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22 May 2020

Energy sector of Ukraine: main changes

Last week several important decisions have been made regarding both the electricity and the gas markets in Ukraine. The changes anticipated by the list of measures to stabilise the energy sector, approved by the Anti-Crisis Energy Headquarters, have been introduced to the public service obligations (the “PSO”) mechanism. Changes regarding the information platforms of the gas transmission system and the underground gas storages aim to simplify the use of the underground storage and short-haul services.

Changes in the PSO mechanism of the electricity market

On 20 May 2020, the Cabinet of Ministers of Ukraine issued a new version of the Regulations on assignment of special obligations on electricity market participants to ensure public interests in the electricity market activities, originally approved by the CMU Resolution No. 483 of 5 June 2019 (the “PSO Regulations”).

It is expected that changes to the PSO Regulations will:

  • stimulate development of the competition on the day-ahead market
  • stimulate an increase in overall market liquidity
  • minimise the possibility of market manipulation
  • reduce the financial burden on the Energoatom, the Guaranteed Buyer and other market participants
  • help balancing supply and demand in the organised market segments
  • reduce amount of the electricity imbalances

Among the main changes to the PSO Regulations, we can highlight the following:

  • the volumes of the compulsory sale to the Guaranteed Buyer of the electricity generated at the nuclear power plants was reduced from 85 % to 80 % of the forecasted supply volume
  • the hydro accumulative power plants were withdrawn from the PSO mechanism
  • introduction of sale of up to 5 % of forecasted electricity supply volume of nuclear power plants under bilateral agreements at special sessions of the electronic auctions
  • launch of publishing information on the volume of electricity purchased from the Guaranteed Buyer and the actual sale of electricity to household consumers on the website by universal service suppliers (hereinafter – the “USS”)
  • launch of publishing information on the actual volumes of electricity sold to meet the needs of household consumers in the context of sale of electricity to USS and sale of electricity under bilateral contracts on the website by the Guaranteed Buyer
  • the Guaranteed Buyer was granted the right to buy/sell electricity under bilateral agreements concluded as a result of the electronic auctions (according to the sample contract form of the auction committee of the Ministry of Energy and Environmental Protection, selling period shall not be more than one month, selling price shall not be less than the purchase price at the electronic auctions under the PSO mechanism, with restrictions on sale of electricity by the Guaranteed Buyer at a price higher than 75% of the price during the peak hours being removed)

In addition, amendments were made to the Sample Contract Form on the provision of services to ensure that electricity is available for the household consumers (Appendix 2 to the PSO Regulations), in particular:

  • the cost of services shall be calculated based on the predicted volume of electricity consumption by the households provided by the USS and the estimated prices of electricity sold by the Guaranteed Buyer to the USS, with a subsequent adjustment according to the actual data
  • the procedure for preparing and exchanging transfer and acceptance acts has been changed as follows: at the first stage, the USS shall draw up a transfer and acceptance act based on the actual volumes required by the household consumers and the actual price within the billing period, sign it electronically and send to the Guaranteed Buyer; the Guaranteed Buyer shall reply within two work days with either an electronically signed act (in the absence of comments) or with a refusal. At the second stage, the USS sends to the Guaranteed Buyer hard copies of the signed act which the Guaranteed Buyer must countersign and return a signed copy thereof to the USS within three work days
  • the final settlement procedure has been clarified: the difference between the forecasted and the actual cost of services provided by the USS shall be paid/returned by one of the parties before the end of the month following the billing month, therefore, the Sample Contract Form was amended with the obligation of the USS to refund such difference in full, subject to liability in a form of a fine of 0.1 % of the overdue payment and a penalty of 7 % of the payment in case of more  than 30 days of delay)
  • the contract is amended with the right of the Guaranteed Buyer to demand a review of the calculations

At the same time, the Energy Community Secretariat sent a letter to the Ministry of Energy and Environmental Protection in which it was noted that the introduced amendments do not provide for the transition from the product model of the PSO to the financial one, which the Energy Community insists on.

The Ministry of Energy and Environmental Protection further informs that the PSO mechanism adopted by the Cabinet of Ministers on 20 May 2020 is a temporary solution that will remain in force until the financial PSO mechanism is introduced. Introduction of the financial PSO mechanism will require amendments to the Tax Code by the Verkhovna Rada, and would be impossible to switch to a new PSO mechanism without such amendments.

Changes to the information platforms of the gas transmission system and underground gas storages

Due to the high level of filling of the European gas storages and in order to incentivize European traders to use Ukrainian underground gas storage (the “UGS”) facilities, Ukrtransgaz reports on synchronized changes to the information platforms of the gas transmission system (the “GTS”) and UGS facilities from May 21, 2020 enabling applications for storage of natural gas in the “Customs Warehouse” mode* which is transported under the short haul mode**.

* The “Customs Warehouse” mode enables customers to store gas in underground storage facilities of Ukraine for 1,095 days free from tax and customs duties.

** Short-haul mode from 1 January 2020 allows transportation of gas at the reduced rates as follows:

  • between certain interstate entry and exit points of the GTS
  • between these points and the underground gas storage facility

The GTS Code defines the short-haul mode as the “capacity with restrictions”.

In order to use the short-haul, shippers (residents and non-residents) shall do the following:

  • conclude a contract with the transmission system operator (the “TSO”)
  • register on the information platform of the TSO
  • receive a separate shipper-code for the short-haul product
  • book a monthly capacity (by submitting an application for capacity distribution on the third Monday of the month preceding the month in which the capacity is distributed), or work on the basis of access to capacity one day ahead/during the day (access to capacity in this case is provided along with the nomination/renomination)
  • have available a preliminary customs declaration and prepaid transportation
  • a short-haul product in transit mode (without using the “Customs Warehouse” mode) does not require financial guarantees

Thus, starting from 21 May 2020, customers of Ukrtransgaz, an underground gas storage operator, will be able to:

  • submit separate nominations/ renominations for the volumes of natural gas submitted for injection and/or selection of gas storage facilities using the short-haul mode
  • submit trade alerts with identification that the natural gas to be transferred has been submitted to the exit point to a gas storages or groups of gas storages subject to the use of capacity with restrictions (short-haul)

It is expected that the new service will be in demand mostly by Ukrainian and foreign gas traders using Ukrainian gas storages for the seasonal storage of gas.

It should be noted that based on its cost, gas transportation at a short-haul tariff and its further storage in Ukrainian UGS facilities is more profitable than gas storage in Europe.

Conclusion:

The government continues to implement the measures for stabilizing the energy sector of Ukraine, while the gas market participants take measure to increase efficiency and transparency of the market.

To avoid being negatively impacted by the measures on the energy markets, you can contact the SK Energy practice team:

  • to get qualified advice on further work on the energy markets of Ukraine
  • to analyse the current strategy of work on the energy markets 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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