IMF urges Ukraine to deepen energy market reforms alongside gradual PSO phaseout
The foundations of Ukraine's energy markets, reformed in 2019-2021, require further development of market mechanisms alongside the gradual phaseout of public service obligations (PSOs) imposed on state-owned companies, according to an October technical report by the International Monetary Fund (IMF), "Assessment of Energy Subsidy Fiscal Cost and Reform Options."
The IMF proposes that Ukraine deepen energy market reforms alongside the gradual phaseout of public service obligations (PSOs) for state-owned companies. Key areas for improvement include competition, liquidity, physical balancing efficiency, and nuclear generation as a stabilizing asset in the electricity market. The report highlights that Naftogaz's dominance in production, wholesale, and retail segments restricts competition, reduces liquidity, and weakens efficient price formation.
While legal unbundling of Naftogaz exists at the transmission level, operational links and coordination roles across production, storage, supply, and distribution create implicit advantages over other market participants. The IMF suggests lifting the ban on gas exports to encourage new companies and strengthen competition. Regarding Naftogaz's consolidation of regional gas distribution system operators under Gazmerezhi, the report advises a postwar modernization roadmap focusing on unbundling to improve transparency, reduce technical losses, upgrade metering systems, and ensure cost-reflective tariffs.
The electricity market needs reforms to move towards full competitiveness, including reducing price volatility, restoring financial stability, and modernizing distribution networks. The report recommends developing a liquid long-term market for hedging and investment, establishing structured access to nuclear generation, and implementing mechanisms similar to France's ARENH model.
Clearing legacy debts and strengthening governance are initial steps, potentially requiring financial restructuring and stricter rules to prevent new arrears. Enhancing flexibility and developing ancillary services markets require competitive reserve markets that allow participation by distributed generation and demand response.
For distribution networks, the transition to distributed generation necessitates flexible, digitalized grids supported by smart-grid technologies and advanced metering systems. A strong, independent regulator overseen by a strong regulatory framework is crucial for both gas and electricity markets. The IMF estimates that energy subsidies, including PSOs, cost 3.7% of GDP annually in 2024-2026, with electricity subsidies accounting for 1.8% of GDP and gas subsidies for 1.4%.
Written by urgent.news from Interfax-Ukraine's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
