Tariff losses of DSOs operating under the RGC brand in 2020 amounted to UAH 1.6 billion

18/ 01/ 2021

The price environment on the gas market in the second half of 2020 resulted in UAH 1.6 billion of annual losses for distribution system operators (DSOs). The main item of expenditures is the technological gas, which the gas DSOs purchase at the expense of the tariff. The price rally that continues at European gas hubs demonstrates that the current distribution tariffs no longer cover all the reasonable DSOs costs. Gas DSOs allocate about 40% of the tariff received to purchase the technological gas. In July-December 2020, the gas price at the Ukrainian energy exchange increased by 54%. At the end of the last year, the market gas price was one third higher than the indicative gas price used in DSO tariffs. As a result, at the end of 2020, gas DSOs operating under the RGC brand received a total of more than UAH 1,6 billion in losses. A similar situation is currently observed in relation to the gas distribution tariffs set by the National Energy Regulatory Commission (NEURC) for 2021. The price rally that is observed on all European trading platforms makes it practically impossible for DSOs to purchase gas at the prevailing market prices at the expense of DSOs tariffs. In particular, 2021 distribution tariff was calculated using the technological gas price of UAH5,850/tcm. According to trading session data at TTF hub in Europe, the process gas price in January is already UAH9,650/tcm. DSOs operating under the RGC brand have twice announced that they seek to purchase the technological gas at the Ukrainian energy exchange, on December 29 and 30, 2020. However, none of the companies received offers to purchase the technological gas on the market at the indicative price used to calculate the tariff. This is the evidence that the distribution tariff effective from January 1, 2021, no longer covers all economically justified expenses of the DSOs to purchase the technological gas. The IMF memorandum signed by President Volodymyr Zelensky and Prime Minister Denys Shmyhal states that “the National Energy and Utilities Regulatory Commission (NEURC) will bring distribution tariffs to full cost recovery.” Regulation distortions will result in tariff imbalances at the DSOs level and bring them to a pre-default state in the 1st half of 2021. Difficulties in covering all economically justified expenses of DSOs for the purchase of the technological gas can create imbalances in relations between gas distribution companies and the Ukrainian TSO and lead to the deterioration of its financial status of the latter. One shall recall that Ukrainian TSO was certified on the condition that DSO tariffs will be set at the economically reasonable level. The imbalances mentioned pose a threat to energy security in Ukraine.

Gas DSOs allocate about 40% of the tariff received to purchase the technological gas. In July-December 2020, the gas price at the Ukrainian energy exchange increased by 54%. At the end of the last year, the market gas price was one third higher than the indicative gas price used in DSO tariffs. As a result, at the end of 2020, gas DSOs operating under the RGC brand received a total of more than UAH 1,6 billion in losses.

A similar situation is currently observed in relation to the gas distribution tariffs set by the National Energy Regulatory Commission (NEURC) for 2021. The price rally that is observed on all European trading platforms makes it practically impossible for DSOs to purchase gas at the prevailing market prices at the expense of DSOs tariffs.

In particular, 2021 distribution tariff was calculated using the technological gas price of UAH5,850/tcm. According to trading session data at TTF hub in Europe, the process gas price in January is already UAH9,650/tcm. DSOs operating under the RGC brand have twice announced that they seek to purchase the technological gas at the Ukrainian energy exchange, on December 29 and 30, 2020. However, none of the companies received offers to purchase the technological gas on the market at the indicative price used to calculate the tariff. This is the evidence that the distribution tariff effective from January 1, 2021, no longer covers all economically justified expenses of the DSOs to purchase the technological gas.

The IMF memorandum signed by President Volodymyr Zelensky and Prime Minister Denys Shmyhal states that “the National Energy and Utilities Regulatory Commission (NEURC) will bring distribution tariffs to full cost recovery.” Regulation distortions will result in tariff imbalances at the DSOs level and bring them to a pre-default state in the 1^sthalf of 2021.

Difficulties in covering all economically justified expenses of DSOs for the purchase of the technological gas can create imbalances in relations between gas distribution companies and the Ukrainian TSO and lead to the deterioration of its financial status of the latter. One shall recall that Ukrainian TSO was certified on the condition that DSO tariffs will be set at the economically reasonable level. The imbalances mentioned pose a threat to energy security in Ukraine.