Ukraine is going to launch one of the major reforms in energy sector – the electricity market reform. For this purpose, Ukraine’s parliament will consider soon the adoption of the draft law on electricity market which was supported by the the Energy Committee of the Verhovna Rada on March 22, 2017 for final adoption.
This draft law plays the crucial role for setting up the competitive and transparent electricity market in Ukraine giving new incentives for big investments in electricity industry of Ukraine, and therefore, stipulating the economic growth. We expect that this strategic for all draft law will be adopted soon. What are the reasons to reform Ukraine’s electricity market and what will be the effect after adoption of the new draft law on electricity market?
Preconditions of reforming
The existing “single buyer” model of the electricity market of Ukraine implemented in 1996 has totally depleted itself. Nowadays, we consider many problems – the tremendous amount of cross-subsidies from industry to population (during 2016, the sum of dotation is around Hr 45 billion), lack of competition between electricity generation companies, billions of debts in the whole chain “generation – SC “Energorynok” – suppliers – consumers” (as of February 1, 2017, the debt of consumers was Hr 27,6 billion, the debt of suppliers – Hr 30,1 billion, the debt of SC “Energorynok” – Hr 29,9 billion). The electricity market is monopolized for consumers and they are not able to change the existing oblenergos for other suppliers. Together with that, we consider lack of legislative incentives to make capital investments into generation capacities and electricity networks.
This is just the brief overview of main problems that shall be resolved, and the electricity market law is one of the main tools to make significant changes towards competitive and attractive for investors electricity market of Ukraine.
Preparation of the new draft
Taking into account international obligations of Ukraine to implement the EU Third Energy Package, Ukrainian authority started at the beginning of 2015 the process of drafting the new draft law on electricity market. As of autumn 2015, the work group at the Ministry of energy and coal industry of Ukraine together with the European Energy Community prepared the draft law which defined the EU rules of trading electricity as the commodity, free non-regulated prices for electricity, competition between all market players and quality service for consumers.
After that, it was intensive discussions with market participants, support of the draft law from former prime minister Arseniy Yatsenyuk government and submission to the parliament such draft law with number 4196 in March 2016, Government’s change and necessity to re-submit the non-voted in 1st reading draft law by the new Government. Thus, in April 2016 the new Government re-submitted to the parliament the draft on electricity market №4493.
On September 22 the draft law was voted by the parliament in 1st reading. After that, it was submitted more than 1,300 proposals from lawmakers to the Energy Committee of the parliament which needed a fantastic work to finalize for a short period of time. The head of sub-committee on electricity industry, lawmaker Lev Pidlisetskiy effectively organized the work process on finalization and organized at the Energy Committee the work group consisting of independent and professional specialists.
As a result of very professional work on finalization of draft law №4493, we think that the European ideology of this draft law was totally saved together with the emergence of necessary additions making the process of opening the new electricity market in Ukraine more gradual and feasible.
The important signal is the full support of the draft law №4493 by all our European and international partners including Eu Commission, European Energy Community, World Bank, EBRD, USAID.
Currently, the draft law №4493 is totally ready for final adoption by the parliament, and we expect that such adoption will be soon.
Key features of the new draft law
The key target of the electricity market law draft is to set up the real competitive and liberalized electricity market model from 1 July, 2019. Such model is the classic for EU members and includes completely new for Ukraine market segments – day-ahead market (indicative market prices), intraday market, bilateral contracts market, balancing and ancillary services markets. The day-ahead market will be the main arena of electricity trading. The prices for electricity at this market segment will be determined on the new IT platform by matching offers from generators and bids from consumers presenting the classic supply and demand equilibrium price. Such approach is a common in all EU members, and this is fair and economically justified approach comparing to existing practice with unjustifiable regulated prices (tariffs) for electricity in Ukraine. Talking about balancing and ancillary services markets, they will be technological markets where appropriate generators will provide special services for the transmission system operator (SC “Ukrenergo”) and then economically cover all its costs with no subsidies from the state.
The implementation of EU Third Energy Package in the new draft law prescribes also conditions for competition in retail level though unbundling of existing oblenergos. The new supplier will be allowed which means that consumer receives the right to change the electricity supplier taking into account the most comfortable service package as it is now a common practice with internet or mobile providers.
Together with mentioned, the new draft law also determines transparent rules for electricity export/import, construction of new generating capacities, incentive mechanisms for investments in generation capacities and networks.
The draft law sets up the necessary regulatory basis for further accomplishment of the strategical project for Ukraine – full synchronization of Ukraine energy system with the European continental energy system ENTSO-E which will give serious ground to realize all export potential of Ukraine in electricity and to have new EU guarantees for security of our energy system.
Process of reform implementation
However, in order to achieve the new electricity market of Ukraine, the massive work shall be done after adoption of the draft law till 1 July, 2019.
The Cabinet of Ministers of Ukraine as the first step after adoption of the law shall adopt the detailed action plan of reform implementation with indication of all actions, responsible parties and strict deadlines. As priority measure, the Cabinet of Ministers shall submit to the parliament the bill on settlement of debts at the existing electricity market, and settlement of debts of consumers with ecological protection which are now the biggest debtors (coal plants, water service companies and etc.).
The National Energy and Utilities Regulation Commission (NEURC) will be obliged gradually to liquidate the cross-subsidies and dotation certificates till 1 July, 2019, for that NEURC shall adopt the relevant schedule on reaching the market price since new electricity market.
The important task will be approval of more than 60 secondary legislation – network codes, rules for market segments, methodologies, licensing conditions, typical agreements. It shall be noted that at this time the majority of secondary acts has been already prepared by support of our European and international partners.
Many organizational measures will be obligatory for SC “Energorynok”, NEC “Ukrenergo”, oblenergos. SC “Enrgorynok” will be reorganized into two new enterprises – market operator and guaranteed buyer. NEC “Ukrenergo” will exercise corporatization and certification as TSO in order be compliant with criterias of independence and unbundling under new law. Finally, oblenergos will be unbundled into distribution system operators (network) and suppliers (trading).
Separately, it is needed to indicate technological measures mostly means buying and launching new softwares for balancing and ancillary services markets (administarted by NEC “Ukrenergo”) and day-ahead and intraday markets ( administarted by SC “Energorynok”). At this time, many steps have been done. There is existing project of tender documentation prepared by NEC “Ukrenergo” for their technological market segments, and positions from the side of SC “Energorynok” on possibilities of buying software for day-ahead and intraday markets including option of outsourcing of the European IT platform (for example, Nord Pool Spot, EPEX Spot).
New incentives to invest
The adoption of the new electricity market law will have a positive effect to incentivize investments in electricity industry.
This law is crucially needed for successful privatization of energy assets announcing by the Government and the State Property Fund for 2017. For the potential investors it is important to know what will be the new rules at electricity market in Ukraine in order to exercise calculation of expected income together with possible capital and operation costs. The new law is the clear indicator for investors in energy assets of Ukraine prescribing rules for all market players including generation companies, distribution system operators, suppliers.
Also, without link to privatization, the new law by itself is attractive for further investments to the industry indicating clear and transparent rules for investors, i.e., export and import of electricity, participation in trading at IT platform, providing balancing services, providing services by new market suppliers. Moreover, the law prescribes many incentive investment mechanisms, in particular, tendering for the new generation capacities exercised by the transmission system operator.
Guarantees for renewable energy generation
The new law absolutely saves all existing rates of “green tariff” till 2030.
The important positive novation is the simplified process of conclusion of agreement on buying of all electricity under “green tariff” (PPA). If nowadays such agreement is concluding with SC “Energorynok” after passing all stages of the construction project, under the new law this agreement will be concluded just after receiving of construction permission. It gives for investors in renewable energy the serious guaranty for realization of its projects including guaranty of access for loan capital from commercial banks or IFO.
Together with that, the law has many other guaranties for investors in renewable energy projects in Ukraine.
By summarizing, we may indicate that the impact from such reform will be positive for all – the state will receive liberalized competitive market with new capital investments and conditions for integration with EU internal electricity market, the market players – equal and economically fair conditions for exercising business, the consumer – the best services for reasonable prices. It’s a win-win strategy. For this reason, the draft law on electricity market shall be adopted by the parliament and the following work on its implementation have to be started.
