On 24 October 2013, Ukrainian Parliament adopted the Law of Ukraine "On Principles of Functioning of the Electricity Market of Ukraine" No. 663-IV (the "Law"), which became effective from 1 January 2014.

General Overview

According to experts of the Ministry of Energy and Coal Industry of Ukraine, the main purpose of the Law is to liberalize the country’s wholesale electricity market and to create an effective competitive electricity market consistent with the basic requirements of EU legislation.

Previously, all wholesale trade in electricity was performed through the state enterprise "Energorynok", which operated as intermediary between the electricity producers and the suppliers selling electricity to end customers. Essentially, such production and supplying companies were the only players on the Ukrainian wholesale electricity market. As per the new Law, it would be possible for customers to become electricity market players and to freely choose their own electricity supplier.

To ensure efficient and free access to electricity grids, the Law provides the possibility to establish distribution and transmission independence for the electricity system operator (an entity which performs united energy system control and balancing functions) and stipulates the appointment of an independent managing body (the Board of the market).

The above changes meet the requirements of the Third EU Energy Package.

New Markets

The main innovation of the Law is the creation of a new market model which consists of:

  • bilateral market,
  • "day in advance" market,
  • balancing market,
  • retail market, and
  • ancillary services market.

Electricity trading on the each of the markets above is subject to specific regulatory requirements.

On the bilateral market, electricity is purchased and sold upon bilateral agreement on prices, electricity delivery volume, and the timing of the order. On this market, electricity should primarily be purchased for further resale.

On the "day in advance" market, electricity is purchased by the "day in advance" market players in organized auctions by entering into respective agreements with operators.

Electricity prices and volumes for the day in advance sale are determined in accordance with the "for a day in advance" market rules. Such prices may be used as an indicator during the electricity prices determination (for purchase and sale) on the bilateral contracts market and the balancing market.

On the balancing market, system operators purchase/sell electricity according to selection's results on the basis of the balancing market proposals submitted by the balancing participants (players taking part in balancing the electricity production, import, and consumption).

On the ancillary services market, system operators purchase ancillary services from electric generation companies.

Until the system operator is established, its functions are performed by the state-owned enterprise that provides centralized (operative and technological) control of Ukraine’s united energy system.

On the retail market, end consumers purchase electricity.

Fund for cost imbalance distribution

Another important innovation is the creation of the Fund for cost imbalance distribution (the "Fund"), which aims to redistribute costs between the market players and to create a competitive environment on the electricity market.

The Fund will obtain a (mandatory) part of the revenues received as a result of business activity from nuclear power plants, hydroelectricity power plants (other than micro -, mini –and small hydroelectricity power plants) and those energy suppliers that import electricity. These funds will be redirected to the guaranteed buyers (market players buying electricity on "green" tariffs) as compensation for the difference between the price of guaranteed electricity (purchased on "green" tariff) provided to public under regulated tariffs and the electricity market price.

Licensing

In addition to the existing licensed business activities related to electricity production, transmission, distribution and supply, the Law establishes new business activities that are subject to licensing:

  • market operator activities (operator of the "for the day in advance" market),
  • system operator activities, and
  • guaranteed buyer activities.

Implementation

Implementation of the new market model will be gradual. In 2016, a new energy market model should be launched in pilot mode, and will take full effect starting from 1 July 2017 after the adoption of certain additional regulations.

It is expected that the implementation of the Law will de-monopolize the energy market and will incentivize investment into Ukrainian electricity market.