#Ukraine: Market reform and electricity

In March 2016, Ukraine’s cabinet of Ministers approved a draft Electricity Market Law (EML) which aims to bring the electricity sector legal framework in line with the EU’s 3rd Energy Package. This can be considered a further step by Ukraine towards having an electricity market where real costs (due to generation, transmission and distribution) provide a basis for price formation at the wholesale and retail levels. This raises the question: how far has Ukraine progressed and how far does it still have to go? What follows considers some of the areas covered by the EML and how well it matches the provisions of the 3^rd Energy Package.

Under the EML, the Ministry of Energy and the Coal Industry is in charge of issuing permits for tendering for new generating capacity. However, there appears to be no obligation on the ministry to treat tenders in a non-discriminatory fashion. Perhaps, this is implicit in the law. This also raises another issue: why is there a need for tenders (and allowing government to act as gatekeeper) if the intention is to move towards a market-based system?

In the case of the transmission system, the TSO, Ukrenergo, is already legally and functionally unbundled whilst remaining a state-owned company, just like RTE in France. Missing from this is a model for ownership unbundling and a procedure for certification of Ukrenergo as provided by Articles 10 and 11 of Directive 2009/72/EC and Article 3 of Regulation (EC) 714/2009. In the context of, RTE, is this important? Or a detail?

The distribution network and supply (to end customers) are also covered by the EML in terms of legal and functional unbundling, which thus complies with THE EU legislation. However, in practice, distribution appears to be still bundled with the regulated supply of electricity within the Oblenergos. This raises the question: will secondary legislation address this (and the role of the Oblenergos?).

Access to the transmission network is well covered by the EML for generators. However, access for customers (at a transmission level) is less well covered. Given that in any country, companies with transmission level connections can be numbered in double figures, is this significant (a detail? or a core issue?). Is it something that could, again, be covered by secondary legislation? On a more serious note, the allocation of cross-border capacity and congestion management has not been covered by the EML. However, in February 2015, electronic auctions were adopted over multiple time frames (annual, monthly, daily) that are able to coordinate auctions with neighbouring operators. Some shortcomings remain such as capacity reservations and priority access, participation limited only to suppliers, dependence on electricity purchased from the wholesale supplier. Another case for more secondary legislation?

Markets imply the ability to switch from ONE supplier to another. The EML takes note of previous legislation that allows all non-household customers to switch suppliers since January 2014 with residential customers being eligible from January 2015. Unfortunately, this previous legislation covering households has never been applied. So commercial customers can switch, but households cannot.

Change, with respect to this situation appears to be on its way. Under the EML, Energorynok currently the single buyer of electricity from any plant greater than 20MW will be replaced with bilateral agreements and day-ahead and balancing markets, as from July 2017. One potential obstacle remains, the Imbalance Allocation Fund which curtails the size and volumes of any liquid trading mechanisms and could distort market price signals. The new law has a provision to phase this out by 2030. Perhaps this could happen earlier?

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Although the EML does not foresee immediate liberalization of prices, it does allow for a gradual phase-out of price regulation. Although regulated prices will still be available to household and non-household customers these must be cost-reflective, leading to a gradual increase in prices for household customers. Electricity price rises are never popular, but their unpopularity can be reduced if households have the ability to easily change supplier and if the government introduces an (electrical) energy efficiency programme that is fit for purpose. Doing so would make it a leader in Europe since according to the European Commission no other country has such a programme.

In the past, the view from outside was that the Ukraine electricity sector was over regulated with a strange mix of regulated prices from the nuclear and hydro generators whilst the coal-fired thermal power plants sold their production through a bidding platform on a daily basis. The EML is definitely a step in the right direction as it moves the Ukraine electricity sector away from such hybrid arrangements and is thus an evolution towards EU-style markets and prices that reflect costs and ultimately a financially health electrical power sector.

The author, Mike Parr, is a director of PWR Consultants Limited.

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