The difficult path to integration into Europe

After ten years have passed since the Revolution of Dignity, which arose in response to the authorities’ decision to stop the process of European integration, Brussels recommends starting negotiations with Ukraine. During these ten years, a significant amount of preparatory work was done, which in many ways brought positive results. However, there are still many tasks to be completed.

In its recent report on Ukraine, the European Commission praised our country’s progress in implementing energy reforms. At the same time, quite naturally, during the period since the full-scale invasion, progress is assessed as “certain achievements.” Such results, of course, cause pleasant sensations. But the “entrance exam” must be passed in full - it is necessary to fulfill all the standards and obligations undertaken, to bring the model of Ukrainian energy markets and regulation into line with European rules and practices.

So what remains undone? What needs to be fixed? Regarding the problems of organizing the internal market, the report focuses on the intervention of government bodies and companies in the mechanisms of corporate governance of system operators (that is, in the work of NPC Ukrenergo and the GTS Operator), on the presence of price caps in the day-ahead and intraday market segments (maximum permitted price levels), on the issues of independence of the National Commission, which carries out state regulation in the fields of energy and utilities, and trust in this body as an independent and impartial institution, on the problems of state energy companies NJSC Naftogaz of Ukraine, NNEGC Energoatom, Ukrhydroenergo ", stipulated by the PSO mechanisms (assignment of special duties) to subsidize tariffs for the population.

It should be noted that these remarks did not take Kyiv by surprise - our European partners have been talking about these problems for many years in a row, and the government has repeatedly postponed their solution, citing objective difficulties or looking for excuses, fearing criticism from political opponents. The Energy Community Secretariat has repeatedly drawn attention to the fact that the current price cap model distorts market signals, not to mention the problems of debt as a consequence of excessive market regulation. By the way, the total unsettled debts in the gas market amount to UAH 190 billion, and in the electric power industry - UAH 60 billion . And the very fact of such debts is already a threat to the functioning of markets, and yet there is also a difficult winter ahead.

Over the past months, the Energy Community has been focusing on the need to ensure the independence of the energy regulator (NEURC). The Secretariat even launched an investigation into this matter after the decision to increase water supply tariffs was revised after an immediate sharp reaction from the top officials of the state. Over time, the Secretariat noted that the independence of the regulator is not just a legal requirement, but the foundation on which Ukraine will have to build its future integration with European energy markets.

This, of course, does not mean that Ukraine has no achievements in reforming the energy sector and bringing it closer to the European model. In particular, in recent months there has finally been progress in introducing mechanisms to prevent collusion and abuse by players in the electricity market, the so-called REMIT regulation.

But there are obvious problems with reform. And to some extent they are ideological, and most of them boil down to one simple formulation: the excessive role of the state in the energy sector. The state is trying to maintain and increase both regulatory influence over the energy sector and control over assets, increasing its share of markets and increasing their concentration, with one company occupying an increasingly larger market share.

The hypertrophied role of the state in the energy sector is traditional for Ukraine, because it is, in fact, a rudimentary pattern of the Soviet economic system and consciousness in general. In this model, the state is the sole owner of the assets; there are no market principles for the management and use of these assets, only centralized, although not always justified, planning. And besides this, the state assumes responsibility for ensuring low prices for energy supply services.

Some might point out that there is nothing wrong with a model where the government keeps prices low and controls energy assets. But low prices do not create any incentives for energy saving and energy efficiency, and this, by the way, is another priority of the EU energy policy. With rare exceptions, in Ukraine the state has not been an effective owner of energy assets. A striking example is the state-owned Centerenergo , one of the largest electric power companies, where, despite repeated management rotations, there were constant problems with winter readiness.

At the same time, a democratic electoral system, together with a controlled energy sector, opens up another dangerous ulcer - populism, when politicians compete with each other to see who promises the lowest tariffs. As a result, citizens will not trust the authorities, no matter how low the tariffs are (believing that corruption still exists in the energy sector), but will continue to demand lower and lower prices, no matter what. At the same time, the state must, one way or another, subsidize unreasonably low prices, which not only limits the development of energy companies, but is also partly a source of corruption schemes.

The problem of post-war restoration of the energy sector is closely related to the peculiarities of its regulation. Most domestic energy assets were obsolete and physically worn out even before the full-scale invasion, and the Ukrainian economy was one of the most energy-intensive and energy-inefficient. We enter the winter of 2023-2024 with a capacity deficit, and it is clear that a potential series of air attacks throughout this winter will further deepen the deficit. Consequently, even next summer we risk living with blackout schedules.

Russian energy terror elevates the need to restore the energy sector simply to the rank of imperative. We will simply be forced to build new, modern and efficient energy facilities. But the question arises: who will invest in the Ukrainian energy sector if operating conditions will only contribute to the accumulation of debts, but not investment? It is dangerous to rely on international assistance for economic and energy recovery. These sectors must become attractive for investment, and they are impossible without transparent and effective regulation, which, in fact, is what the EU demands from Ukraine. Only slogans, populism and attempts to manually regulate the energy sector will not ensure this result.

The British-German sociologist Ralf Dahrendorf once said: “Populism is simple, but democracy is complex.” In the same vein, it is much easier to try to influence the energy sector manually than to spend years building a working market system. However, only with efficient energy markets will we be ready to be accepted into the EU. At the same time, moving to Europe and the West in general is an obvious choice for Ukraine. Geographically, we are on the border between the West, on the one hand, and the future raw materials appendage of China, which still has power and is trying to destroy our country, on the other. But to achieve the goal, both the authorities and ordinary Ukrainians will have to get rid of some habits. And energy transformation is a complex change, without which the doors to the EU will not open.