017, the price per kilowatt-hour will be the same for everyone, and there will be no tariff increases for residents or any price manipulation! Clearly, this is an illusion.
The first thing that is alarming is that there will remain two prices: for consumption of up to 100 kWh, the tariff will be
90 kopecks, and for everything above that, 1,68 UAH. Yes, yes, ladies and gentlemen, if previously there were three prices—up to 100, from 100 to 600, and over 600 kWh—in the final stage, there will only be two! The government is ostensibly encouraging people to save, but the 100 kWh limit doesn't hold up to scrutiny. In 2015, the average monthly household consumption in the country was twice as high—over 200 kWh, meaning the majority of the population still consumes more than 100 kWh! But even this figure looks paltry compared to other countries. In the US, for example, the average family consumes 740 kWh per month.
The second suspicion: establishing a "tariff for the poor" contradicts the principles of trade. It would seem that the more we buy, the lower the price should be. But no, it's precisely the opposite. Where's the logic? That's the logic, but it's a very peculiar one. Since no one checks how much a specific regional power company supplied up to 100 kWh and how many people consumed less than 100 kWh (there are no official statistics!), there will always be a delta between actual consumption and this "hundred." And this "unaccounted for" electricity can be sold, but at a price "over 100 kWh." Get it? The main thing is that all the "cheap" electricity is written off.
Considering that our country is fully electrified, and there are about
If you're using 15 million, then by writing off at least 1 kWh at 1,68 UAH per meter, you could get 25 million UAH. But that's just pennies. If the country doesn't have strict metering for consumption of up to 100 and above,
100 kWh is a veritable electric Klondike. This division into electricity "for the poor" and "for the rich" was probably invented (as rumor has it, by one of the fugitive Klyuev brothers) for this very reason.
Finally, we come to the main source of “turbidity” – the so-called energy market.
Black hole or "common fund"?
Ukraine's wholesale electricity market (WEM), as ZN.UA reported when the idea was first put into practice, was modeled after the electricity pool in England and Wales. In other words, the model was worthy. But it only operated there for seven years. Furthermore, the conditions for democracy and oversight are incomparable—the UK's parliamentary system dates back to the 11th century!
The essence of the model is that every electricity producer is obligated to sell its output on the wholesale electricity market (or more precisely, to the state-owned enterprise "Energorynok"), at a price set by the state, represented by the National Commission for State Regulation of Energy and Public Utilities (NKREKU), for each generating company. Then, on this "market," electricity is purchased by energy supply companies (oblenergos), which then sell it to households and other consumers. The price for electricity generation, transmission, and distribution is set by the same national regulator.
Of course, calling such a system a "market" is a stretch. In physics, it resembles a "black hole" through which all energy disappears. The average person might be better served by the term "obshchak," where, pardon the comparison, stolen goods are deposited. The price of the stolen goods is determined by the "authorities"—the holders of the obshchak—and there's no way to sell them anywhere for a higher or lower price.
All energy generating companies sell their products to the wholesale electricity market at different prices. These prices are then somehow boiled down into a single price, resulting in a single wholesale purchase price for all regional energy companies, changing every month. Of course, there's likely a specific formula or methodology for this price-fixing process, but that's a whole other story.
This is where the analogies end, since the next paradox of the "wholesale market" is that the price for its product is actually dictated by the monopolist! The methodology for determining tariffs for the production, transportation, and distribution of electricity is written based on the cost principle. Simply put, the National Commission will set the price the producer or transporter and distributor (until recently, and even informally still under one roof—the regional energy company) asks for. However, even here, there are some ambiguities (mysteries).
Firstly, different weighted average tariffs are set for different groups of generators—nuclear power plants, hydroelectric power plants, combined heat and power plants (coal and gas-fired), combined heat and power plants, and alternative energy sources: from 42 kopecks per kilowatt-hour for nuclear power plants to 1,83 hryvnias for combined heat and power plants. This is logical, but it is alarming that tariffs fluctuate within each group. For example, for different combined heat and power plants, generation prices can vary by a factor of six—from 67 kopecks to 2,78 hryvnias.
And all because they have different “economically justified production costs.”
Naturally, with such a tariff system, no monopoly would even think of modernizing, cutting costs, lowering production costs, etc. Why bother? The more expensive the product, the greater the profit, which is captured in the tariff.
The same applies to transmission and distribution tariffs. Although differences in these tariffs can be explained, for example, by the number of consumers or the length of transmission lines. In this case, it would be logical to establish the same "specific" tariffs—per consumer or per kilometer.
Civilized countries subject natural monopolies to strict legislative and public oversight, and even encourage them to lower socially significant tariffs. In our country, however, the opposite is true: "social" tariffs are becoming a profit-making mechanism for unscrupulous monopolists.
Formula of Justice
Let's approach the question logically: what will be the price of electricity at the end of the tunnel—42 kopecks, like for nuclear power plants, or 1,83 hryvnias, like for thermal power plants? If the government announced 90 kopecks for families consuming up to 100 kWh per month and 1,68 hryvnias for everyone else, what formula was used to calculate this?
The formula used to calculate the end-user tariff is written for a first-grader—the sum of the wholesale market price and the transportation and distribution tariffs. However, even this formula has a catch: the denominator of the wholesale market price includes economic coefficients for the standard technological losses of electricity transmission through distribution networks, which, naturally, drives up the tariff!
Even a naive first-grader would figure out that these factors should be included in the transmission tariff, but their inclusion in the formula is either a sign of great intelligence or sheer impudence. The size of these coefficients, which have surely inspired more than one dissertation, allows for price manipulation. If we disregard these "coefficients," then tariffs for the country's population are distributed as follows: the first class of consumers is exclusively businesses (voltage 10-35 kV), while the second class includes both businesses and residents (up to 10 kV).
For businesses, the National Commission for State Regulation of Energy and Public Utilities (NKREKU) has set the price per kWh at between 1,19 and 1,34 UAH. This means that already today, families consuming over 600 kWh and paying 1,56 UAH per kilowatt-hour are subsidizing businesses. The infamous cross-subsidization has changed its focus! Moreover, starting March 1, 2017, virtually all households in the country—and the average family consumption is around 200 kWh per month—will pay (after 100 kWh) 1,68 UAH, meaning more than businesses…
For the second class of consumers, which includes the population, tariffs range from 1,24 to 1,64 UAH. Does this mean that, starting March 1, 2017, the 1,68 UAH tariff will exceed the tariffs for all regional power companies nationwide?
***
The elimination of tariff imbalances (cross-subsidization) in Ukraine is being carried out at the expense of the people. Ultimately, all regional power companies will sell electricity to households at a price that is higher than cost and includes profit; this is already partially happening. Therefore, the gradual increase in household tariffs will lead to a simple increase in profits for a few Ukrainian billionaires who own the country's energy sector, and, consequently, to the impoverishment of all other Ukrainians.
Do President Poroshenko, the Prime Minister, and the members of parliament who signed the Coalition Agreement understand this? Do they understand that they are robbing an already impoverished people (consumer prices rose 42% in 2015) while enriching the already wealthy owners of regional power companies?
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