Natural gas: how to choose a supplier

Lecture content:

1. Normative principles of the right to change supplier
2. Changing natural gas supplier: evolution and modern practice
3. Conclusions
4. Active links (NPA, standards, resources)
5. Glossary
6. Questions for self-testing

1. Normative principles of the right to change supplier

1. Origin of the right
Changing natural gas supplier is a derivative right and procedure that follows from the basic principle of the market: the consumer should freely choose his supplier.

2. International obligations of Ukraine

In 2010 Ukraine joined the Energy Community. Accordingly, it undertook to implement the norms of the EU energy packages.

3. European energy packages

• The first energy package (1998) – unbundling of gas supply from transportation.
• Directives No. 55/2003 and No. 703/2009 – dedicated to the protection of consumer rights.

Contained annexes that obliged member states to provide measures to guarantee consumer rights.

4. The central role of the consumer

According to European norms, the consumer is the key figure in the gas market. All reforms and changes are aimed at his interests.

The axiom of the gas market: the consumer pays for everything: transportation, distribution, storage, service and for gas as a commodity.
Even if he does not directly pay for transportation or storage, suppliers include these costs in the final price of gas.

2. Changing natural gas supplier: evolution and current practice

1. Why is free choice of supplier important?

• In consumer costs, the largest share is the price of natural gas as a commodity.
• It is impossible to change the transporter, distributor or custodian – these are natural monopolies, the tariffs for which are set by the National Commission for the Regulation of Energy and Utilities of Ukraine.
• The costs of monopolies are automatically included in the price of gas.
• The only tool of competition is the choice and change of supplier.

The goal: to create a competitive environment so that suppliers fight for the consumer.

2. Until 2015: limited right to change supplier

• Only industrial consumers had the right.
• Competition took place through discounts from the marginal price.
• Condition for switching: no debt.

If there was a debt, the consumer had to pay it or restructure it. Supplying to debtors was a violation of the license conditions, for which the NERC imposed sanctions.

3. Since 2015: expansion of rights

The following have received the right to change supplier:

• household consumers,
• budgetary institutions,
• enterprises financed from the budget,
• religious organizations,
• heat producers.

However, heat producers and religious organizations were actually deprived of this right due to special obligations.

• Budgetary institutions switched to the Prozorro system, concluding contracts in accordance with the Law of Ukraine “On Public Procurement”.
• Household consumers received a real opportunity to change supplier only after the intervention of the Secretariat of the Energy Community.
• In 2017, the issue was finally resolved in favor of household consumers.

The procedure for a full-scale war

Changing the supplier took up to 21 days. The consent of the previous supplier was required. Everything happened through the information platform of the GTS Operator. The current supplier could block the transition in case of debts. Suppliers or regional gas companies had the right to initiate termination of gas supply to debtors.

Challenges during the war

Many suppliers evacuated or stopped working. Consumers were left without a supplier because they could not obtain the consent of the previous supplier. This led to a collapse in gas supply.

NEURC decision: to allow a change of supplier without the consent of the previous one.

• The change period is from 3 to 21 days.
• The system simplified life for consumers, but opened up space for abuse.
• In 2023–2024, inspections, trials, and fines were imposed.

Current procedure (after changes to the National Electricity Regulatory Commission)

• The supplier can fix the consumer only on the basis of the contract and agreed volumes.
• The settlement period is a day or a month.
• The supplier changes:
  • on the 3rd day after the application is submitted by the new supplier,
  • but no later than 21 days.

• If the consumer was entered into the register withouthis consent, it is forbidden to demand payment from him.

Today, the system of changing suppliers has become simple and secure. The consumer can actually choose a supplier, and the natural gas market is gradually acquiring competitive features.

Abuses and their overcoming

Some suppliers have begun to lock in consumers without their consent. Result: inspections by the National Commission for the Regulation of Energy and Utilities of Ukraine, court cases, fines (2023–2024).

• Changes in legislation:
  • the fixing of a consumer is possible only on the basis of a contract,
  • it is mandatory to have agreed volumes for the billing period.

• If a consumer is added without his consent, the supplier has no right to demand payment.

Supplier switching system: practice for different categories of consumers

1. Industrial consumers

• Actively use the opportunity to change supplier.
• Usually a framework agreement is concluded, which determines the general terms of cooperation.
• A additional agreement is signed for each billing month, which specifies:

• gas price (according to market fluctuations),
• consumption volume.

2. Budgetary institutions, organizations and state/municipal enterprises

• Work under contracts concluded in accordance with the Law of Ukraine “On Public Procurement”.
• In in such contracts, changing the supplier is impossible due to legislative restrictions.

3. Heat producers

• They are also limited in choosing a supplier due to current price regulations.
• In fact, all heat producers are forced to work with companies of the NAC “Naftogaz of Ukraine” group.

Thus, only industrial consumers actually have flexibility in choosing a supplier. For budget and heat-generating organizations, the market remains largely closed.

Household consumers: formal law and economic realities

• Formally since 2015, household consumers have the right to freely change their natural gas supplier.
• In practice the decisive factor is the price of gas.

Example:

• A household consumer pays 8 UAH per 1 m³ of gas.
• At the same time, the price on the Ukrainian Energy Exchange is about 19,000 UAH per 1,000 m³ (≈ 19 UAH per 1 m³).
• That is, switching to another supplier is economically inexpedient, because the new supplier is forced to purchase the resource at the exchange price.

Why did the monopoly arise?

About 90% of household consumers today receive gas from the gas supply company Naftogaz of Ukraine. This was made possible thanks to the monopoly artificially created in 2021, when other suppliers were limited in access to the cheap resource JSC Ukrgazvydobuvannya.

Uncertain future

• The question of how the gas supply market for household consumers will function after the end of martial law currently remains open.
• Important: the state must decide whether the mechanism of special obligations (PSO) will be preserved, or whether there will be a gradual transition to a fully competitive market.

Restrictions on price changes during the contract

An important aspect that concerns budget institutions, organizations and enterprises that purchase gas through the public procurement system:

• The practice of the Supreme Court confirms:
  – during the contract term, the price for natural gas cannot be increased by more than 10%.
• This rule is enshrined in the Law of Ukraine On Public Procurement and is aimed at:

• preventing abuse by suppliers,
• ensuring transparency of procurement,
• protecting the interests of state and municipal customers.

• If there is a significant fluctuation in prices on the market, suppliers have the right to initiate changes to the contract, but only within the established 10% limit.

This creates additional difficulties for budget institutions during periods when market gas prices are growing rapidly, as suppliers often refuse to fulfill contracts due to their economic disadvantage.

Conclusions

• The right to change supplier is a key element of a competitive gas market.
• After 2015, it became available to most categories of consumers.
• During the war, the procedure was simplified, but required additional control.
• Today the market has stabilized: there is competition for industrial consumers, but for household consumers there is still a de facto monopoly.

Active links (NPA, standards, resources)

• Law of Ukraine “On the Natural Gas Market” (Vidomosti Verkhovnoi Rada (VVR), 2015, No. 27, Art. 234): https://zakon.rada.gov.ua/laws/show/329-19#Text
• Law of Ukraine “On Public Procurement” (Vidomosti Verkhovnoi Rada (VVR), 2016, No. 9, Art. 89): https://zakon.rada.gov.ua/laws/show/922-19#Text
• Gas Transportation System (GTS) Code: https://zakon.rada.gov.ua/laws/show/z1378-15#n18
• Rules for the supply of natural gas: https://zakon.rada.gov.ua/laws/show/z1382-15#Text
• Directive 2009/73/EC concerning common rules for the internal market in natural gas: https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A32009L0073
• Energy Community (official website): https://www.energy-community.org/