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The government hopes for a solution that provides for the least increase in tariffs, that is, the option "Hub-."
Ukraine's Cabinet of Ministers has suggested three main scenarios for calculating prices of natural gas for households.
The first is "Hub+," which means the price of natural gas at the German hub plus transportation costs. This is the most expensive option, which the government is trying to avoid, the Ekonomichna Pravda online newspaper wrote on July 31.
With a mark-up of 2.5% of VAT (for suppliers with public service obligations, PSO), the gas price will reach UAH 10,259 (US$382) per 1,000 cubic meters. With a mark-up of 10% of VAT, it will rise to UAH 10,945 ($407) per 1,000 cubic meters.
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According to the law, a seller's trade margin cannot exceed 2.5% of the price at which suppliers bought fuel from National Joint-Stock Company Naftogaz of Ukraine.
Ukraine's Energy and Coal Industry Ministry proposes limiting the retail price of gas sales by an extra charge of no more than 10%, so that consumers could choose from available gas suppliers only the one that offers the lowest mark-up.
The "Hub-" option means the price of gas at the German hub minus transportation costs.
The price of gas for households with a minimum mark-up and VAT will be UAH 7,765 ($289) per 1,000 cubic meters. With a mark-up of 10% of VAT, it will grow to UAH 8,268 ($308) per 1,000 cubic meters. This is the option with the lowest price.
The "Hub0" option means the net price at the German hub. The price of gas for households will reach UAH 9,215 ($343) per 1,000 cubic meters, while it will be UAH 9,825 ($366) per 1,000 cubic meters with a mark-up of 10% of VAT.
The Cabinet hopes for a solution that provides for the least increase in tariffs, that is, the option "Hub-."
The government's first argument against a sharp rise in gas tariffs is that the number of those who receive subsidies for housing and utilities services will grow, triggering an increase in budget expenditures.
If in 2017 some 60% of the population, or 7.2 million households, received subsidies, their share could increase to 72%, or to 8.6 million households, respectively, in case of gas price hikes.
Under such a scenario, budget spending on their subsidies will grow from the planned UAH 71 billion ($2.6 billion) to UAH 79.2 billion ($2.9 billion) – UAH 115 billion ($4.3 billion), depending on the option.
The second factor is a rapid accumulation of households' debts for consumed gas.
The third factor is "the market price goes after everything."
This is the way the Ukrainian government is trying to convince the IMF that first of all, it is necessary to complete Naftogaz's unbundling by the end of 2018, introduce daily balancing, reduce the number of subsidy recipients to 25% or to satisfy the needs of consumers with domestic gas, and only then raise the gas price to the market level.