Timely implementation of #Ukraine #ElectricityMarketReform

| May 31, 2019

The energy sector is the foundation of the Ukrainian economy. Unfortunately, energy remains a highly politicized topic in Ukraine and the current political uncertainty means there is a very real danger that the vital process of energy market liberalization will be pushed back. This will have significant consequences for the economic development and security of Ukraine, as well as its relations and standing with the international community, writes Ivan Plachkov (pictured).

Under the EU-Ukraine Association Agreement and the provisions of the EU Third Energy Package, Ukraine is obliged to liberalise its electricity sector in order to stimulate competition amongst energy suppliers and encourage new market entrants. The reform is also a precondition for Ukraine’s integration into the EU’s electricity market and, without it, Ukraine will not be able implement the measures set out in the EU’s Clean Energy Package.

Failure to implement the reform will present Ukraine as an unreliable partner in the eyes of the international community and will place in jeopardy the country’s access to the international finance needed to modernise our energy infrastructure, whether this is from the EU, World Bank or private sector. It will also frustrate the process of integration with the European energy system and maintain the countries dependence on Russia and Belarus for electricity imports during crisis periods.

With an estimated remaining operating life of 10 years, Ukraine’s Soviet-era energy infrastructure desperately needs nationwide upgrading and replacing – from production facilities to replacing the grids – in order to help meet the country’s international climate change obligations. Promoting renewable energy is also a key requirement.

Significant progress has already been made toward reforming the energy market, but to achieve this transformation, Ukraine needs a fully modern, well-functioning electricity market – one that allows for the purchase and sale of electricity in the open market and ensures that supply and demand ultimately determines the price.

While the process of replacing a Soviet-era energy grid and politically controlled electricity tariffs with a market-based system is a fundamentally challenging one, it is important to recognize the benefits that it will bring to Ukraine.

Timely implementation of the electricity market reform will deliver significant economic benefits to Ukraine.

The reform will attract investment in the power sector between 2019 and 2030. Additional investments will allow modernizing generating facilities and distribution networks, which will improve the quality of power supply, as well as the environmental situation at the electricity installations. The electricity market reform is a prerequisite for integration with the European electricity markets.

This will increase competition in the electricity generation sector of Ukraine, ensuring improved quality of power supply and preventing the possibility of abuse of the monopoly power by energy supplying companies. In other words, this will boost the development of enterprises, which is a win-win situation for both the enterprises and electricity consumers.

For consumers, both household and industrial, the reform will increase competition and allow them to choose their service provider, both of which will drive-up the quality of the services they receive. The increased investment will also significantly decrease the risk of power outages.

The political uncertainty that may result in a delay to the reform process is underpinned by concerns that household electricity tariffs in Ukraine and which have been set by the government for many years will rise dramatically.

In reality, this is not the case. The cross-subsidization of electricity, from industrial to household consumers, was supposed to be eliminated before the launch of the full-scale electricity market. However, the political situation has delayed this process. But this will not be an obstacle or a long-term barrier to the development of the market as a temporary mechanism to counteract the negative effects of cross-subsidization exists.

Ultimately, if there is a choice between an imperfect launch and having no launch at all, we prefer the first option. The alternative’s negative consequences and the threats stemming from it are far greater.

Today, Ukraine is overwhelmed with emotional rhetoric. It is extremely important that international institutions and politicians support Ukraine’s citizens, who are in favour of the direction of the energy sector’s reform, having had firsthand experience with its results. The importance and benefits of the electricity market liberalization are indisputable. There is an opportunity to make a significant contribution to the development, competitiveness, security and welfare of the country, and it is crucial to continue to support this process.

Ivan Plachkov is the head of the All-Ukrainian Energy Assembly and Ukraine’s Ex-Minister of Fuel and Energy.

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Category: A Frontpage, Electricity interconnectivity, Energy, EU, Ukraine

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