Gas market of Ukraine: retail market

Historically, the gas retail market includes gas supply to the consumers who buy gas for their own consumption – household and non-household consumers. There are 12.57 mln consumers in total on the Ukrainian gas retail market, whereas 12.46 mln are household and 111,000 are non-household consumers.

Who are the main participants of the retail gas market?

The main retail gas market participants are:

• gas transmission system operator
• gas distribution system operators
• gas suppliers
• supplier of the “last resort”
• consumers (household and non-household)

The wholesale gas market is analysed in more detail here.

Natural gas supplier (the “Supplier”) is a business entity that is engaged in activities of supply of the natural gas to consumers on the basis of a license.

232 Suppliers operated on the market in the Q3 2020. However, only around 50 suppliers provide their  price offers to the public segment.

A Supplier buys gas on the wholesale market (from the producer, wholesaler, importer, etc.) and resells it to the consumer. As a rule, the networks of the transmission system operator (the “TSO”) and the distribution system operators (the “DSO”) are used for the physical gas flow.

Distribution system operator  is a business entity  engaged in activities on distribution of natural gas to the third parties (customers) through a gas distribution system on the basis of a license.

For gas consumption, a consumer must conclude contracts with the DSO and the Supplier.

Consumer is an individual, entrepreneur or legal entity receiving natural gas based on the  natural gas supply agreement to use it for their own needs or use as raw materials but not for resale.

Consumers are divided into:

• household, e., an individual who purchases natural gas for their own household needs, including cooking, heating water and heating residential premises, excluding professional and commercial activities, and
• non-household, i.e., a legal entity or entrepreneur who receives natural gas on the basis of a contract for supply of the natural gas for their own use or use as raw material but not for resale.

In order to protect the rights of the consumers, the Natural Gas Market Law establishes the supplier of the “last resort”. Consumer can rely on the supplier of the “last resort” in case its primary Supplier is liquidated, goes bankrupt or its license is revoked or suspended etc.

The Supplier of the “last resort” is a supplier determined by the Cabinet of Ministers of Ukraine with no right to refuse to conclude an agreement for the supply of natural gas for a limited period. Supply period may not exceed 60 days and in any case should not last longer than until the end of the calendar month following the month in which the actual supply of natural gas to the consumer by the supplier of the “last resort” has begun.

The Competition Commission selected the LLC “Gas Supply Company “Naftogaz of Ukraine” as the supplier of the “last resort” approved by the Cabinet of Ministers of Ukraine for a period of three years starting from July 2020.

How the gas retail market of Ukraine works?

In order to receive natural gas, consumer shall conclude:

• the natural gas supply agreement with the Supplier and
• the natural gas distribution agreement with the DSO or the natural gas transportation agreement with the TSO in case of connection of consumption units of non-household consumers to the gas transmission system

On the basis of these agreements, the consumers on the gas retail market shall pay for:

• natural gas provided by the Suppliers; and
• transportation to the DSO and/or the TSO

Payments for the gas

With regard to the gas prices, the retail gas market is divided into two segments – regulated (under the mechanism of Public Service Obligations) and unregulated (free market pricing).

The unregulated segment of the retail gas market with free market pricing was implemented together with the Natural Gas Market Law. However, given the significant difference between the market price of gas and the price that consumers paid before the gas market had been introduced, it was decided to implement a mechanism of Public Service Obligations (the “PSO”) in the gas market in order to protect household consumers and certain categories of the non-household consumers (religious organisations, thermal energy producers).

According to the PSO mechanism, special preferential conditions for gas pricing were established for the household consumers until 31 July 2020. Since 1 August 2020, the PSO mechanism has been partly terminated.

The regulated segment of the Ukrainian retail gas market is now represented by the natural gas supply to certain categories of thermal energy producers until 1 May 2021 under the PSO mechanism according to the Resolution of the Cabinet of Ministers of Ukraine No. 867 dated 19 October 2018.

Operation of the supplier of the “last resort” can also be attributed to the regulated gas market segment.

The supplier of the “last resort” supplies natural gas to the consumer in the following cases:

• bankruptcy, liquidation of the previous Supplier
• suspension or revocation of the license for the supply of natural gas from the previous Supplier
• lack of a confirmed nomination from the current Supplier to the point of exit to the gas distribution system to which the household consumer is connected
• the absence of a household consumer (point of commercial of the consumer) in the Register of consumers of any supplier on the information platform of the GTS Operator

The gas price of the supplier of the “last resort” is determined by a separate formula established by the Cabinet of Ministers of Ukraine and is tied to the prices at the German Gas Hub (NCG). This price also implies a mark-up of up to 20 percent of the maximum price that has developed in the natural gas market for the previous month. However, in its bid, the LLC “Gas Supply Company “Naftogaz of Ukraine” offered a markup of 0 per cent.

Payment for transportation

The cost of gas distribution is calculated individually for each consumer on a monthly basis. The amount of the monthly payment depends on:

• the volume of its consumption during the previous gas year – from 1 October to 30 September and
• the distribution tariff approved by the NEURC for each DSO separately

The payment for transportation is divided into regular monthly installments throughout the year, in order to reduce the financial burden on the consumers during the heating season.

Monthly payment = annual volume of consumption/12 months* distribution tariff.

The payment for transportation is required for maintenance of  the gas distribution networks the length of which is almost 350,000 km.

How can a consumer change its Supplier?

From the moment the Natural Gas Market Law came into force, the household consumers had the right to choose any gas supplier. However, this was pointless  until 1 August 2020 since under the PSO mechanism, regional gas suppliers (former “oblgas” companies) provided gas at the lowest price to the consumers whose premises were located within the assigned territory of the supplier with the special obligations.

After termination of the PSO mechanism in August 2020, household consumers, religious organisations and State Enterprise of Ukraine “International Children’s Center “Artek” had to start monitoring conditions offered by the Suppliers who now work under the same rules. In this regard, the NEURC simplified the procedure for transition of a household consumer from one Supplier to another.

Thus, presently a household consumer has to submit to the new Supplier:

• an application for joining the supply agreement (it can be done online)
• passport
• tax identification code
• documents confirming the right of ownership or use of the object (premises)
• other documents if such are identified at the Supplier’s website

However, the new Supplier has the right to refuse the consumer to join the supply contract. Moreover, if, prior to the start of the changing procedure the previous Supplier stopped or limited supply of gas to the household consumer due to their debts, the new Supplier has the right to carry out  supply only after the debt to the previous Supplier has been fully paid off.

The new Supplier shall notify the previous Supplier about the consumer’s intention to change. A supply agreement with the previous Supplier terminates automatically.

Non-household consumers are deprived of such preferential conditions for changing Suppliers. In order to make a change, they need to settle all financial issues with the current Supplier, which includes terminating or suspending the supply contract.

What are the gas price cap and distribution tariffs for the quarantine period?

Temporarily regulated segment emerged in connection with the sharp increase in the gas prices during the heating season in quarantine. The Cabinet of Ministers of Ukraine in its Resolution No. 25, dated 18 January 2021, took the following steps:

• until the end of the quarantine, natural gas is classified as a commodity that has significant social importance, which means the Suppliers have to declare an increase of gas retail price in the State Service of Ukraine on Food Safety and Consumer Protection Issues
• the maximum gas price cap under the contracts between Suppliers and households was set at UAH 6,99 per 1 m³ (including VAT and TSO transportation fees) starting from 1 February 2021 till the end of the quarantine, but no longer than 31 March 2021. The same temporary price cap applies to the supplier of the “last resort”

Additionally, the NEURC has revised and in some cases reduced the tariffs of the DSO for gas distribution, which now generally do not exceed UAH 1,79 per 1 m³.

 Information contained in this article is for the general informational purposes only, does not constitute legal or other professional advice and should not be relied upon as a substitute for specific professional advice adapted to the specific circumstances.