Energy units of gas: innovations in the gas market in Ukraine

Bogdan Kosokhatko, an Energy Lawyer at Pravova Dopomoga Law Firm, commented to the UBR portal on the development and further movement of the Draft Bill No. 2553 "On amendments to certain legislative acts of Ukraine as to introducing into the natural gas market of the accounting practices and settlements by volume of gas used in energy units”.

Below is the full text of the material, part of which was used in the article on the portal.

Why does Ukraine refuse gas accounting in cubic meters?

This is primarily due to international legal obligations assumed by Ukraine in accordance with the third energy package with the European Union. In particular, it is:

  • The Treaty establishing the Energy Community;
  • The Association Agreement between Ukraine and the European Union. 

According to these agreements, Ukraine should follow the road map for the implementation of accounting standards and the introduction of so-called energy units of gas (kWh), instead of the well-known cubic meters to which we are all so accustomed.

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Will the law change the processes of gas sales and consumption?

The bill does not propose or create a globally new approach to the transportation or consumption of natural gas. Analyzing the European practice of natural gas accounting and the procedure proposed by the Ukrainian legislator, one can come to the conclusion that most of the provisions are simply borrowed without their proper transformation into the Ukrainian analogue.

The bill also has a number of conflict rules. In particular, it concerns the terms of enactment of the bill, introduction of gas measurement units, the procedure for further calculation and payment of subsidies, etc.

As for the impact of the bill on business and ordinary citizens, we can highlight a number of the following issues:

  • Now the supplier forms the gas price for the consumer by the following formula: a certain amount of the supplier’s earnings is added to the original cost of gas. Changing the unit of measurement requires changing the above formula, which means that the balance of gas price in the gas market may be upset;
  • Change in the unit of measurement also causes changes in indicators in the software and hardware of the entire energy system, which will create certain inconveniences for business and ordinary consumers, as well as force to spend taxpayers’ money on change of the indicators in the system, re-equipment of gas storage facilities, gas pipelines, etc., which is not provided for in the Law of Ukraine “On the State Budget of Ukraine for 2020”;
  • New gas metering units may also lead to conflicts among gas market participants, as the draft bill does not specify a clear period, within which all companies must switch to the new measurement standard. This may create different metering units between companies and lead to constant disputes over the gas price.

What positive changes will occur in the gas market?

Despite all the risks listed above, the draft bill solves one historic and typical problem for Ukraine - the problem of determining the quality of gas and the corresponding formation of its price. This problem is well known in the oil products market, when, for example, gasoline of different quality is sold at the same price.

The same is happening now in the gas market. Sometimes one and the same supplier can provide gas of different quality, buying some gas cheaper and selling it at the same price.

Of course, there are certain standards of gas supply and quality of gas composition, which every supplier adheres to, but this is not enough to ensure a really high standard. After all, we are talking, first of all, about proper accounting of gas resources, and then about the correct formation of its price.

The problem of different quality of gas in the gas transmission system is painful not only for consumers, but also for suppliers, because in fact, they also buy gas without having enough accurate indicators of its quality, and set the price depending on the prices provided to them by gas producers.

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What problems can arise from the transition to energy units of gas?

In our opinion, there is a gap in the draft bill, as the amendments to the Law of Ukraine “On the Natural Gas Market” suggest that the following phrase be added to the indicators of gas quality: “... nitrogen content, sulphur and other indicators of natural gas consumption.”. As practice shows, the wording “... and others …” usually creates conflicts and additional requirements on the part of regulatory authorities, unknown to business and ordinary citizens.

A change in the unit of measurement may also create certain financial inconveniences, especially with regard to the procedure for obtaining subsidies and mutual settlements.

Now all conditions, documents and calculation formulas are created for cubic meters, but in case of change of this unit it is not known how the calculations and settlements on existing payments will be made.

Now the so-called “transition period” is not allowed by the legislator.

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What are the prospects for gas market development in Ukraine?

The gas market in Ukraine is currently still in the process of its formation and development, but despite this, it is already taking certain steps towards success, as evidenced, for example, by unbundling.

The introduction of clear gas quality parameters is a positive trend, which in theory should lead to greater competition for the consumer, and thus introduce low prices, improve product quality and ensure fair rules of the game.

Of course, the lawyers of our company will keep a hand on the pulse of all the changes in the gas market, and if you are a gas supplier, or intend to become one, we will provide all the necessary information on the organization of your business activity.

If you want to get advice on business activity in the gas or energy market, don’t hesitate to call us!

Publication date: 28/07/2020

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