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30 September 2020

Energy sector of Ukraine:main changes

The National Energy and Utilities Regulatory Commission of Ukraine (the “NEURC”) is actively developing the legislative framework on the energy markets in Ukraine and engaging energy market participants in the discussion. The following drafts are of particular interest.

Mechanism of reimbursement for the curtailment to renewable producers at the “green” tariff/auction price

On 23 September 2020, the NEURC approved the draft Resolution (the “Draft Resolution”) on amendments to the Market Rules (approved by the NEURC Resolution dated 14 March 2018 No. 307) (the “Market Rules”) with the purpose of making it public and obtaining comments and suggestions from the interested parties before final adoption.

The main purpose of the Draft Resolution is to determine a mechanism for reimbursement to the renewable producers at the “green” tariff/auction price of the cost of electricity that was not produced due to the dispatcher’s command to unload by the transmission system operator (the “TSO”).

According to the Draft Resolution, the TSO is obliged to compensate the curtailments of the renewable generation occurred before 1 January 2020 as a result of the execution of the TSO’s commands to reduce the load. The cost of compensation is proposed to be calculated according to the methodology that will be introduced by the Draft Resolution.

The Draft Resolution supplements the Market Rules with the Methodology for calculating the volume of electricity which was not generated by a generator that sells electricity at the “green” tariff or at the auction price due to executing the TSO commands (the “Methodology”) and suggests the following amendments to the Market Rules.

Changes in definitions:

  • a definition of the “Electricity Producers at the Green Tariff” should be replaced by the “Sellers to the Guaranteed Buyer”, which will also include producers who received the right to support as a result of the auction.

Dispatcher’s commands rules:

  • the rule that the TSO informs the NEURC about non-fulfillment of a dispatcher’s command more than once within a calendar month should be extended to the activity of the Sellers to the Guaranteed Buyer
  • to provide the Seller to the Guaranteed Buyer with access to information on the issued dispatcher’s commands for the purpose of dispute resolution

Information and new account:

  • to oblige the TSO to disclose on monthly basis information on the volume of electricity which was not produced by the Sellers to the Guaranteed Buyer due to the dispatcher’s command
  • to add a new account of the Settlement Administrator for compensations for electricity which was not produced by the Sellers to the Guaranteed Buyer due to the dispatcher’s command and establish the rules for its debiting and crediting

Calculation of compensation:

  • to add the rules on calculation of compensation for the electricity which was not generated by the Sellers to the Guaranteed Buyer due to the curtailments
  • to add the rules on calculation of fees that the Sellers to the Guaranteed Buyer have to pay for non-compliance with the dispatcher’s commands

Tolerance margin for performance of the dispatcher’s command:

  • it is suggested to establish a tolerance of 10 per cent between the volume of actually generated electricity during the execution of the dispatcher’s command and the estimated volume that such a unit should have generated. If this tolerance is exceeded, the dispatcher command is considered as not executed

Amendments to the model agreement on settlement of electricity imbalances:

  • to extend to the Sellers to the Guaranteed Buyer an agreement on settlement of electricity imbalances, which will determine the procedure and conditions for the compensation for executing the TSO commands to reduce the load. Such an agreement will be the basis for the mutual settlements between the Seller to the Guaranteed Buyer and the TSO for execution of the dispatcher’s command to reduce the load
  • to supplement the Model Agreement on Settlement of Electricity Imbalances with the form of an act of reimbursement for the execution of the dispatcher’s command to reduce the load and payment for non-compliance with such a command, which determines the cost of the final payment (as the difference between the cost of compensation for the execution of dispatcher’s command and payment for failure to comply with dispatcher’s command)

The Methodology contains the following methods:

  • a reference method
  • a calculation method for calculating the volume of electricity which was not generated due to executing the dispatcher’s commands and the corresponding formulas for each of the methods

The reference method uses commercial metering data of a reference generating unit. The commercial metering point of reference generating unit must be agreed with the network operator to which the generating unit is attached.

The calculation method is based on the data from the previous periods and is used only if it is impossible to carry out the calculation by the reference method.

Draft Law on the prevention of abuse in the wholesale energy markets

The NEURC developed and posted on its website a draft Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Preventing Abuse in the Wholesale Energy Markets” (the “Draft Law”).

The purpose of the Draft Law is to identify and overcome abuse in the wholesale energy markets. It is developed to implement the European rules on the integrity and transparency of the wholesale energy market.

Comments and suggestions to the Draft Law are accepted until 22 October 2020.

The Draft Law proposes to amend the Code of Ukraine on Administrative Offenses, the Laws of Ukraine “On the National Energy and Utilities Regulatory Commission of Ukraine”, “On the Natural Gas Market”, “On the Antimonopoly Committee of Ukraine” and the Electricity Market Law.

Among the main provisions of the Draft Law, the following should be noted:

New definitions are introduced:

  • “wholesale energy market” – a place where transactions with the wholesale energy products are carried out
  • “wholesale energy products” – contracts for sale and purchase of electricity/gas, electricity/gas transmission, supply or distribution of electricity/gas to consumers with the capacity of electricity and gas consumption of 600 GWh per year and above
  • “a person who professionally organises operations with wholesale energy products” – a person who carries out professional activities on the organised trading platforms for operations with wholesale energy products (stock exchanges, electronic trading platforms, etc.)
  • “insider information” – unpublished information of a precise nature that directly or indirectly relates to one or more wholesale energy products, disclosure and promulgation of which could significantly affect market price of one or more wholesale energy products
  • “market manipulation” – 1) transactions or other actions that: (i) can create or create deceptive signals for supply/demand or price formation for the wholesale energy products, (ii) provide/can provide an opportunity to form prices for wholesale energy products on an artificial level, (iii) are fictitious actions or an attempt to commit fictitious actions that disorient or may give deceptive signals for supply/demand, price formation for wholesale energy products; 2) disclosure or spread of information through the media, which can give false or deceptive signals for supply/demand, price formation for wholesale energy products

Updating the list of offences

The list of offenses in the energy markets has been supplemented with the following types of abuse on the market:

  • (i) violation of restrictions on the use of insider information (a fine of up to UAH 51 million)
  • (ii) manipulation (fine up to UAH 51 million)
  • (iii) non-disclosure or disclosure of insider information with violations (fine up to UAH 25.5 million). In any case, the fine should not exceed 10 per cent of the annual income (revenue) of the person who is being prosecuted. At the same time, the NEURC is empowered, together with the application of a fine, to issue an order for the return of income received as a result of an offense

Updating of the NEURC competence:

  • to define the requirements on prohibition and prevention of abuse on the wholesale energy markets
  • to determine requirements for disclosure of insider information
  • to define a list of actions that are recognised as manipulation or attempt to manipulate, as well as acceptable market practices that are not manipulation
  • to monitor the electricity and gas markets, trading activities and behavior of their participants in order to identify signs of market abuse or suspicious activity and prevent abuse
  • to register participants in the wholesale energy markets
  • to cooperate with international and foreign regulatory authorities regarding the integrity and transparency of the wholesale energy markets
  • to receive information from persons who professionally organise transactions with the wholesale energy products regarding such transactions
  • to initiate and conduct investigations of the revealed violations in the use of insider information, or actions with signs of manipulation in the wholesale energy markets
  • to apply sanctions for abuses in the wholesale energy markets
  • to interact with the Antimonopoly Committee of Ukraine and the National Commission on Securities and Stock Market in the monitoring process and in the investigation of violations regarding the functioning of energy markets. The procedure for cooperation will be determined by a memorandum of cooperation.

Requirements for insider information

  • the owners of insider information are prohibited to carry out transactions with the energy products for their own benefit or the benefit of third parties using insider information; disclose, transfer, provide access to insider information
  • restrictions on handling insider information apply to (i) members of the supervisory board or the executive body of market participant, (ii) owners of shares or share capital of market participant, (iii) persons who have access to such information due to their professional, labor (official) duties, (iv) persons who have gained access to insider information as a result of illegal actions, (v) persons who know or should know that the particular information is insider information
  • persons who professionally organise transactions with the wholesale energy products are obliged to notify the NEURC about transactions with signs of (i) violations of handling insider information or (ii) manipulation

Conclusion:

The Draft Law is intended to introduce the European rules on integrity and transparency of the wholesale energy market into the legislation of Ukraine. The Draft Resolution is aimed at bringing regulatory documents in line with the Electricity Market Law of Ukraine and introducing mechanisms for its implementation in terms of compensation to RES producers for curtailments.

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 on compensation for curtailments, or regarding mechanisms for preventing abuses in the energy markets
  • 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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