Winter is approaching. How might electricity prices for businesses change?

On Thursday morning, November 28, the Russian army launched yet another strike on Ukraine's energy infrastructure. This marks the 11th large-scale missile and drone attack on the Ukrainian energy system since the beginning of the year. The article by RBC-Ukraine discusses the implications for the energy sector and whether electricity prices for businesses might change with the onset of winter, — in detail.

Due to the ongoing conflict, Ukraine has already lost over 40% of its thermal power plants, resulting in a shortage for both the population and businesses.

According to the Kyiv School of Economics (KSE Institute), direct losses in Ukraine's energy sector due to the war have already exceeded $8 billion, with cumulative losses considering economic impacts reaching over $56 billion. The recovery of the energy sector will require years of investment and coordination with international partners.

Despite efforts to restore it, fully rehabilitating damaged facilities is impossible.

To ensure stable energy supply, Ukraine has been forced to import electricity, including from European markets.

As per the Ministry of Energy, as of November, imports account for about 5% of the country's total energy consumption, although during peak periods this figure can rise to 10-12%. However, imports only partially address the problem. With the arrival of winter, these challenges have intensified.

The winter period is traditionally characterized by increased energy consumption, particularly for heating and lighting needs. This factor, combined with generation shortages, increases pressure on the energy system and drives up prices.

1

How is the electricity price for businesses determined?

In Ukraine, electricity pricing operates within a free market framework, governed by the principles of supply and demand. Electricity suppliers do not arbitrarily set prices; they rely on market pricing mechanisms.

Price parameters are determined based on trading in market segments such as the day-ahead market (DAM), intraday market (IDM), and balancing market.

In the DAM, price offers from demand (consumption) and supply (generation) meet, allowing the market price to be established. The balancing market, in turn, is used to correct deviations in real-time when actual consumption or production differs from forecasted levels.

Price caps are in place on these markets—government-regulated boundary prices to prevent sharp cost fluctuations for consumers.

Price caps are particularly relevant for the balancing market, where costs for imbalances between forecasted and actual consumption or generation are calculated. For instance, if a business consumes more electricity than ordered, the supplier must compensate for this shortfall at the balancing market purchase price, which is always higher than DAM prices. Conversely, in the event of unexpected outages, electricity purchased by suppliers but not consumed is sold on the balancing market at a price lower than the DAM price. All of this creates additional costs when supplying electricity to consumers.

2

Factors influencing prices with the onset of winter

The main factors determining electricity prices as winter begins include:

Consequences of shelling. Each new attack on the energy system not only damages infrastructure but also provokes uneven energy distribution, requiring costly balancing measures. For example, in November 2022, daily attacks on the energy system resulted in a loss of up to 1,500 MW of capacity on average per day, increasing balancing volumes and costs by 40-50%.

Increased demand during the heating season. The heating season typically leads to higher electricity consumption, particularly in industry and the service sector. Forecasts indicate that in December, peak electricity consumption could exceed 22 GW, nearly 10% more than early autumn levels.

Generation deficit. The generation deficit becomes more pronounced in winter as household needs add extra load. Despite imports, there remains a lack of necessary domestic generation capacity, especially during peak consumption hours, which has decreased by 30% compared to pre-war levels.

Market price caps. The regulator has temporarily capped maximum prices in the market, but experts predict these caps may be adjusted to European levels, leading to further price increases.

Imbalance risks. The overall volume of imbalances in the energy system has significantly increased due to ongoing shelling of generation facilities and networks, which will impact final prices for businesses.

Compensation for imbalances is carried out through the balancing market, where prices are typically much higher than those in the day-ahead market.

To avoid significant imbalances, consumers are advised to enhance energy planning. Implementing consumption forecasting models can help reduce the gap between ordered and actual volumes.

Additionally, investing in autonomous energy sources, such as generators, solar panels, and storage systems, can reduce dependence on the grid during crises.

It is also crucial to engage professional energy resource suppliers, as companies with extensive market experience are better equipped to forecast risks and can offer more stable supply conditions.

3

Electricity imports: can this be a solution?

One of the tools for ensuring stable energy supply is electricity importation. However, the cost of imported electricity can significantly exceed the average domestic price. In October 2024, the average import price from European markets was 200-250 euros per MWh, compared to the weighted average price of electricity in the Ukrainian day-ahead market of 100-150 euros per MWh.

Another significant limitation on imports is the technical infrastructure. The capacity of interconnections between the Ukrainian and European energy systems remains limited. As of December 1, 2024, the maximum capacity for importing electricity from EU countries was increased from 1.7 to 2.1 GW. In comparison, the peak winter demand for Ukrainian businesses can exceed 10 GW.

Moreover, imports cannot provide significant pricing flexibility for end consumers. Suppliers purchasing electricity at European market prices must factor in its high cost when setting tariffs for businesses. At the same time, the availability of imports allows for compensating for shortages during critical moments, making it an important complement to the overall energy supply model.

4

For Ukrainian enterprises looking to utilize imported electricity, it is crucial to establish agreements with suppliers who have access to the European market. However, this option is often only available to large companies consuming substantial volumes.

What does this mean and how to prepare

For businesses, rising electricity prices certainly represent an additional financial burden, especially during high energy consumption periods. Therefore, it is essential to closely monitor the terms of contracts with suppliers.

It should also be noted that most suppliers operate based on DAM prices with an additional percentage (DAM+%), rather than a discount (DAM-%), as was previously the case.

If the tariff is calculated using the "DAM+%" formula, it is important to understand whether this markup reflects actual market conditions. Access to official data from the Market Operator can help compare offered tariffs with average market indicators and avoid overpricing.

To be prepared for winter, businesses should consider entering into long-term contracts with fixed terms or transitioning to energy-efficient technologies that reduce consumption. It is also vital to have a contingency plan in case of emergency power outages, as blackout schedules can disrupt production processes.

Another issue is the transparency of suppliers' operations. To determine whether a supplier is inflating electricity costs, clients should pay attention to how prices and discounts are formed, as well as the conditions of settlements. For instance, if a company offers a tariff lower than the market DAM price, it may indicate risks of unstable supply or the risk of revising terms every month, as companies have limited discounting options in energy shortage conditions.

5

In summary, it can be stated that the cost of electricity for businesses in Ukraine is likely to rise in the coming months due to market shortages caused by military actions and the winter period of increased consumption. The deficit affects both electricity generated domestically and imported electricity, which faces limitations at interconnections with the European energy system.

Furthermore, significant losses in generating capacity and increased imbalances are forcing energy companies to change their pricing approaches. The discount model, where electricity prices for large consumers were formed based on DAM-%, is gradually becoming obsolete. Increasing risks and instability are prompting the market to shift to a DAM+% model, where a premium is added to the base price to account for shortages, risks, and imbalances.

This means that businesses should prepare for increased electricity costs and reconsider their energy consumption management strategies. Effective planning, implementation of energy-saving technologies, and the use of alternative energy sources are becoming not only a guarantee of stability but also a means to minimize financial losses.