For some, it’s utilities; for others, it’s politics: what’s wrong with electricity prices in Ukraine
3 July 18:16
ANALYSIS FROM 
The Temporary Investigative Commission on the Investigation of Possible Violations of Ukrainian Law in the Formulation and Implementation of Pricing and Tariff Policies in the Energy and Utility Sectors concluded in its report that electricity rates for residential customers in 2023 and 2024 were raised unjustifiably and illegally. At least, that is what its chairman, People’s Deputy Oleksiy Kucherenko, claims. So what exactly is wrong with the setting of prices and rates for households in Ukraine?
The current electricity price for residential consumers is 4.32 UAH per kWh. This rate took effect on June 1, 2024; prior to that, residential consumers paid 2.64 UAH per kWh for electricity.
In fact, a parliamentary investigative commission examined how these rates were set. It examined the involvement of the National Energy and Utilities Regulatory Commission (NEURC), the Ministry of Energy, and the Cabinet of Ministers in this process and reached conclusions, which the commission’s chair, People’s Deputy Oleksiy Kucherenko, shared on his Facebook page.
One of the commission’s main conclusions is as follows: The increases in electricity prices in May 2023 and May 2024 were implemented without economic justification and in violation of several articles of the laws “On the Electricity Market” and “On Prices and Pricing.”
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The Difficulty of Justification
How can one justify something that cannot be justified? Especially when guided by market laws. This general conclusion can be drawn based on discussions with experts interviewed by the publication
“Of course, there are questions for the government: why did they settle on, for example, 4 hryvnias 32 kopecks, when it had previously been 2.64? Why was it set that way, and why did they choose this option? That’s why the commission’s conclusions don’t surprise me. The rates were indeed adopted, let’s say, without any specific justification. It’s also clear why they decided this way: they simply needed to collect more money from the public, because the public will be the ones paying. And then this money could have been used, say, within the “Energoatom” structure, because it is this company that ultimately receives the funds for its own needs. And then… We’ve already heard all these stories about “Energoatom,”” the expert notes.
Volodymyr Omelchenko, head of energy programs at the Razumkov Center, also offers his perspective on the appropriateness of various types of calculations when setting tariffs.
“In the process of setting the price at 4.32 hryvnia per kilowatt-hour of electricity, some calculations were certainly made. But if we set prices based on calculations, we’re going back to the days of the State Planning Committee and the State Committee on Prices. Perhaps the ‘Cost-Plus’ system was used when setting prices. That is, they look at the costs of each energy company, primarily Energoatom, because this company, together with Ukrhydroenergo, supplies electricity to the population. But again, in any case, there are grounds to argue that such rates are unjustified, since they simply cannot be justified. How can one justify prices for residential customers that are 2 to 2.5 times lower than those for industry? That is why populism plays the leading role in setting prices for residential customers,” says the expert.
“Politics and an awareness of the extent of social problems are what currently determine the pricing of electricity for residential consumers,” says Oleg Pendzin, an economist and head of the Economic Discussion Club.
“When setting electricity prices for households, the government is guided first and foremost by political considerations. Second, it calculates how much additional budget funding it will need to finance the needs of everyone seeking a subsidy. Because as soon as you raise the price of electricity, the number of subsidy recipients immediately increases by 25–30%. Instantly. And in each specific case, the government calculates, for example, how much additional tax “Energoatom” will pay into the budget if electricity prices rise. How much in additional subsidies will be needed. In other words, these are completely non-market calculations, because there can be no market calculations in non-market matters. It’s all politics and nothing more,” the expert emphasizes.
The market will justify everything
The experts’ answer to the question of how tariffs—including those for the general public—should be set turned out to be quite predictable.
According to Volodymyr Omelchenko, head of energy programs at the Razumkov Center, these rates can only be justified by a competitive market.
“I myself am not a supporter of a planned economy, and therefore I believe that prices for the public should also be market-based. And the state should compensate the costs for those people who are unable to pay for objective reasons—that is, low-income citizens,” the expert emphasizes.
According to Oleg Pendzin, head of the Economic Discussion Club, if we have declared a strategic path toward Europe, then we must understand and act as they do in Europe.
“What does it mean to sell electricity to the public at below-market prices? It means doing so at the expense of state monopolies—‘Energoatom’ and ‘Ukrenergo.’ In fact, for some strange reason, our entire ideology of state support is based on the principle of helping everyone indiscriminately, regardless of their financial situation. In contrast, the rest of the world operates on the following principle: it allows market forces to determine prices, while providing state assistance to those who cannot afford to pay due to objective financial circumstances. And then all this talk about whether prices are justified or not will disappear on its own. Because prices will be determined by the market,” the expert explains.
And according to Oleg Pendzin, Ukraine and Ukrainians already have both a roadmap and an incentive to move in this direction.
“We need to understand the following: both in the memorandum with the International Monetary Fund and in other programs we have agreed upon—which concern reforms and receiving aid from the European Union—there is this provision about bringing prices and tariffs for the population up to market levels. And we will not become a member of the European Union unless we bring the energy pricing system for households in line with market levels,” the expert states.
The current electricity rate for households of 4.32 UAH per kWh, according to a government decision, will remain unchanged at least until October 31, 2026. As for forecasts, for example, the National Bank of Ukraine (NBU), in its inflation reports this year, while noting the significant need to restore the power grid, diplomatically stated that the likelihood of gradually bringing rates to economically justified levels is increasing. However, the reports also made a point of noting that the NBU is not a tariff regulator and does not have information regarding specific timelines for future decisions.
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