Water rates are rising in Ukraine: where will the money go?
20 May 14:06
ANALYSIS FROM 
In Ukrainian cities and towns, local authorities are preparing to raise water rates. They cite rising electricity costs for local water utilities as the primary reason for this move. "Komersant Ukrainian" investigated who stands to gain and who stands to lose from these decisions.
The central government recently delegated its authority to adjust water rates to local governments. And it did so not only because raising rates is a very unpopular move. It’s simply that local water utilities need financial resources to pay for electricity and even settle their electricity debts. The government has also considered how to quickly and efficiently transfer funds from the accounts of local electricity consumers, who have been accumulating debts for years.
Debt Knot
The Cabinet of Ministers is preparing systemic solutions to stabilize payments in the electricity market. Government head Yulia Svyrydenko made this statement a week ago and explained:
“The first step is to launch a special mechanism for supplying electricity to district heating companies, water utilities, and state-owned mines. This will help stabilize payments and stop the accumulation of debt. The mechanism for distributing funds to district heating companies is also changing. A portion of the payments must automatically be directed toward paying for electricity.”
The head of government backed up these intentions with a compelling argument: “Resolving the debt issue is critically important for getting through the coming winter without disruption.” And a great deal of debt has accumulated in the electricity market in recent years. It has become a veritable “debt knot.” Daria Orlova, an electricity market analyst at ExPro, explains who owes money to whom.
“One of the biggest debtors is Ukrinterenergo. This is a state-owned company that acts as a supplier of last resort. That is, it is the company that supplies electricity to these water utilities, state-owned mines, and a number of state-owned companies that are unable to pay for electricity. They accumulate debts to Ukrinterenergo, and then Ukrinterenergo accumulates debts to Ukrenergo. Meanwhile, Ukrenergo’s largest debt is owed by the state-owned company Ukrhydroenergo. There are also significant debts owed by thermal power generation companies—namely those in the DTEK group and Centrenergo—as well as by combined heat and power plants, such as the Kyiv CHP and Kharkiv CHP, which are typically large CHP plants in cities. “These companies need to prepare for the heating season and carry out repairs, because the facilities of these very generating companies suffered the most this winter,” the expert explains.
The debt of balancing market participants to Ukrenergo has already surpassed 46 billion hryvnias, which is considered one of the highest figures since the market’s inception. Ukrenergo itself owes not much less. Daria Orlova continues.
“Ukrenergo is the settlement administrator for the balancing market. And as of early May, Ukrenergo already has 46.4 billion in debts. This is a record figure right now, and it’s just growing steadily. Accordingly, the amount of Ukrenergo’s debt to market participants is growing at a similar rate. In other words, the debt owed to Ukrenergo was 46.4 billion, while Ukrenergo’s debt to market participants is 31 billion hryvnias. And this problem needs to be resolved so that, at some stage, payments for electricity can begin,” the expert notes.
Judging by government officials’ plans, the key to untangling this entire debt knot is, first and foremost, water utilities and district heating companies. But this will not be a simple matter, particularly because a significant amount of debt has accumulated. Oleg Garnik, an expert on housing and utilities at the Analytical Center of the Association of Ukrainian Cities, explains.
“The debt of heating companies for consumed natural gas is caused by the state’s failure to compensate for the difference in tariffs and amounts to over 110 billion hryvnias. The debt of water supply and wastewater treatment companies for electricity amounts to more than 10 billion hryvnias. These debts are caused by an imperfect tariff policy in the housing and utilities sector,” the expert emphasizes.
Moreover, current tariffs have not been revised for a long time and are now far from economically justified levels. Oleg Garnik continues.
“Tariffs for heat and hot water supply services for residential consumers have been ‘frozen’ since the beginning of 2022. As a result, the tariff for these services currently amounts to only 60% of the economically justified level. The situation is similar for water supply and wastewater treatment companies, where the NEURC has not changed tariffs for these services for its licensees since 2022, resulting in water supply companies’ tariffs amounting to about 65% of economically justified levels. At the same time, the state does not reimburse companies for the tariff difference, which is estimated at over 80 billion UAH,” the expert explains.
He noted that the situation is complicated by the need to allocate financial resources to address the consequences of destruction and damage to the companies’ infrastructure caused by the Russian Federation’s armed aggression. Funds are also needed to implement community resilience plans. Thus, according to Oleg Garnik, enterprises simply lack the resources to fully repay their energy debts.
But if any funds do become available, government officials already have a plan for how to obtain them without unnecessary complications. As a reminder, the government plans to change the mechanism for distributing funds to heating and power companies so that a portion of payments is automatically directed toward paying for electricity. But how well will this plan work? Here is the perspective of Daria Orlova, an electricity market analyst at the ExPro agency.
“In fact, many similar mechanisms have already been devised, such as special accounts from which funds were supposed to be withdrawn to pay for electricity. But judging by the debts currently in the market, these mechanisms never actually worked. I don’t know if the option proposed by the Cabinet of Ministers will work. There is hope. But let’s take a hypothetical water utility: if their tariff is underfunded and they lack funds for electricity, this will lead to a constant accumulation of debt. Perhaps they will pay for electricity but won’t pay for other services or modernize their networks. The same applies to heating utilities and state-owned mines, which also lack adequate funding,” the expert notes.
Oleg Garnik, an expert on housing and utilities at the Analytical Center of the Association of Ukrainian Cities, also does not consider the automatic allocation of funds for electricity payments to be an optimal solution.
“Given the difficult financial and economic situation of heat and water supply companies, as well as ineffective tariff regulation in this sector, automatically redirecting a portion of the funds received from consumers may partially solve the problem for individual energy suppliers, but it will complicate the situation for heat and water supply companies. They will be unable to pay salaries to employees, pay taxes, or pay for spare parts or equipment necessary to implement approved sustainability plans,” the expert emphasizes.
According to him, the Association of Ukrainian Cities insists that the problem requires a systemic solution, rather than a piecemeal approach that solves the problems of some at the expense of others.
Tariff Decision
Local water utilities have already been given a chance to alleviate their own problems and at least somewhat improve their financial situation. This happened because, in February of this year, the Verkhovna Rada adopted a decision to transfer the authority to set water and wastewater tariffs to local governments. They will exercise this authority locally on a temporary basis—until the end of martial law plus one year. Andriy Gerus, chairman of the parliamentary committee on energy and housing and communal services, explained the logic behind the decision as follows:
“Cities will be able to make their own decisions. Some will raise rates, some won’t, and some will allocate funds from the budget. But the situation where these rates haven’t changed since 2021 is probably not quite right, because we understand there’s a huge problem with water utilities. While this step may not completely solve the problem, it will begin to address it in part.”
In fact, the process of resolving the issue has already begun. The National Commission for State Regulation in the Spheres of Energy and Public Utilities, which retains oversight functions in this matter, approved on May 5, by its resolution, the Procedure for Setting Tariffs for Centralized Water Supply and Centralized Sewerage Services. And local water utilities have already begun actively informing consumers of their intention to change tariffs for centralized water supply and centralized wastewater disposal. At the same time, they are even inviting consumers to express their wishes and comments. Some have limited themselves to “dry” informational notices, while, for example, in Kryvyi Rih, Serhiy Markov, director of the municipal enterprise “Kryvbasvodokanal,” issued a statement justifying the tariff review:
“The current water and sewerage rates were set in 2021. Since then, electricity prices have risen by 270%, fuel by 453%, and imported chemicals and spare parts by 122% due to currency exchange rate fluctuations. Therefore, unfortunately, in order to prevent the company from shutting down due to non-payment of electricity bills, we are forced to bring the rates in line with production costs,” noted the head of the water utility, adding that this, unfortunately, means an increase in rates.
He also reported that more than ten of Ukraine’s largest water utilities have already announced rate increases effective June 1: from Kyiv, Dnipro, and Zaporizhzhia to Uzhhorod, Ternopil, and Lutsk. And the reasons for the increases, according to the official, are the same across the board.
Although the rates of the increases vary. For example, in Odesa, residents are facing a 184.5% increase in fees for centralized water supply (from 17.916 UAH to 50.964 UAH per cubic meter, including VAT) and a 147.6% increase for wastewater disposal (from 17.244 UAH to 42.696 UAH). In Uzhhorod, the total projected increase in rates could be around 128% for residents and 31% for other consumer categories. In fact, there are currently no signs at the local level of any intention not to raise water supply rates.
