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17 August 2020

Energy sector of Ukraine: main changes

Current and expected changes at the electricity market

Public service obligations mechanism on the electricity market is again changed

On 5 August 2020, the Government adopted a Resolution to amend the public service obligations (the “PSO”) mechanism on the electricity market (the “Resolution”). The Resolution contains a new version of the Regulations on assignment of special obligations on the electricity market participants to ensure public interests in the electricity market, originally approved by the Cabinet of Ministers of Ukraine, Resolution No. 483 of 5 June 2019 (the “PSO Regulations”). It is expected that the implementation of the Resolution will reduce the surplus on the day-ahead market, reduce the volume of electricity imbalances and improve the financial condition of state-owned enterprises, including the Guaranteed Buyer.

Among the main amendments, the following are the most crucial

Share of electricity from the state-owned companies:

  • Energoatom shall sell to the Guaranteed Buyer approximately 50-55 per cent (instead of 80 per cent) of electricity. The exact amount will be calculated by the Guaranteed Buyer based on the data submitted by the universal services suppliers and further provided to Energoatom
  • Ukrhydroenergo shall sell to the Guaranteed Buyer 30 per cent (instead of 35 per cent) of electricity;

Electricity price:

  • instead of referring to the price caps, the Resolution establishes the price of the electricity sold to Guaranteed Buyer by Energoatom and Ukrhydroenergo. The price is UAH 10 per 1 MWh (the price caps were UAH 566 per MWh for Energoatom and UAH 673 per MWh for Ukrhydroenergo, respectively)
  • Energoatom and Ukrhydroenergo must ensure the weighted average selling price of electricity in all commercial market segments not lower than the price of covering the cost, calculated according to the formula established in the PSO Regulations.

Terms of bilateral contracts with the Guaranteed Buyer:

  • the Resolution abolished the maximum term of the bilateral contracts with the Guaranteed Buyer (which used to be one calendar month). It also required the starting price/sale price of electricity to be not lower than the price at which the Guaranteed Buyer buys electricity from the state-owned enterprises under the PSO.

According to the information announced at the Government meeting, Energoatom will be able to sell up to 40% of electricity under bilateral agreements and other market segments on competitive terms. Increase in the volumes of electricity sold by Energoatom and Ukrhydroenergo both under the bilateral agreements and in other market segments will improve financial situation of these state owned enterprises.

Opportunities to repay debts on the electricity market could be expanded by attracting international loans

On 5 August 2020, the Government supported the draft law prepared by the Ministry of Finance to supplement the Law of Ukraine “On the State Budget of Ukraine for 2020” (the “Draft Law on State Budget”). The Draft Law on State Budget states the requirements for the loans from the international financial organisations attracted to support liquidity and sustainability of the public sector entities carrying out activities in the field of production and/or transmission of electricity.

It is expected that adoption of the relevant legislative changes by the Verkhovna Rada of Ukraine will help resolve the situation on the electricity market, as well as to repay existing debt to RES producers.

Draft laws on joint auctions for allocation of the cross-border transmission capacities

The Verkhovna Rada of Ukraine registered the draft laws No. 3837 dated 14 July 2020 and No. 3837-1 dated 29 July 2020, both of which deal with implementation of joint auctions for allocation of the cross-border transmission capacities for electricity export, import and transit operations.

Both drafts are quite similar concerning procedure for allocation of the cross-border transmission capacities. On the other hand, the draft law No. 3837-1 differs in that it aims to unblock certification of the transmission system operator (the “TSO”) – Ukrenergo.

In particular, the draft law No. 3837-1 proposes to introduce an ISO (independent system operator) separation model, in which the transmission system operator can be the owner of the transmission system or the business manager of state-owned objects which are used to carry out activities for the transmission of electricity.

Currently, the auctions for access to the cross-border transmission capacity between the TSO of Ukraine and of its neighbouring states are held separately. This increases the price, as the access from each side of the border shall be paid for separately. Furthermore, such system does not guarantee the use of the crossing since it is necessary to get access in both states.

Joint auctions for allocation of the cross-border transmission capacities between Ukraine and neighbouring TSOs of the ENTSO-E zone significantly simplify export/import of electricity to/from Europe. The main advantages can be summarised as follows:

  • unhindered access for all market participants to the cross-border transmission capacity
  • decreased number of the procedures required to ensure interstate electricity trade and its significant optimization
  • increased competition among the market participants
  • elimination of the unnecessary bureaucratic obstacles
  • contribution to the formation of the electricity fair market price

Both draft laws propose:

  • to replace the possibility of exporting/importing electricity with the right to carry out foreign economic activity on the electricity market, in particular, export-import or transit operations
  • to give the right to carry out procedure for allocation of the capacity to the TSO or another authorised legal entity that ensures allocation of the cross-border transmission capacities (auction office)
  • to differentiate procedures for allocation of the cross-border transmission capacities with the countries of the Energy Community and with the third countries that are not members of the EU and the Energy Community
  • in the event of restrictions of the cross-border transmission capacities, methods for managing restrictions must be agreed with the neighboring countries of the Energy Community
  • to exclude an obligation of the TSO to offer all available cross-border transmission capacity to the third countries for allocation

Conclusion:

Amendments to the PSO mechanism will increase the volume of electricity that Energoatom and Ukrhydroenergo sell according to the market terms, which is beneficial for both state-owned producers and other market participants. Draft Law on State Budget will speed up the process of reducing debts to RES producers. Changes in the procedure for allocation of the cross-border transmission capacities will simplify the interaction with the European electricity market.

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 PSO mechanism, or regarding allocations on cross-border transmission capacity;
  • 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.

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