“Of all the liars in the world, sometimes the worst are our own fears.” – Rudyard Kipling
What we were afraid of – just did not happen. On July 1, Ukraine launched the new electricity market. The skeptics hit the panic button: the regulatory framework is not ready yet, consumers are not ready, sellers are doomed to fail, the critical software for daily trading and data sharing between market players will crash.
The country has been living for a month with the new power market. Let’s do a quick check: what works and what does not.
Myth 1. Prices will shoot 1.5 or even 3 times
They did not. The electricity market has been launched in safe mode. They introduced the so-called price caps for 9 months to avoid possible price surges. Prices were limited in all market exchange segments. For the first week of trading, the weighted average cost was UAH 1.619/kWh. It is equal to the June wholesale price. However, bid prices ranged from UAH 1.51 to 1.63/kWh, which is fully consistent with global marketing practices.
But this is only the beginning. The final price for industrial consumers can be reduced on account of transmission tariff of Transmission System Operator (NPC Ukrenergo). If we review only PSO compensations to renewable electricity producers in connection with new production volumes for the second half of the year, the tariff can be reduced from UAH 0.3474 (UAH 0.3121 in August) to UAH 0.23/kWh (approximately).
Myth 2. Only private producers will benefit from the new market model
The state-owned nuclear and hydropower companies are already earning more. For the first month in the market, they sold electricity at a higher price: Energoatom – by 25%, and Ukrhidroenergo – by 56%.
In turn, in the first half of the year tariff of Ukrhidroenergo was UAH 0.704/kWh. As per calculations of the regulatory authority and the experts, the electricity selling price of Ukrhidroenergo in the new market will be more than UAH 1.10/kWh. The Cabinet of Ministers has already estimated an increase in profits by more than UAH 800 mln towards the end of the year. Notwithstanding the obligations imposed on Energoatom and Ukrhidroenergo under the PSO, which have kept the lowest electricity tariff for the population in the EU.
However, the price of electricity at TPPs of a private company DTEK decreased by 12%, as compared with the first half of the year. Competition at the market has escalated.
Myth 3. The new market model will not create the preconditions for a competitive market
Everybody is in search of the best deal. The indicative situation occurred on the first day of trading. The state-owned Centrenergo (operates Vuglegirska, Zmiivska and Trypolska TPPs) offered UAH 2.3/kWh at bidding on bilateral agreements, while the price on the day-ahead market was UAH 1.59/kWh. There were no buyers for the lot offered by Centrenergo.
July 1 became a landmark for the entire industry. On this day, the first in the history of Ukraine electricity supply from Europe (Slovakia) via the Burshtyn Energy Island took place.
It was reported that for 17 days almost 97 million kWh of electricity was imported, of which 92.675 million kWh from Slovakia and 4.241 million kWh from Hungary.
In fact, Burshtyn Island is already part of the European energy market, where international trading activities are conducted. From here, export continues to countries where prices at certain hours are higher than in Ukraine. Also, Ukraine is already transiting electricity from Slovakia to Hungary and Romania. And the Transmission System Operator receives revenue for the use of transmission networks.
More importantly, the stable supplies of imported electricity come to the United Energy System of Ukraine from Belarus, namely 6.8 mln kWh for the period.
Myth 4. Software and market players are not ready
It worked. Since June 30, the SE “Market Operator” started registering and executing trades among independent buyers and sellers of power on its electronic platform on the day ahead market. This is the main and most liquid power exchange segment. Generating companies, commercial and industrial consumers, traders buy and sell power on a competitive basis. The intraday and balancing markets function similarly.
Other market segments also began to operate without failures. The state-owned producers sell electricity under bilateral agreements at the site of the Ukrainian Energy Exchange.
Settlements are made continuously. No interruptions in power supply occurred since the launch of the new market. Skeptics and naysayers went back to their FB blogs empty-handed. Imperfect as it may be, the New Market has arrived in Ukraine and it is here to stay.
Myth 5. Ukraine will not be able to fulfill obligations to European partners
The international financial partners of Ukraine, as well as many other local opinion makers, exhibited a perfect “Schrödinger’s cat” situation. The launch of the new market was simultaneously possible and impossible depending on who you ask – “Quantum superposition theory” at its best.
The certainty and confidence in the new market reigned supreme again a week after the market launch. European Union donors announced the allocation of a new tranche of macro-financial assistance from the EU in the amount of 500 million euros.
Ukraine’s commitment to reform is clearly stated in the association agreement between Ukraine and the EU as well as in the agreements on the implementation of the third EU energy package. The new market will continue to evolve and improve. Many issues still remain unresolved. For example, one of the big questions that needs to be addressed expediently concerns the situation with the old debts for electricity to power producers and NPC Ukrenergo accumulated during the many years of the administratively operated inefficient old market system. Frivolous legal suits and on-the-spot court decisions which threaten to undermine the validity of the regulatory acts in the new market is another unwelcome consequence of the power market reforms. It all contributes to fears and uncertainty among the investors and market participants as to the future of the market reform in Ukraine.
The battle between the old and the new continues. Ukraine is no different from many other countries and markets west of its border. Important to recognize that the energy market reform has been long overdue in the Ukrainian power sector and it comes on the heels of the gas market reform launched a few years earlier. This is not a coup d’état of the few but rather a conscientious choice by Ukrainian people to join European market place. Reform is the only door which leads us there.
Vitaly Butenko is CEO at D.Trading LLC in Kyiv.
