Energy Security Project Analysis of final TSO, dispatch, DSO and USS tariffs approved by NEURC for 2023

The tariffs for transmission system operators (TSOs), dispatch, distribution system operators (DSOs), and universal service suppliers (USSs) have been approved, with a focus on cost savings and a gradual increase. The timeframe for tariff approval procedure for 2023 began in September 2022, when the Ukrainian Energy (UE) published draft TSO and dispatch tariffs for 2023. NEURC held public hearings and approved the draft tariffs for discussion, and the Ministry of Public Services (MP) submitted their comments and recommendations to NEURC. NEURC then held a public hearing for the approval of recalculated tariffs based on MP's comments, and finally approved the final tariffs for 2023 on December 21, 2022. The approved tariffs for 2023 include a gradual increase for TSO and dispatch tariffs, while DSOs and USSs tariffs are only approved for the first quarter of 2023. The tariffs are as follows: TSO - 636.17 UAH/MWh, dispatch - 207.63 UAH/MWh, DSO 1 class - 168.72 UAH/MWh, DSO 2 class - 985.46 UAH/MWh, and USS - 95.31 UAH/MWh. The assumptions for tariffs calculation include parameters of tariffs items, such as TSO, dispatch, DSO 1 class, and USS. The tariff base for 2023 is 106,135 million MWh, with a decrease of 26% for TSO and dispatch tariffs, and 5% for USS tariffs. For DSOs, NEURC applied a normative decrease of 40% for the 1st class and 30% for the 2nd class. The approved tariffs for 2023 are compared to the current tariffs for 2022, with a difference of 29% for TSO, 20% for TSO green metallurgy, 37% for dispatch, 41% for DSO 1 class, 27% for DSO 2 class, and 17% for USS. The major factor of tariffs' increase relates to decreasing tariff base and an increasing need for ancillary services for balancing the energy system. NEURC's approach for tariff calculation in 2023 was mainly oriented on cost savings and a gradual increase. The Regulator applied factors for smoothing tariff increase, such as fixing depreciation for DSOs at the 2022 level, fixing salaries for TSO, dispatch, and USSs, 3% return on RAB new, applying CPI/PPI at a lower rate than actuals, postponement of loans repayment for UE, and fixing prices for ancillary services at 2022 level. The impact on end-user prices in Q1 2023 is as follows: 2% for end-users at the 1st class DSO tariff and 4% for end-users at the 2nd class DSO tariff. The energy component is calculated as average DAM price in September 2022. Starting from Q2 2023, the impact on end-user prices is to be higher, which should be considered in pricing strategy of consumers. The Household (HH) price covers only TSO tariff and 83% of DSO tariff. The full cost-reflective energy price would have been 5,082 UAH/MWh. Thus, 17% of DSO tariff, USS tariff, and energy component would have to be covered through the HH PSO mechanism in the size of 3,803 UAH/MWh. The CMU should find additional sources to cover the deficit by changing the existing PSO mechanism. NEURC approved a gradual increase of TSO tariff by 29% from 345.64 to 445.18 UAH/MWh. The major impact on tariff surge is a decrease in tariff base from 144 TWh in 2022 to 106 TWh in 2023 or 26%. The final tariff approved by NEURC is 15% lower compared to the initial NEURC proposal due to the following factors: RE support decreased from 30 BUAH to 27.5 BUAH, finance costs were recalculated considering restructuring of UE loans from state banks and KfW, and adjustment of RR was properly done, in line with ESP recommendations, considering results of 2020 and 2021 regulatory audits.