In Search of Balance: Who Stands to Gain and Who Stands to Lose from the Latest Review of Electricity Price Caps
23 April 19:31
ANALYSIS FROM 
Ukraine is once again revising the maximum electricity prices for businesses. The current prices took effect on March 31. "Komersant Ukrainian" investigated the reasons behind this latest price revision.
If necessary, it can be done. And fairly quickly. On April 7, in response to market conditions and appeals from market participants, the regulator initiated a procedure to review electricity price caps and called on market participants to join the discussion of the decision. It took less than a week to collect comments and proposals; an open discussion took place on April 17, and on April 23, the NEURC reviewed the relevant resolution at a meeting. As expected, starting May 1, on the day-ahead market and the intraday market, the maximum price cap will be 15,000.00 UAH/MWh—currently in effect only from 5:00 PM to 11:00 PM—and the minimum price cap will be 10.00 UAH/MWh; on the balancing market: the maximum price cap will be 17,000.00 UAH/MWh, and the minimum—0.01 UAH/MWh.
In Search of Balance
The downward revision of electricity price caps (price caps), which took place on March 31, was met with a negative reaction from market participants, particularly those who import or generate electricity. And this reaction, it seems, did not go unnoticed. Critics were further emboldened by the resumption of targeted power outage schedules, which they cited as evidence of a shortage in the power grid. The reduction in price caps was cited as the main reason, as it curbed electricity imports and reduced the economic incentive for its production. Indeed, the reduction in electricity price caps and the simultaneous elimination of gas subsidies for a significant portion of Ukraine’s cogeneration sector became the basis for limiting or even halting production.
In its justification for the new decision, the NEURC also mentioned the existing risk of problems with the proper functioning of Ukraine’s energy system due to shelling, the importance of attracting electricity imports, and the challenges facing Ukrainian gas-fired generation. Daria Orlova, an electricity market analyst at ExPro, agrees that these factors were key in the decision to revise the price caps.
“Gas-fired generation has partially exited the electricity market because, when price caps were lowered and, on top of that, preferential gas prices for small-scale gas-fired generation were abolished, it simply became unprofitable for them to operate during certain hours of the day, mostly during the morning peak hours. The decision to revise price caps is also linked to electricity imports, given that there may be situations where imports need to be rapidly brought in if attacks on the power grid continue. “In other words, these two key factors had an impact: the need to return to the gas generation market and the tools for quickly bringing in imported electricity if necessary,” says the expert.
During the discussion of the NEURC’s draft decision, various proposals were put forward, including some that were diametrically opposed. On the one hand, it was proposed to leave the price caps on the market unchanged. On the other hand, there were proposals to revise the level of price caps taking into account the market value of natural gas and set them, for example, at 28,000–30,000 UAH/MWh, or to abolish price caps on the market altogether.
Representatives of large, and above all, energy-intensive enterprises—that is, those that consume a lot of electricity—do not like the idea of raising price caps at all. Oleksandr Kalenkov, president of the Metallurgprom Association of Enterprises, continues .
“The NEURC says this is a technical component and does not necessarily mean prices will rise. But we understand that, as has happened in the past when the price cap was raised, the overall price level also rose. And there is nothing good about this, because for many of our enterprises, this is a huge component of production costs. For full-cycle metallurgical enterprises last year, for example, it rose to more than 20 percent of production costs. “Now, I think, it’s even higher. And this is abnormal; there’s nothing like this in Europe or anywhere else. In Europe, they’re fighting to keep the price of electricity below 50 euros per megawatt. In Ukraine, just recently—literally in February—the price was 300 euros per megawatt,” the expert notes.
According to him, this leads to the metallurgical industry losing its competitiveness, and production volumes are declining.
Direction: Market Liberalization
Andriy Gerus, Chairman of the Verkhovna Rada Committee on Energy, Housing, and Utilities, supports the current review of electricity price caps and views it as one of the steps toward establishing a fully-fledged market-based pricing system with minimal administrative intervention.This is particularly true given that Ukraine has expressed its readiness to move toward market liberalization as part of its European integration.
For this reason, the decision to revise the price caps is also positive for the market and necessary. This is emphasized by Daria Orlova, an electricity market analyst at ExPro,
“The figure of 15,000 is normal. This doesn’t mean that prices on the electricity market will be 15,000 hryvnias around the clock. It’s just the upper limit. And even now, when our price caps are lower, we see that they aren’t being reached. During the day, prices drop. The same happens at night. So, as a price cap, it’s ‘OK’ for now. And it’s important for the market to continue moving toward gradual alignment with European standards. “Let me remind you that price caps, as they currently exist, are set to be abolished as of May 1, 2027, even before the full integration of our market with those of neighboring countries. Therefore, over the course of this year, it would be desirable to gradually move in this direction,” the expert believes.
At the time, while presenting the already adopted draft law No. 12087-d on the implementation of European law regarding the integration of energy markets at a meeting of the relevant parliamentary committee, Deputy Committee Chair Andriy Zhupanin explained:
“In EU markets, price caps are more of a technical nature and do not serve to limit prices, as they do in Ukraine. The fundamental position of our EU partners was that price caps must be abolished—and abolished even before the markets are integrated. Therefore, price caps will be abolished as of May 1, 2027.”
But market liberalization does not mean a complete absence of state influence on the market. Especially in the context of an ongoing war. Oleksandr Kalenkov, President of the Metallurgprom Association of Enterprises, has this perspective:
“The more market-driven the mechanism, the better, because there is predictability, and you can plan ahead. But in conditions where there is such an unpredictable factor as war, it is certainly advisable for the state to retain its influence and provide electricity consumers with some alternatives. First and foremost, this involves the possibility of importing electricity under long-term contracts and working to expand interconnections to allow for some maneuverability. There should also be incentives and opportunities for investing in alternative power sources. In other words, under current conditions, it is important for the state to retain some role.”
Incidentally, the decision to abandon price caps on electricity, announced as part of European integration, may have exceptions. For example, the NEURC could return to discussing the idea of price caps if a state of emergency is declared in the energy sector. However, this would be implemented as an emergency measure, not a permanent one, as is currently the case in Ukraine.
Author: Serhiy Vasylevych
