Ukraine: Electricity Market liberalised to meet the EU 3rd Energy Package requirements

On 13 April 2017 the Parliament of Ukraine adopted Draft Law No 4493 “On Electricity Market of Ukraine”, registered on 21 April 2016 (the “Draft Law”). The Draft Law is expected to be signed by the President in the coming weeks. The final text has not been officially published yet, however, the most recent version of the Draft Law is available on the Parliament’s web-site.

The Draft Law transposes Ukraine’s commitments on the liberalisation of the Ukrainian electricity market in compliance with the Energy Community Treaty and the so-called “3rd Energy Package” of the European Union. Provisions of the Draft Law are drafted in compliance with (i) Directive 2009/72/EC concerning common rules for the internal market in electricity, (ii) Directive 2005/89/EC concerning measures to safeguard the security of electricity supply and infrastructure investment and (iii) Regulation (EC) No 714/2009 on the conditions for access to the network for cross-border exchanges in electricity.

The primary goal of the Draft Law is a step-by-step liberalisation of the internal electricity market of Ukraine. In 2013, Parliament attempted to reorganise the Wholesale Electricity Market (WEM) of Ukraine, which still functions based on a single-buyer model. According to the Law “On Basic Principles of the Electricity Market Functioning” the full-scale liberalised electricity market was supposed to become operational in Ukraine on 1 July 2017. However, the suggested legal framework was not in line with the Third Energy Package and, as a result, necessitated further improvement. Thus, the first version of the Draft Law was prepared at the initiative of the Energy Community Secretariat back in 2015.

Below we capture the main novelties of the new Draft Law.

1. Main Electricity Market Players

© Ukrenergo

• Power producers (including thermal power plants (TPPs), nuclear power plants (NPPs), hydro power plants (HPPs), renewable power plants (RPPs), etc.) licensed for electricity generation shall be allowed to sell electricity at the electricity submarkets (including the market of bilateral contracts, the day-ahead and intraday market and the balancing market) and shall deliver ancillary services. New generation capacities shall be constructed following results of the tender conducted by the Government;
• The Transmission System Operator (TSO) shall be a joint stock company (100% owned by the Ukrainian state) licensed for the performance of electricity transmission (currently the National JSC “Ukrenergo”). The Draft Law provides for numerous requirements with respect to independence and certification of the TSO. In particular, the (i) TSO shall be an owner of the power transmission system; (ii) TSO must be a separate legal entity and may not be a part of a vertically integrated undertaking (VIU) (iii) TSO may not be engaged in the electricity generation, distribution, supply and/or trading activities. The TSO shall also administer settlements and perform the functions of the commercial metering administrator at the balancing market.
• The Distribution System Operators (DSOs) shall be entities licensed for power distribution. DSOs are not entitled to perform any sale and purchase operations (except for operations necessary for their technological needs and settlement of imbalances). Currently, Ukrainian DSOs also perform supply functions, which they will have to unbundle, as the Draft Law provides that DSOs are expressly prohibited from the performance of generation/transmission/supply activities. If a DSO is a part of a VIU, such DSO must be independent in its decision-making and current business operations, in compliance with numerous requirements established by the Draft Law. Only small DSOs (i.e. companies with less than 100,000 customers and with an average monthly volume of distributed electricity below 20 mln kWh) can be exempt from this requirement, subject to the Regulator’s approval.
• The Market Operator shall be a joint stock company (100% owned by the state), which ensures the functioning of the day-ahead and intraday markets and performs the sale and purchase of electricity for the relevant day of supply on the basis of the relevant licence.
• Suppliers shall be entities licensed for electricity supply to end consumers (at free non-regulated prices). The supply agreement shall be executed between a supplier and a consumer for the sale and purchase of the total amount of electricity necessary for its consumption within the relevant supply period and supplied to the consumer exclusively by the relevant supplier.
• Traders shall be entities engaged in the resale of electricity (i.e. trading activity) in the electricity market. Such activity shall be subject to licence only in the event that the trader has no other licences necessary for its activities in the market. Traders may sell and purchase electricity under the bilateral agreements and at the submarkets, but shall not be allowed to supply electricity to end consumers.

2. Structure of the new electricity Market

© Energy Community Secretariat

Under the Draft Law a new liberalised electricity market is expected to be launched on 1 July 2019 and will function on the basis of the following submarkets: (1) market of bilateral contracts; (2) day-ahead market; (3) intraday market; (4) balancing market; (5) market for ancillary services; and (6) retail market.

• Bilateral electricity trading shall take place based on contracts for the sale and purchase of electricity. The Draft Law does not provide for the establishment of a central platform and trading is expected to take place “over the counter” (OTC).
• The day-ahead market (DAM) is based on a competitive pricing mechanism and is basically a bidding auction, which is held one day before the actual delivery of electricity. The intraday market (IDM) allows market participants to update their trading positions taking into account the existing supply and demand and current system conditions, as they approach real time. Both day-ahead and intraday markets are managed by the Market Operator (MO), which accepts bids to sell or buy electricity and holds an auction. The Regulator establishes the minimum amounts of electricity to be sold by the power generators (according to the Draft Law it may not be more than 15% of the monthly volumes for any power generators, save for renewable power plants (RES)).
• The balancing market (BM) is established for the sale and purchase of electricity: (i) for balancing supply and demand within a day; and (ii) for handling imbalances of the market participants responsible for the balance. The market is operated by the Transmission System Operator, who is responsible for balancing, and who will accept the bids of the market players for load increase or decrease. Acceptance of a particular bid by the system operator results in the sale and purchase of the relevant amounts of electricity. The market players responsible for balancing may also join their efforts and form a group of balancing parties.
• The ancillary services market (ASM) includes various types of energy and capacity products to meet the reliability requirements of the market players. The power generators bid for a right to deliver such ancillary services to the Transmission System Operator.
• At the retail market (RM) the electricity is traded between the power suppliers and the consumers. The prices shall be regulated only for: (i) the suppliers of the universal services (i.e local power suppliers selected by the Government for electricity supply to households and small non-households) and (ii) the “last resort” suppliers (i.e. local electricity suppliers selected by the Government which may not refuse execution of the electricity supply agreement with consumers under certain circumstances determined by the applicable law).

3. Novelties for the renewable power producers:

• The renewable power producers shall sell the electricity to the so-called Guaranteed Buyer (a state enterprise to be designated later by a separate resolution of the Government - most likely, State Enterprise “Energorynok”) under the bilateral contracts at the feed-in tariff. The Guaranteed Buyer then re-sells the electricity at the day-ahead and intraday markets. Until 1 July 2020 the difference between the feed-in tariff and the price of electricity sold at the day-ahead and intraday markets will be reimbursed to the Guaranteed Buyer by NPPs; later and until 1 January 2030 - by TSO as a payment for the Guaranteed Buyer’s services for the increase of the share of electricity generated from alternative energy sources.
• The renewable power producers selling electricity at the feed-in tariff should also enter the special balancing group where the Guaranteed Buyer (as the party responsible for balancing on behalf of all such RPPs) shall settle imbalances that emerge within such balancing group. The costs of the Guaranteed Buyer associated with the settlement shall be reimbursed by the renewable power producers in the following shares[1]:

4. Cross-border trading:

• The Draft Law also changes a number of basic principles of the auction procedure for obtaining access to the interstate power lines. For instance, if the export capacity exceeds demand, access to the interstate power lines shall be granted free of charge. The free capacity shall be distributed following results of the electronic auctions. The auctions may also include access to the cross-border capacities and the price for the relevant amount of electricity (i.e. so-called “explicit” and “implicit” auctions).
• Private entities will also be able to construct new capacities for export purposes and such objects shall not be subject to auctions for a certain period of time, in compliance with the established requirements.

5. Connection procedures:

• TSO and DSO may not refuse connection of the customers (subject to their compliance with the applicable regulations) and connection procedures shall be performed in line with the Electricity Transmission System and Distribution System Codes. The standard connection (i.e. below 160 kW) and non-standard connection (including the connection of the power generation facilities) shall be performed by DSO on a “turn-key” basis. The customer may also choose to apply for issuance of the technical conditions for non-standard connection and to procure development of the necessary project documentation of its own volition.

6. Transition period:

The Draft Law becomes effective once signed by the President and officially published (the “Effective Date”). However, some of its articles and provisions will come into effect much later, in particular:

• Provisions regarding independence and certification of TSO – 6 months following the Effective Date;
• Provisions relating to suppliers of universal services and status of the “last resort” supplier –12 months following the Effective Date;
• Provisions relating to the legal status of DSOs – 18 months following the Effective Date;
• Provisions relating to the independence of DSOs – 36 months following the Effective Date;
• Implementation of the submarkets – starting from 1 July 2019, according to a decision of the Cabinet of Ministers of Ukraine;
• Provisions regarding the execution of bilateral contracts shall not be applicable to NPPs and HPPs until 1 July 2020.

Law: Draft Law No 4493 “On Electricity Market of Ukraine”, registered on 21 April 2016 and adopted on 13 April 2017

[1] These tolerance levels were a heavily debated topic in the Parliament on the day of adoption of the law. Some changes were introduced to these provisions, compared to the last version of the draft law, which was made available to public.