In Search of Balance: Will the Revision of Price Caps Affect the Stability of Ukraine’s Energy Market?
2 April 18:12
ANALYSIS FROM 
On March 31, the electricity market returned to the price caps that were in effect until January 17 of this year. However, many market participants had urged the regulator to maintain the “raised” price caps. "Komersant Ukrainian" investigated why prices were lowered and what will happen to them in the future.
The January adjustment of electricity price caps did its job: the path for commercial imports from abroad was then fully open, electricity import volumes increased significantly, and the country’s energy balance improved. But back in January, the National Commission for State Regulation of Energy and Public Utilities (NKREKP) predicted that the increase in price caps would be temporary and that a reversal would occur on March 31. In fact, there are few changes. For example, while over the past two and a half months on the “day-ahead” and intraday markets the maximum price cap of 15,000 UAH/MWh applied throughout the entire day, from now on this price will apply only from 5:00 PM to 11:00 PM. During the time periods from 12:00 a.m. to 7:00 a.m. and from 11:00 a.m. to 5:00 p.m., the maximum price cap is 5,600 UAH/MWh, and from 7:00 a.m. to 11:00 a.m. and from 11:00 p.m. to midnight—6,900 UAH/MWh. These changes have drawn both supporters and opponents.
“Pros” and “Cons”
In late March, proposals addressed to the regulator to maintain the electricity price caps in effect at that time regularly appeared in the media. Arguments cited included the need to ensure the stable functioning of the electricity market, the development of distributed generation, the strengthening of the country’s energy security, and proper preparation for the upcoming heating season.
The Federation of Employers in the Fuel and Energy Complex, for example, deemed it appropriate to point out that the level of price caps directly affects the ability of power generation facilities to operate, particularly thermal power plants, which ensure coverage of peak loads and the flexibility of the power grid. They also cited estimates that lowering price caps amid rising costs for fuel, logistics, and equipment maintenance could lead to electricity production becoming unprofitable.
Daria Orlova, an electricity market analyst at ExPro, also believes that the current adjustment of price caps will affect more than just import volumes.
“Under the new restrictions, it may not be profitable for small-scale gas-fired power plants to operate for many hours a day. Moreover, a parallel decision is being made that will prevent some of these small-scale gas power generators from using natural gas at preferential rates. Consequently, this will simply mean less available capacity for the power grid during certain hours,” the expert says.
Those who might view the return to the old price caps positively are, of course, electricity consumers. And, first and foremost, businesses that use a lot of electricity for their industrial needs.
Oleg Krykavsky, Director of Government Relations at ArcelorMittal Kryvyi Rih, explains the logic behind the revision of electricity price caps as follows:
“This fits logically into the overall trend: conditions for distributed generation have improved, hydropower generation has come online, and so on. And so those draconian—so to speak—conditions under which we operated in the winter are gradually being liberalized. In other words, this is a sign of a certain stabilization of the situation in the electricity market.”
Market modeling
While the establishment of higher price caps in January was justified by the need to increase electricity imports and overcome the energy deficit, the reduction of price caps during certain periods of the day can indeed be explained by the stabilization of the situation in the energy sector. But there may be other explanations.
Daria Orlova, an electricity market analyst at ExPro, who believes that the price caps in effect since mid-January should have been maintained and gradually raised, offers the following perspective:
“The problem here is that the regulator fears that someone will manipulate prices, that someone will artificially inflate them. But in that case, in my opinion, it would be better to work directly with these manipulators, monitor the market from that angle, rather than simply imposing price caps on everyone. Because with this approach, it will be difficult for us to integrate into the European market. In the European market, a price cap is simply a technical limit, since electricity is never traded at the price caps set there. The market functions there, and market oversight is in place, which prevents any players from manipulating the market.”
Oleksiy Kucherenko,FirstDeputy Chairman of the Parliamentary Committee on Energy,Housing, andUtilities, has a particular view on setting price caps for electricity. He believes that price caps are an emergency measure that, for some reason, is constantly in effect here.
“Therefore, in my opinion, this market model, under current conditions, brings nothing positive to Ukraine’s economy. Because we have a highly monopolized market situation. And with an entity like ‘Energoatom,’ we need very strict state regulation, primarily of the monopolist that dominates this market. That is, ‘Energoatom.’ Because everything turns into a behind-the-scenes struggle over Energoatom’s cheap resources—who will take more for themselves and who will either resell it at a higher price or use it for themselves at below-market rates. “In other words, everything is completely distorted, and these price caps are an attempt to regulate something, so to speak, without answering the key questions,” the deputy emphasizes.
Given the current generation structure, Oleksiy Kucherenko sees no possibility for any competition in the European sense and advocates for a change in approach.
“I believe that the war itself is pushing us toward an obvious solution: to mix all electricity and operate under a pool model. Let me remind you that until 2019, there was a sort of pool where all electricity was mixed—both in terms of volume and price—and averages were calculated. And accordingly, the resource was distributed more or less fairly. At least, we understood where it was going and at what prices. Moreover, we monitored where the money for this resource was going to ensure it was actually directed toward solving specific energy problems and priorities. But now the money is not being monitored,” the deputy emphasizes.
According to him, the current market model essentially encourages the speculative segment rather than the production segment. And in this market, price caps remain the primary means of regulation.
Incidentally, it is possible that the issue of revising price caps will once again become a topic of discussion in the near future. After April 1, in a market where new price caps will be in effect, various fluctuations are possible, and the regulator, in the event of an unstable situation, will have grounds to initiate a price cap review procedure and, if necessary, appropriately stimulate electricity imports.
Author: Serhiy Vasylevich
