The increase in tariffs on electricity by 40 %, on gas by 280 % and on heating by 72 % has caused public outrage. This is the first time since Ukraine gained independence that Ukrainians have seen such a skyrocketing increase in energy prices. According to the National Commission for Energy Regulation, the main reasons for the increase in energy tariffs for households are the hryvnia’s devaluation, the increase in energy transportation costs and the IMF’s demands. A sharp increase in energy prices for households is merely an attempt by the government to shift the debts of “Naftogaz of Ukraine” onto the shoulders of energy consumers.
After such an increase in tariffs against the backdrop of hyperinflation, unemployment and currency fluctuations, only 20 % of Ukrainian families will be able to pay their utility bills, whereas the remaining 80 % will be in need of state subsidies. It is expected that increasing prices will drive up household debts as a result of defaults in utility payments. The money collected thus by the government will be used to pay state subsidies. Such a situation makes it impossible to carry out public utilities and energy sector reforms. Today, all government efforts are directed at rescuing “Naftogaz of Ukraine”. It is hard to see the reason behind the government’s attempts to save this gas monopolist in view of the fact that “Naftogaz of Ukraine” is loss-making, falls short of its responsibilities, contributed to the hryvnia’s depreciation and blocks energy sector reform. In view of the aforementioned, it would be logical to liquidate the “Naftogaz of Ukraine” altogether and liberalize the energy market.
In addition, the situation in the domestic gas market and “green” energy market has been significantly worsened by the state’s unbalanced fiscal policy. In particular, the Verkhovna Rada of Ukraine introduced amendments to the Tax Code, which provided for an increase in rental payments up to 70 % for “Ukrgasvydobuvannia” company and companies working under joint activity agreements. Also, according to the amendments, “green tariffs” were reduced for renewable energy (the state will not reimburse 50 % of electricity costs to their suppliers if electricity came from renewable energy sources). The Government’s decision to increase rental rates and reduce “green” tariffs will adversely influence the investment climate in Ukraine and increase dependence on energy imports.
Russia has taken advantage of the deterioration of the situation in Ukraine’s energy market by creating a new problem, i.e. beginning “humanitarian” supplies of Russian gas to the so-called DPR and LPR at the expense of “Naftogaz of Ukraine” PJSC, which technically cannot suspend unauthorized activities of “Gazprom”. Russian gas supplies to the rebel-held territories are not only an indication of the Kremlin’s collaboration with terrorists, but it also proves Moscow’s special attitude to this region, which is viewed by Russia as strategically important for the fulfilment of Russia’s goals. Today, Putin’s regime is trying to ensure that enterprises in Donbas keep working, thus creating jobs and providing public services for the population. On the other hand, the Russian government is pushing Ukraine into a political dead-end: while supplying imported gas to the occupied territories without any compensation, Kyiv is running up a conflict “debt” to “Gazprom”, which illegally supplies natural gas to Donbas. Thus, Russia is creating a certain gas reserve in DPR and LPR, which is likely to be used as a resource base for the “economic recovery” of the self-proclaimed republics. The Kremlin’s attempts to remove this issue from the negotiations package in Brussels on March 3, 2015, show Russia’s true intentions: to draw out the conflict in Ukraine to drain Ukraine’s resources.
Author — Natalia Slobodian, Head of Energy Department (ICPS)