Maxim Rabinovich: There are all conditions for creating a competitive gas supply market to residents by May 20

Maxim Rabinovich: There are all conditions for creating a competitive gas supply market to residents by May 20

Whether the state creates conditions for competition in the retail natural gas market before the suspension of Public Service Obligations (PSO), which will take place next year - those were the toppics ExPro Gas discussed with Maxim Rabinovich, Deputy Director of Integrated Gas Division of Naftogaz of Ukraine, who also manages Naftogaz Ukraine Gas Supply Company, a retail division of the Naftogaz Group.

To begin with, what are the current positions in the gas supply market and in what segments does Naftogaz of Ukraine, in addition to PSO supply, position itself?

I would start by saying that in the fall of 2018, Naftogaz, while implementing its transparency strategy, created three subsidiaries to work in different areas. Naftogaz Trading operates in the wholesale segment, supplying gas to large industrial enterprises at market prices.

"Naftogaz Teplo" - now becomes a gas supplier to Ukrainian CHPs.

Finally, Gas Supply Company Naftogaz Trading LLC, is supplying natural gas to the retail market for households, as well as for small and medium-sized businesses. Today we have about 200 employees. In the lead-up to the cancellation of PSOs starting May 2020, that will evolve hoseholds into natural gas retail market, our company has focused on the supply of natural gas to medium and small businesses. The latters are the customers with a monthly consumption of about 1 million cubic meters. We have already got about 2 thousand contracts, out of which 1.5 thousand contracts are in Kirovohrad region, and the remaining ones are contracts with consumers from all over Ukraine.

What are the total deliveries?

For the last few months, we have not been selling gas to most business customers, as there is now an irrelevant situation in the domestic market for natural gas, the so-called decoupling. The sale price of gas in the market is almost by 1,000 UAH / thousand cubic meters less than the price of import parity price.

There are several reasons for this. Most of them are external, such as a possible Russia-Ukraine natural gas transit shutdown and the uncertainty associated with it, as well as the large volumes of natural gas in the Ukrainian underground strograges placed by natural gas traders, who are unable to sustain and are ditching their natural gas volumes at any price. All these entails an unfavorable market situation far from fair competition.

Prior to current aggravation in the market, we were selling tens of millions of cubic meters of gas. In fact, sales of Gas Supply Company Naftogaz Trading LLC starting from July 2018 were 50-60 million cubic meters a month. Although, quantitavely there weren't as many contracts then as there are now. Now we are waiting for the situation to return to normal.

We, as part of the Naftogaz Group, support the use of import parity price as a price benchmark. This is a transparent market mechanism. As for working with residential consumers, by the end of the year we will agree on a development strategy, but its full launch depends on the cancellation of the state regulation.

Do you expect the government cease to regulate gas prices for residential consumers after May 1, 2020?

We believe that it should be as stated in the Law on the Gas Market. From January 1, 2020, the price of gas will be shaped by the market, and from May 1 - the special obligations of Naftogaz to supply gas to the gas market will be waived. That is, the market will start working.

And who then will compete with the regional gas distribution companies in the field of gas supply to the residential consumers and households?

In 2015, when planning for the liberalization of the gas market, a lot of attention was paid to regional gas distribution companies as entities, but they did not think at all about new emerging suppliers and, most importantly, about consumers, who would "vote for the supplier" with money. As a result, at the current stage, it is unlikely that any foreign company or a Ukrainian one, even from advanced energy holdings, will gladly enter the consumer market.

For example, the currently regulated trading margin is just extra 2.5% to the purchase cost, which restricts companies from forming an effective development strategy for the retail gas market. In addition, the procedures governing the relationship between gas companies and suppliers, suppliers and consumers are very complicated and imperfect. There are several third-party natural gas vendors who are also trying to work with residential consumers - but they have few clients, because it is not economically viable.

We also have pilot projects, covering hundreds of households, and we can tell from our experience that the transition from one provider to another is a huge burden. First, the process of changing suppliers may take 30 to 110 days. Secondly, and potentially most importantly, there is no so-called DataHab in Ukraine - a platform that works as a sole information center for customers, including a customer credibility system, through which suppliers will be able to quickly obtain entire history of a client.

In addition, it is necessary to determine the responsibility of natural gas regional distribution companies for forecasting gas consumption, and to set up procedures for interaction of small non-residential customers with regional distribution companies. In addition, natural gas retail traders do not have effective tools to deal with debtors.

Who will put all this into order?

Naftogaz sees one of its goals is to promote the development of the retail market. The market should be open and independent of anyone. Our interest is to have a competitive market. We and NEURC created a joint working group to discuss with all interested market participants, and to amend the Gas Supply Rules.

The amendemts relate to reducing the time for a change of a natural gas supplier, technical aspects of gas relations with regional gas wholesale companies and gas distribution facilities, introduction of a combined gas bill (for distribution and supply). The market will have to solve many problems, but we must duely launch it. Our planned measures will help to make the supply of natural gas to residential consumers attractive to new market players, including foreign ones.

In 2015, no one fully thought of what can happen after the cancellation of PSO. Now we have to bridge this gap. Gas suppliers will be the pioneers to blaze the trail in this regard, so that in a while electric power suppliers go a paved way. Creating a DataHub is quite a challenge! For two years on end, Ukrenergo has not been able to choose though a tender for a developer of such a platform for the electric power industry.

Who can then handle this for natural gas business?

They suggested that the NEURC would take over the platform creation. There are various worldwide practices in organizing such platforms. In some countries, the platform is operated by an independent legal entity. In Ukraine, without any doubt, it should be a state entity, at least during the first phase.

Perhaps we will discuss this issue with the Ministry of Information Policy of Ukraine in charge of nationwide digitization. We do not have a consolidated database on the use of resources - water, electricity, gas - so the government can address this as one of the issues of national security.

We are also thinking of proposing to create a sole DataHub for gas and electricity sectors, since because consumers are the same.

How long do you think the development of procedures can take?

By May 2020, to introduce changes is quite real, providing political will, desire, and absence of any obstruction. We have a roadmap for the necessary activities.

Some of the documents could be approved in January next year.

In general, residential customers are worldwidely considered to be very inert and concervative. For example, in Vienna, only 15% of users change supplier each year, after 10 years of demonopolisation, in Germany - 10% -15%. It is unlikely that we will have a transition boom, though at first, obviously, the percentage will be higher.

We received a signal that people are ready to change supplier after the end of the Gas Stock campaign, which we launched before the current heating season. During that campaign we sold only 55,000 contracts. To understand and compare, there are approximately 13 million households in Ukraine. We had less than a month to promote this product, and many regionan gas wholesale companies would not have offered this option to their customers, if there had been no information from Naftogaz and promotion by a number of progressive regional gas wholesalers. This number of contracts would have been available either. Of course, if we had continued this promotion, we could have sold more.

Many consumers say they are ready to change their suppliers, but they need simplicity of procedure and guarantees against the threat of being disconnected from the local gas pipeline network (as the technical condition of the vast majority of consumers is not backed by a regulation). Among our several hundreds of household customers, everyone has had problems while switching suppliers, and they all understand that they can still be disconnected from gas pipeline. This is the kind of unbundling we have to do to regarding regional gas distribution facilities and regional gas wholesalers.

Since 2015, about 30-40% of commercial customers have left regional gas wholesalers, and the latters understand that it will be the same with the household customers. Their reluctance to cede their market share can be understood. But, on our part, we have to make the market competitive so that a consumer win, and the industry become attractive for investment.

In early December, the government decided to set a fixed price for gas for the population in January-April 2020. So, after the cancellation of the PSO, the state still wants to continue to regulate the market, only in a different way?

In fact, it is not. As natural gas price regulation is cancelled from January 1, 2020, the market will become variable - prices will change monthly, and it is difficult to predict what they will be. On the one hand, the time is quite favorable for reforms - prices are much lower than last year. On the other hand, the situation is affected by the uncertainty about the transit of Russian gas.

Naftogaz understands that people need to be offered some tools to keep them from sharp price hikes. The company has chosen a rather effective instrument under such conditions – supply of gas under forward contracts for the first quarter of 2020, which was contracted from European partners. However, the market is, first and foremost, an opportunity to choose. Therefore, Naftogaz offers two gas payment options for customers from January next year: a fixed quarterly price, or a monthly price.

I note that the International Monetary Fund (IMF) has agreed to this approach. Critics of the initiative say the proposed price is too high… The proposed price is the price we enter with into forward contracts in Europe for the first quarter of 2020. This is the hedge we offer to residential consumers. Who can quote a price three months in advance? There looms a possibility that Russian natural gas transit is unlikely to be in January 2020, so the market will have to respond to it.