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5 May 2020

COVID-19 outbreak in Ukraine: overview of the main changes on the electricity market

What happened?

In the last week of April the Ukrainian authorities adopted many amendments to the regulations on the electricity market of Ukraine, among which the following are the most important:

  • Update on the Energy Balance Forecast

On 28 April 2020, the Ministry of Energy and Environmental Protection approved a new Energy Balance Forecast for Ukraine.

The Energy Balance Forecast was approved in order to overcome the crisis in the energy sector and reduce all types of generation due to the increased use of renewable energy sources.

The main reasons for approving the Energy Balance Forecast:

  • ensuring a safe work schedule for nuclear power plants by reducing consumption
  • performing deferred repair of the NPP units
  • ensuring safe operation of the energy system of Ukraine due to the lack of balancing capacities
  • ensuring sustainable operation of the coal mining sector in connection with the shutdown of the most of coal mines in Ukraine
  • RAB regulation

On 29 April 2020, the National Energy and Utilities Commission of Ukraine (NEURC) has approved a draft resolution on the implementation of RAB regulation and published it on its website for public discussions. Proposals to the draft resolution can be submitted to NEURC by 1 June 2020.

The resolution will apply to the distribution system operators (DSO). In order to apply RAB regulation, the DSO shall submit a request for approval of the distribution tariff to NEURC. The draft resolution contains the following amendments:

  • regulated rates of return of 1 % or 15 %, depending on the condition of the assets
  • the possibility of applying RAB regulation only from the beginning of the year
  • revision of the formulas for calculation of depreciation, asset base, profit on asset base, etc

Approval of RAB regulation is important to ensure reliability (continuity) of electricity supply in Ukraine. Due to the lack of liability of DSO for the continuity of electricity supply, in Ukraine the average power failure disruption per consumer per year is 620-690 minutes, which is the worst in Europe. This is one of the reasons for introducing RAB regulation.

  • New price formation for Guaranteed Buyer

On 30 April 2020, NEURC amended Resolution No. 766 “On the Actions of Electricity Market Participants during the Quarantine Period and Restrictive Measures Related to the Spread of Coronavirus Disease (COVID-19)”. The amendments entered into force on 30 April 2020.

Amendments to Resolution No. 766 changed the conditions for the formation of price bids of the Guaranteed Buyer in the “day-ahead” market. In particular, the Guaranteed Buyer shall indicate in the bid for the “day-ahead” market the price of electricity:

  • the volume of which is determined before 10 AM on the day preceding the trade and
  • at a level not exceeding 75 % of the price during the peak hours determined by the Market Operator in accordance with the Rules of the “day-ahead” market and the intraday market

At the same time, the Guaranteed Buyer shall offer for sale on the intraday market all electricity that is not sold on the “day-ahead” market.

These amendments shall contribute to the development of a competitive market. These amendments apply to the quarantine period and for 30 days from the date of its cancellation.

  • Debt Recovery Act

On 30 April 2020, the Verkhovna Rada of Ukraine adopted in the first reading the Draft Law No. 2386 (“Draft Law”) on measures to pay off debt generated on the wholesale electricity market.

The Draft Law proposes the settlement of debts arising on the wholesale electricity market before a new market was introduced on 1 July 2019. In particular, the Draft Law is aimed to settle the debts of SE “Energorynok” as of 31 August 2019, namely: accounts receivable – UAH 30.9 billion, accounts payable – UAH 28.1 billion.

The Draft Law proposes the following measures to repay the debt of SE Energorynok:

  • the use of the mutual settlement mechanisms, debt transfer and assignment of claims for purchased/sold electric energy in the wholesale market
  • repayment of debts (debt relief) to Energoatom and debts of coal industry enterprises for electricity
  • replacement of a party to an obligation (assignment of a claim)

According to the conclusion of the Main Scientific and Expert Department, the concept of debt settlement proposed in the Draft Law is not successful enough. In particular, the approach proposed in the Draft Law to solve the issue of debt repayment between business entities is not consistent with the fundamental principle of civil law on the mandatory execution of an agreement (Article 629 of the Civil Code of Ukraine).

In addition, according to the conclusion of the Budget Committee, the Draft Law will affect performance of the state budget (which will lead to increase in spending and public debt and the cost of its servicing, as well as decrease in revenue), and so the Draft Law must be brought in line with the requirements of the Budget Code of Ukraine.

Conclusion:

We hope the above will help you deal with the impact of the quarantine on your business. To avoid negative impact of the quarantine measures on the electricity market, you can contact the SK Energy practice team:

  • to get qualified advice on further work on the electricity market
  • to analyse the current strategy of work on the electricity market and consider possible changes in this strategy to avoid risks
  • to audit your electricity supply chain and the risks of this scheme in the current situation

The 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 a specific professional advice adapted to specific circumstances.

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