Energy sector of Ukraine: main changes

At the end of August 2020, the Regulator adopted several important amendments to the regulations in the energy sector. The gas market participants received decreased tolerance margin for imbalance. At the same time, the Distribution System Operators of the electricity market received the new RAB regulation.

Settlement of daily balancing on the gas market

On 26 August 2020, the National Energy and Utilities Regulatory Commission of Ukraine (the “NEURC”) adopted a Resolution № 1611 to amend the Gas Transmission System Code (the “GTS Code”) of Ukraine and the Gas Distribution Systems Code of Ukraine.

Daily balancing of gas supply/withdrawal volumes was introduced on the natural gas market from 1 March 2019.

In order to develop a short-term wholesale gas market and reduce the costs of the Operator of the Gas Transmission System (the “GTS Operator”) for balancing actions.

The volume of gas price adjustment for calculating the imbalance payment was reduced

The GTS Code stipulates that payment for the daily imbalance is calculated based on the gas price which is defined as:

• the marginal price of natural gas sale, if the volume of the daily imbalance of the customer of natural gas transportation services (the “Customer”) in a gas day is positive (i.e. when Customer’s gas supplies during a gas day exceed its withdrawals)
• the marginal price of natural gas purchase, if the volume of the daily imbalance of the Customer in a gas day is negative (e.g. when Customer’s gas withdrawals during a gas day exceed its supplies)

The GTS Code defines the procedure for calculating the marginal selling price and the marginal purchase price of natural gas for each gas day. To determine the marginal selling price, the estimated gas price is reduced by the amount of the adjustment, and to determine the marginal purchase price, this price is increased by the amount of the adjustment.

Before the amendments, the size of the adjustment value was 10 per cent.

The amendments provide for a differentiated approach to the amount of the adjustment value depending on the amount of imbalance.

The following adjustment amounts are applied:

• 10 per cent in case of imbalances
• from 3 per cent to 5 per cent (inclusive)
• from 7.5 per cent to 15 per cent (inclusive) for operators of the gas distribution system
• 20 per cent in case of imbalances
• more than 5 per cent
• by more than 15 per cent for gas distribution system operators

The amount of permissible deviation of the daily imbalance volume (tolerance margin) is reduced

In accordance with the provisions of the GTS Code, the payment for the daily imbalance for the Customer is calculated without taking into account the amount of the adjustment, if the amount of the daily imbalance does not exceed the tolerance margin.

The provisions of the GTS Code established the size of the tolerance margin at the level of 10 per cent.

The amendments provide the following decrease of the tolerance margin:

• from 10 per cent to 3 per cent for customers
• from 15 per cent to 7.5 per cent for operators of gas distribution systems

Requirements for customer’s financial security in favor of the GTS Operator was changed

It has been established that a bank guarantee must be provided by a bank classified by the National Bank of Ukraine in the list of systemically important banks. If a bank is removed from this list, the Customer should replace the bank guarantee in order to bring it in line with the established requirements during 2 months from the date of the GTS Operator’s notification.

Requirements for sufficient financial security of the Customer have been replaced by the requirement for the Customer to create an irreducible balance of financial security.

The requirement to create an irreducible balance of financial security does not apply to Customers who have no overdue debt to the GTS Operator to pay for negative imbalances and have no cases of delay in payment of monetary obligations to the GTS Operator for the negative imbalances during the last twelve months.

The irreducible balance of financial security is the amount of the gas cost that the Customer’s consumers use in total in 5 days for chemical and metallurgical enterprises and in 3 days for other consumers with the maximum (peak) daily gas use for the previous gas month.

Amendments regarding financial security come into force on 1 October 2020.

RAB-regulation for electricity Distribution System Operators

On 26 August 2020, the NEURC amended a number of Resolutions on the methodology of incentive tariff setting for Distribution System Operators (RAB-regulation). The reform is expected to help stimulate investment and improve grid quality indicators.

The most crucial amendments relate to the following:

• 16, 74 per cent of a rate of return for the new asset base and 3 per cent a rate of return for the old asset base during the first regulatory period (3 years)
• obligation to decrease SAIDI (average duration of power outages) to 150 minutes in urban areas and to 300 minutes in rural areas
• achievement of the established quality indicators of services is postponed from the 8th to the 13th year after the transition to incentive tariff setting
• the possibility of transition to incentive tariff setting is associated with the beginning of the calendar year (previously such possibility was provided for from January or July of the respective year)
• the conditions for the transition to incentive regulation have been revised (among other things, the requirement that there is no debt for electricity to SE “Energorynok” has been excluded)
• the requirements for the licensee during the first regulatory period were revised (among other changes, the requirement for annual investment in volumes of at least an annual amount of depreciation and income from payments for reactive energy and 50 percent of profit on the regulatory base of old assets was established)
• the list of objects and assets which are not included in the regulatory asset base was revised (“social and cultural facilities” have been expanded by adding the broader concept of “non-production facilities of non-usable assets”; the cost of a car which is not included in the regulatory asset base increased from UAH 200,000 (including VAT) at UAH 500,000 (excluding VAT))
• a list of documents and information that are submitted with an application for setting tariffs and for their revising when switching to incentive regulation was changed
• the list of grounds for setting tariffs by the NEURC on its own initiative is supplemented by the case of revealing the fact that the licensee provided inaccurate information for setting the tariff
• formulas for determining depreciation, regulatory asset base and profit on the regulatory asset base were reviewed

 Conclusion:

Changes in the daily balancing procedure will make it possible to improve the discipline of planning and actual gas turnover in the market, reduce the costs of the GTS Operator and use balancing as a penalty measure. The introduction of RAB-regulation will make it possible to upgrade power grids and reduce the rates of interruption of power supplies in Ukraine.

To avoid being negatively impacted by the current or expected legislation changes, as well as to take advantages provided by the legislation changes, you can contact the SK Energy practice team:

• to get a qualified advice regarding advantages from the implementation of amendments to the RAB-regulation, or regarding daily balancing mechanism in the gas market
• to analyse your current business strategy in the electricity sector, avoid risks and take advantages provided by the legislation
• to audit your possible risks and benefits in the current situation

Information contained in this legal alert is for the general informational purposes only, does not constitute legal or other professional advice and should not be relied upon as a substitute for specific professional advice adapted to the specific circumstances.