January 24, 2019
While Ukraine is wrapping up its New Year and Orthodox Christmas celebrations, there is one more thing worth celebrating. On 1.1.2019, Ukraine took a big leap towards liberalizing its retail electricity market towards European standards. As of this date, consumers are free to choose their electricity supplier. Well, almost all consumers. Households and the SME segments will, by default, continue to be served by incumbent suppliers (which at the moment of receiving the license were part of vertically integrated companies) that have been tasked to perform the so-called “universal service obligation” up to mid-2020. In theory, household and SME consumers can opt for a commercial supplier (other than their universal service supplier) but since the maximum price that a universal supplier can charge to consumers is set administratively on the basis of a tariff approved by the Ukrainian regulator, no mass switch away from universal suppliers is expected. After all, this was the intention of the legislation. The government was keen to ensure that no household or small business would be left without a supplier once this reform kicks in. The length of the period during which universal service suppliers will maintain a de facto monopoly is debatable, of course.
Competition in the retail market is, therefore, likely to happen mainly in the segment of larger consumers, at least in the first phase. Industrial consumers can negotiate a supply contract with whichever supplier they choose and switch their supplier rather frequently (several times per year). Up till now, as many as 179 suppliers have signed a contract with Energorynok, the Ukrainian Market Operator who is the only entitled entity to purchase and sell electricity at the wholesale market until July 2019. The fact that Energorynok will maintain this monopoly for the next six months and will continue to administratively set wholesale market price until July seriously limits the competition at the retail market level. It is not clear on what basis the retail suppliers will compete if the electricity they buy at the wholesale market is the same for everybody and no competitive advantage can be gained. Because of this, real competition even in the larger consumer segment is likely to take off only after July 2019 when the wholesale market fully opens up.
However, even after the wholesale market opening there might be new problems. Implementation of processes that are key for the proper functioning of the wholesale market are lagging behind (such as the balancing settlement process or the central administration of metered data). Lack of competition between the electricity producers is an even more serious obstacle to achieving a liquid and healthy wholesale market. There are a few large generators present at the market (basically the state-owned conventional power plants and DTEK-owned power plants) and the possibilities for cross-border trade is limited. Only a relatively small part of Ukraine (the Burshtyn island) is linked to liquid EU markets. Interconnectors with Russia and Belarus are not used for trading purposes and possible market coupling with Moldova is likely to have a relatively limited impact on Ukrainian electricity market liquidity and will not seriously disrupt the current oligopoly-like market structure. Rapid physical integration with the ENTSO-E area and the further liberalisation of electricity export and import (currently subject to prior Governmental approval) have the potential to considerably increase the liquidity of Ukrainian electricity market.
Having listed all these caveats, is there really anything to celebrate? Definitely yes. A lot has been done during 2018 to make the launch of the retail market a reality. In particular, NEURC, the Ukrainian energy market regulator, has drafted and adopted all the necessary secondary legislation in record-short time. This is all the more impressive because the first half of 2019 was marked by a loss of the quorum required to take decisions, and the institution was paralysed. In March 2018, the Market Rules, Retail Market Rules, Distribution System Code, and a Commercial Metering Code were adopted. As a result, the architecture of contractual relations between market participants and other key processes such as switching rules, dispute resolution procedures, or data metering were established. During the early autumn of 2018, NEURC adopted tariffs for DSOs, tariffs for universal service supplier and tariffs for the supplier of last resort. The establishment of a tariff methodology and a predictable tariff structure for each of these market participants is a precondition for the unbundling and termination of the cross-subsidised system. Universal service suppliers must be able to function independently from the DSO within the same holding structure; DSOs must receive enough funds to finance the maintenance and development of the grid. Towards the end of the year, NEURC approved contracts between Energorynok, the universal service suppliers, and the suppliers of last resort. In the last days of 2018 the Government decided to establish the state-owned company Ukrinterenergo (responsible for electricity imports/exports) as supplier of last resort for the entire territory of Ukraine until January 2021.
These steps required considerable efforts and some aspects remain controversial and/or unsolved. For example, the date of the transition towards incentive based regulation for DSOs (using the regulated asset base as a basis for tariff calculation) has been postponed. Compensation model for universal service providers to cushion the effects of possible wholesale market volatility post July 2019 is far from clear. The situation of protected customers and the issue of finding the appropriate balance between payment discipline and protection from supply interruption (as evidenced by state owned water transportation companies) remains unsolved. An efficient support system for vulnerable consumers who have difficulties covering utility bills will need to be introduced. At the same time, as already mentioned, Ukrenergo has made little progress in establishing an IT system for the centralized balancing settlement administrator and so far, Government has not selected the authorized bank that will handle the trading collaterals and the imbalance clearing. It is difficult to assess market participants’ readiness for the new market (although, based on surveys undertaken by the Project Office during 2018, some progress could be noted). Some market players (such as Energoatom) have taken concrete steps and have for example already procured IT systems that will enable them to purchase and sell the electricity through OTC and at DAM/IDM market. Others are still struggling with tailoring the appropriate strategy and may lag behind with IT system procurement and the implementation of other organisational measures (setting up call centres, efficient billing systems, etc.). However, there are experienced companies that are already active in Ukraine and are able to offer ready-made solutions for market participants. The Slovak company Sfera, a.s. is successfully implementing an IT solution for the day-ahead and intra-day market for Energorynok (and has also systems for trading and distribution companies). Other foreign companies are assisting Ukrenergo and other Ukrainian market participants.
Despite all these deficiencies and imminent challenges, there are reasons to applaud Ukraine for the efforts to liberalize its energy markets. Except for the Baltic states and Georgia, Ukraine is the only post-Soviet country to take such a path. Obviously, it will take some time for the retail and wholesale electricity markets to stabilize, but at the end of the road lies a reward of a more competitive and secure power market with the perspective of joining the EU-wide electricity market on equal terms, to the benefit of the Ukrainian electricity consumer.
Author: Kristian Takac, Head of the Electricity Retail Market Working Group at Project Office (Coordination Centre for Electricity Market Implementation, Ukraine), for DiXi GroupAuthor : Ukrainian Liaison Office in Brussels