Ukraine: Svitlana Teush Commented About The New Electricity Market In Ukraine

Svitlana Teush, head of renewable energy and construction practices at Redcliffe Partners, commented on the launch of the new electricity market. She discussed the increase of Ukrenergo's transmission tariff following the introduction – from 1 July – of the new fund allocation structure to support payment of the feed-in tariff. Svitlana also discussed their related impacts on other market participants, as well as potential solutions. These included changing the scope of the PSO obligations on state power producers with the aim of increasing the volumes of electricity produced from nuclear and hydro power sources traded in competitive market segments. Svitlana also identified other uncertainties and shortcomings causing market distortions – insufficient market competition and liquidity, substantial administrative interference, absence of an ancillary services market segment and balancing capacities, a lack of efficient metering system and other issues – which need to be addressed for the the market to function efficiently. Below is her interview to Iclub Energy:

1. Before the launch of the new energy market on 1 July 2019, there were concerns that Ukraine was not quite ready for that. As the first month under the new market has come to a close, how does reality compare with these expectations?

ST: On the surface, there has been relative stability in the first month since the new market launch. However, we are in a transitional stage and this may not be indicative of the further operation of the market. The new market model is not yet fully functional, and deviates from the original concept of the new market and so causes certain market distortions. This includes, for example, imposing cumbersome public service obligations (PSO) on state power producers (Energoatom and Ukrhydroenergo), establishing price caps, and predetermining power supply chains. These administrative interferences are claimed to be ultimately aimed at preventing an increase in the cost of electricity for households. Hence, the financial burden of the increased costs is reallocated – through administrative instruments – amongst other market participants causing natural opposition from those participants particularly affected (industrial consumers, Energoatom, Ukrhydroenergo, etc.).

2. Part of the cost difference of the transmission tariff is claimed to be due to the changed structure of the transmission tariff due to the need to pay renewable energy producers. The regulatory agencies claimed that these tariffs are to be reduced in August. What is your take on this?

ST: Since 1 July 2019, the financing algorithm supporting the feed-in tariff has been changed. There is a difference between the feed-in tariff paid to producers by the Guaranteed Buyer, and the market price at which it then sells electricity on the day-ahead and intraday markets. Now, the costs required to pay this difference have been included in the transmission tariff of Ukrenergo approved by the NEURC in June 2019 followed by a slightly reduced tariff approved in July with effect from 1 August. The reduction of the tariff is said to be due to the decrease of Ukrenergo's costs required to buy energy to compensate technical losses in the transmission system. However, the tariff is still viewed as being too high by a number of industrial consumers – particularly from energy consuming industries such as metallurgy, where the cost of electricity represents a considerable share of the cost of production.

3. What are the principal questions about the new market that remain unanswered, as well as the main uncertainties right now?

ST: Should the market become liberalised as contemplated by the new model, the outlook for electricity pricing remains unclear for all categories of consumers (including industrial consumers and households). Current pricing is not indicative as the market is at the early stage and there are heavy administrative interferences (PSO, price caps and predetermined power supply chains). However, a trend that has already been seen is that power prices can be expected to increase.
Another question of a general nature is how the electricity market under the new model would meet the security, sustainability, system balancing and resilience requirements.

The practical issues adding uncertainties include, for example: the absence of an ancillary services market segment required for efficient market functioning; a lack of metering systems needed for the accurate measurement of power volumes consumed and adequate charging of electricity costs, as well as for demand management in the longer term; a limited number of players in the market segments and, hence, insufficient competition and market liquidity causing various market distortions.

The outlook can improve over time with a growing number of market participants in all market segments, streamlining the market rules and following the opening of market for the cross-border trade.

4. Could the Nikopolsky ferroalloy plant matter affect the future payment of the feed-in tariff?

ST: The new fund allocation pattern – whereby the relevant costs payable by Ukrenergo to the Guaranteed Buyer are included in the transmission tariff, which thus had to be increased – is established by the electricity market law.

Importantly, there is the state guarantee of the full and timely payment of the feed-in tariff to renewable energy producers which is enshrined in law, and so any changes on the fund allocation mechanisms should not disrupt or impair such payments

It remains to be seen how the case will develop in the court. The court may decide to invalidate the regulator's decisions on the new (increased) tariffs adopted in June and/or July, or dismiss all claims and thus maintain June and July tariff in effect.

Whatever the outcome of the court cases, by operation of law Ukrenergo remains under an obligation to pay for the services of the Guaranteed Buyer relating to an increase of the share of renewables, while the Guaranteed Buyer is obliged to make full payment to renewable energy producers under the feed-in tariff. The question is about the implementation and sources of funding required to support the above statutory obligations of Ukrenergo and the Guaranteed Buyer.

From the current perspective, both NEURC Resolutions setting the transmission (and dispatch) tariffs from 1 July and from 1 August are now in full force and effect other than in relation to the NFP and several other industrial consumers. Hence, payments of Ukrenergo the Guaranteed Buyer (GB) and, consequently, by GB to renewable energy producers have now largely been unblocked.

The possible solutions aimed at prompt relieving the financial burden for industrial producers which followed the increase of the transmission tariff could, for example, include changing the scope of the PSO obligations on state power producers with the aim of increasing the volumes of electricity produced from nuclear and hydro power sources traded in competitive market segments.There might also be a potential for refining the calculation methodology underlying the transmission tariff and further decreasing the tariff.

However, to change the structure of the transmission tariff and exclude Ukrenergo`s payments to the Guaranteed Buyer for increasing the share of renewables (subsequently translated into the payment by the Guaranteed Buyer of the feed-in tariff to producers), it will be necessary to change the electricity market law, which does not seem to be a workable solution in a short term.

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