The Parliament of Ukraine has adopted the Law of Ukraine No 663-VII “On Basic Principles of the Electricity Market Functioning” (dated 24 October 2013( (the “Law”). The Law is a part of the so-called “European package”, being one of the legislative tools to facilitate Ukraine’s implementation of (i) EU Directive № 2003/54 EC concerning common rules for the internal electricity market and (ii) EC Regulation No 1228/2003 26 June 2003 on the conditions for accessing networks for cross-border exchanges of electricity (both dated 26 June 2003). The primary goal of the Law is a step-by step liberalisation of the internal electricity market.
The full-scale liberalised electricity market shall commence operations in Ukraine on 1 July 2017. Once it is implemented in Ukraine, the Wholesale Electricity Market (WEM) of Ukraine (established according to a single-buyer model) shall be reorganised and divided into the following submarkets: (1) market of bilateral contracts; (2) day-ahead market; (3) balancing market; (4) market for ancillary services; and (5) retail market. The necessary secondary legislation and market rules are expected to be adopted in 2014-2017 (the so-called “transition period”, when only certain provisions of the Law are in effect).
The Law is an all-encompassing legal act, which changes completely the fundamentals of the internal electricity market of Ukraine. It requires a thorough analysis and in-depth study, but some of the most important highlights are listed below:
- Bilateral electricity trading shall take place outside the power exchange (the so called “day-ahead” market) based on contracts for sale and purchase of electricity. These contracts will be executed between the power generators on the one hand and other market players (mostly – power suppliers) on the other hand, for a period of at least three months. Players in this market can freely choose their counterparties and are not obliged to publicly disclose their contractual arrangements. Under bilateral contracts the power generators can sell all the electricity they generate, save for volumes that must be traded on the day-ahead market. The price for electricity produced by hydro (HPPs) and nuclear (NPPs) power plants shall be established by the National Commission for State Regulation of the Energy Sector (NERC) in order to include the value of the services for adjustment of the competitive environment, rendered by the Cost Imbalance Allocation Fund.
- The day-ahead market is a market where the prices and volumes of electricity traded are based on supply and demand dynamics. The market is based on a competitive pricing mechanism and is basically a bidding auction, which is held one day before the actual delivery of electricity. The day-ahead market is managed by the Operator, which accepts bids to sell or buy electricity in advance (but no later than a certain time for each hour of the next day) and holds an auction. NERC establishes the minimal amounts of electricity to be sold by the power generators at the day-ahead market (according to the Law it may not be more than 15% of the monthly volumes for any power generators, save for renewable power plants and HPPs). The Operator’s functions shall be performed by a public joint stock company, 100% owned by the State.
- The balancing market is established for handling imbalances recorded during the previous periods of operation of the electricity market players. The market is operated by the System Operator, who is responsible for balancing, and who will accept the bids of the market players for load increase (decrease). Acceptance of a particular bid by the system operator results in the sale and purchase of the relevant amounts of electricity. The market players responsible for balancing may also join their efforts and form a group of balancing parties. The functions of the System Operator shall be performed by National Joint Stock Company “Ukrenergo”.
- The market for ancillary services includes various types of energy and capacity products to meet the reliability requirements of the market players. The power generators bid for a right to deliver such ancillary services to the System Operator.
- At the retail market the electricity is traded between the power suppliers and the consumers. The power suppliers are divided into two groups: (i) guaranteed (i.e. - Oblenergos) and (ii) independent ones (i.e. private companies licensed for electricity trading). Starting from 1 January 2015 all consumers in Ukraine will be entitled to choose whom they will purchase their electricity from: either guaranteed or independent power suppliers.
- Cogeneration plants (CHPs) shall enjoy certain privileges under the Law. For a period of ten years after the full-scale market is implemented (i.e. after 1 July 2017) the prices for electricity produced by CHPs shall be established by NERC and the operator shall be obliged to purchase it from CHPs at the minimum price for electricity (permitted by the day-ahead market rules).
Novelties for the renewable power producers:
- The renewable power producers shall sell the electricity to the so-called Guaranteed Buyer (a state enterprise to be designated later by a separate resolution of the Government - most likely, State Enterprise “Energorynok”) under the bilateral contracts at the feed-in tariff. The Guaranteed Buyer then re-sells the electricity at the day-ahead market. The Law ensures the priority purchase of electricity from the Guaranteed Buyer on the day-ahead market - the minimum price for electricity (permitted by the day-ahead market rules) shall be established for the Guaranteed Buyer. The difference between the price of the electricity at the market of bilateral contracts (i.e. feed-in tariff) and price of electricity sold at the day-ahead market will be reimbursed to the Guaranteed Buyer by the Cost Imbalance Allocation Fund.
- The Cost Imbalance Allocation Fund is a non-profit organisation established by the Government for maintenance of the competitive environment in the electricity market of Ukraine. The Fund will deliver the services for adjustment of the competitive environment at the market. In particular, such services shall be delivered to: (i) NPPs and HPPs; (ii) the power suppliers engaged in import operations; and (iii) transmission companies. At the same time the Cost Imbalance Allocation Fund will also be purchasing services for adjustment of the competitive environment from: (i) the Guaranteed Buyer; (ii) guaranteed power suppliers (i.e. Oblenergos) and (iii) CHPs. By purchasing the services the Fund will be compensating their losses during sale of the electricity at prices lower than the free market prices.
- The renewable power producers selling electricity at the feed-in tariff should also enter the special balancing group where the Guaranteed Buyer (as the party responsible for balancing on behalf of all such producers) shall settle imbalances that emerge within such balancing group. The costs of the Guaranteed Buyer associated with the settlement shall be reimbursed by the Cost Imbalance Allocation Fund. The renewable power producers (save for wind and solar power plants) shall reimburse cost of the imbalances in the following shares: (i) during the first year after the full-scaled market is implemented – 0%; (ii) during second year – 50%; and (iii) starting from third year – 100% of cost of imbalances.
- The renewable power producers (save for those ones which have executed their connection agreements prior to 1 July 2014) shall be entitled to obtain the feed-in tariff only if their construction project is in line with the so-called Development Plan of the United Energy System of Ukraine for the Next Ten Years (the “Development Plan”). The Development Plan must be elaborated and adopted by the System Operator and approved by competent state bodies and the Government before 1 January 2014, and will then be revised on an annual basis. It is the System Operator who will decide whether the construction project complies with the Development Plan (mostly by answering the question whether a renewable energy plant is needed in a particular region).
- If a construction project of a renewable energy plant is not in line with the Development Plan, such power plant shall not be eligible for (i) a feed-in tariff; and (ii) connection to the grid through 50/50 funding scheme (i.e., when 50% is covered by the transmission system operator (the TSO) at the cost of electricity transmission tariffs and other 50% is covered by the reimbursable financial assistance rendered by the renewable power producer and repaid by the TSO). As a result, connection of such “non-eligible” renewable energy plants shall be performed by the TSOs according to the general funding scheme (first and foremost the mentioned power producers shall be required to pay the applicable connection fee).
- The Law provides that the transition period will last approximately for 3.5 years (between 2014 and 2017). During this period only the following markets will be operational in Ukraine: (1) WEM, (2) retail market and (3) market for ancillary services (operated by Ukrenergo). In the meantime the Government, NERC, Ukrenergo and Energorynok will be elaborating and adopting the necessary legislative environment
- The Law also changes a number of basic principles of the auction procedure for obtaining access to the transnational power lines. For instance, if the export capacity exceeds demand, access to the transnational power lines shall be granted free of charge. Private entities will also be able to construct new capacities for export purposes and such objects shall not be subject to auctions for a certain period of time, while the investing entities shall have a right of priority access to such new capacities. The changes mentioned in this paragraph will become effective as of 1st December 2014.
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