The Gas Market For The Households Is One Year Old: What Has Changed?

What is a gas market?

 Today, the household gas market is no different from any other market. The consumers of the product, i.e. natural gas in this case, are free to choose those who will deliver the product to them. Supplier companies come up with different prices and package offers, and they can vary in quality of service. However, gas delivery (i.e. network maintenance) is a natural monopoly. Because it is economically inefficient to lay several pipes in parallel. Therefore, gas delivery fees are regulated by the state (the National Commission for State Regulation of Energy and Public Utilities, or NERC). To allow consumers to freely choose a supplier, the Government split up the payments for gas delivery and gas as a commodity at the end of 2019.

 Those living in both private houses and apartment buildings can change their gas supplier. It can even be done online: you just have to inform the company that you wish to work with and confirm your identity. The new supplier needs to be sure that you have title to the house to which it will deliver gas. The rest of the issues, such as terminating the contract with your previous supplier will be handled by the new company.

There will be no competition?

According to the NERC, more than 600,000 households changed their natural gas supplier in the first six months since the opening of the gas market for the population. Nearly 76,000 Ukrainians switched to a new supplier in the third quarter and almost seven times more, 528,000, in the fourth quarter of 2020. However, this amounts to only 5% of the total number of household consumers of natural gas. The reasons for this vary from consumer ignorance and passivity to the gas suppliers deterring consumers from doing it (e.g. threats from the current supplier, non-existent debts, etc.).

Since not too many consumers currently exercise their right to choose the best supplier, the companies do not have significant incentives to change or improve their services. The pilot rankings of gas suppliers from DiXi Group showed that the vast majority of companies have a lot of room for improvement. They were evaluated based on customer orientation, ensuring consumer awareness and the transparency of their work. The top 50 suppliers received rather low rankings. With 1 being the highest score, no company in the market even exceeded half a point. Naftogaz of Ukraine Gas Supply Company currently has the highest score of 0.435 points.

However, the dominant factor influencing consumer choice of suppliers is the price of gas, with non-price factors having much less weight.

Thus an open and competitive market in Ukraine has not yet been formed. According to DiXi Group, the suppliers who historically participated in the PSO (were assigned special responsibilities to purchase gas from NJSC Naftogaz of Ukraine at regulated prices and deliver it to the population) have higher scores in all ranking criteria compared to the suppliers that did not participate in the PSO. One of the reasons for this is that, due to a much larger customer base, these companies had more financial resources to develop their operations and improve service. 

Therefore, companies still have room for growth: increasing their transparency, introducing modern formats of online service and customer information, and offering a wider range of commercial offers tailored to customers’ needs.

Weak communication

Many consumers were not ready for the launch of the gas market. According to the NERC, 80% of household consumers in Ukraine were not aware of their rights or opportunities. As a result, Ukrainians were vulnerable to abuse by gas suppliers and regional gas companies. Then the regulators began to intervene in the market. 

For example, back in winter, the Government set the maximum gas price. This happened because some companies had hiked up the price with the start of the heating season, and consumers did not know how to replace them and choose a cheaper supplier. After a wave of “tariff protests”, the Government decided to manually reduce gas prices for the population. On January 18, the Cabinet of Ministers set the maximum price of UAH 6.99 per cubic meter. Simultaneously, the gas delivery price was limited for certain regional gas companies, with the highest delivery price set at UAH 1.79 per cubic meter. The decision was approved by the NERC on January 19.

Such changes in the market are not due to the regulation but manual overrides. It brought a temporary reduction in prices for consumers. After all, there will always be some part of the population for whom energy is too expensive, and so the issue must be addressed systematically with targeted subsidies, not with price restrictions. The IMF agrees with this. Goesta Ljungman, the Fund’s resident representative in Ukraine, noted in March (when the restriction was already in force) that it was necessary to refrain from returning to controlling gas prices. The “Servants of the People” promised that the Fund’s mission would resume its work in Ukraine after the restrictions on gas prices were lifted. Today, the mission is scheduled to return in September.

In May, the mandatory annual gas contracts took effect. That is, no matter the supplier, the May price becomes fixed for the whole year.

Earlier, some companies, such as Naftogaz of Ukraine Gas Supply Company (a subsidiary of Naftogaz of Ukraine) also offered a fixed annual gas price. But the monthly price automatically applied for the clients, so it was necessary to make some effort to get another contract. Currently, all clients automatically get annual contracts. Yet they can abandon them at any time and switch to a monthly or quarterly contract (alternative seasonal offers) if they see advantages in them. The new system of annual contracts will run until April 30, 2022.

However, the new system also carries risks. According to an article in the Ekonomichna Pravda, when concluding annual contracts with gas suppliers that will sell gas to the population, Naftogaz set a different gas price and supply volumes for each private provider. Thus, the largest suppliers of gas to the population, Dmytro Firtash’s Ye Energia and Naftogaz of Ukraine Gas Supply Company are actually “cementing” their monopoly on the market.

Local wrongs

Gas suppliers occasionally tried to take advantage of their consumers’ ignorance. For example, although the law prohibits interfering with the process of changing a supplier, in practice, there were many cases where existing suppliers created barriers for the consumers willing to switch over to other companies.

On the other hand, some companies tried to attract customers by dishonest means. For example, in October 2020, the state-owned enterprise Kremenets Department for Gas Supply and Sale became unprofitable and stopped supplying gas in the Kremenets district of the Ternopil region. Naftogaz of Ukraine acted as a “Supplier of Last Resort” (SoLR) so that residents would not be left without gas. However, according to the law, the SoLR can supply gas for no longer than 60 days, during which time citizens need to find another perennial supplier.

Soon, a “clone” of the state company named Naftogaz Delivery emerged in the city. After the SoLR’s period of delivery ended, the representatives of Naftogaz Delivery started visiting the city residents to offer their services. The residents were confused by the company’s name, which sounded similar to the state monopolist providing temporary services to them. Some residents even wrote letters to Naftogaz of Ukraine complaining about the competitor’s manipulation and asking to sort out the situation.

Systemic issues

Consumer awareness alone cannot resolve the systemic issues arising in the market. The Ukrainian gas market is not yet fully integrated into the EU gas market. As a result, the companies working in the EU market do not have access to the Ukrainian market and vice versa. All natural gas entering our retail market is thus formed by the supply of Ukrainian wholesalers only. Specifically, Ukrainian mining companies, importers, and gas owners in underground gas storage facilities. If European companies had access to our market, competition would be higher. The situation in the retail market and the conditions under which the end consumers receive natural gas are thus directly dependent on the supplies, prices and the sellers’ and traders’ behavior in the wholesale market.

Therefore, the natural gas market in the current conditions lacks competition at both the wholesale and retail levels.

At the same time, although public service obligations for JSC Ukrgazvydobuvannya and JSC Chornomornaftogaz expired in the wholesale market in May of this year, they continue selling gas of their own production exclusively to NJSC Naftogaz of Ukraine. On the one hand, this forms a resource for commercial contracts of JSC NJSC Naftogaz of Ukraine Group for heat producers and gas distributors supplying gas to the population, as well as for an independent supply of gas to the population. On the other hand, however, access to gas owned by JSC Ukrgazvydobuvannya and JSC Chornomornaftogaz is limited for other wholesale market buyers, which is hindering competition. The Energy Community has repeatedly emphasized the need to remove such constraints. Because, if these volumes of gas are traded in the market transparently, on competitive terms and with equal access for all players, it will create additional liquidity in the wholesale market making it possible to determine real market prices for gas. 

Although the Government had plans to obligate JSC Ukrgazvydobuvannya to sell 100% of natural gas to all market participants as of April 2021, this has not yet happened.

The retail market continues to be dominated by regional gas companies through their subsidiaries delivering gas to the population, i.e. gas distribution networks. And that despite the fact that the retail market was formally opened on August 1, 2020, and despite a fairly large number of gas suppliers, namely 266 (according to the latest data). According to the NERC, in 2020, about 71% of natural gas was supplied to the population by suppliers whose controlling stakes (shares, units) belong to the operators of gas distribution networks under the umbrella of a single brand, “Regional Gas Company” (hereinafter called the RGC Group), with 4% of volumes belonging to the NJSC Naftogaz of Ukraine Group and the remaining volumes to other suppliers. The situation changed somewhat in the first quarter of 2021 when the share of the RGC Group in the volume of gas supplies to the population decreased to 58%. As a result, the share of the NJSC Naftogaz of Ukraine Group increased to 18%. 

Earlier, the Antimonopoly Committee of Ukraine (AMCU) reported on signs of the RGC Group’s dominance in the natural gas market and abuse of their market position. In January 2021, the AMCU began an in-depth examination of the natural gas supply market for compliance with laws protecting economic competition. 

What’s next, then?

Because of cases of abuse of their market position, the AMCU issued mandatory recommendations for natural gas suppliers in December 2020. They say that companies should refrain from actions that could restrict household consumers from changing natural gas suppliers and distort competition in the retail market. 

Some organizations created special portals to answer some of the most commonly asked questions and ensure the convenience for the user to compare gas prices and conditions for gas delivery. 

It is, for example, the Gasoteka service on the “Ukrainian Energy – UA-Energy.org” information and analytical website launched with the financial support of USAID. Or the consulting center for the population, GazPravda, created with the support of the Ukrainian Industry Association “Federation of Employers of the Oil and Gas Industry”.

In either event, the deregulation of the retail market is bearing fruit, even though it is not very abundant at the moment. The suppliers began competing for the consumers’ attention, who are now free to choose between and change suppliers. The suppliers are creating new, more convenient services and different conditions for gas delivery. The market is still dominated by the “old” monopolists. And yet if the state maintains competition, this situation will eventually change for the better.