Launch of electricity market in Ukraine: opportunities and risks

 

 Starting from July 1, 2019, electricity market started to operate in Ukraine – electricity prices began to be determined on a market basis. However, today market participants and experts have different opinions about the readiness of the energy system. Similarly, the various implications of the launch of the market for consumers are also different. It is significant that the two largest players in the electricity market – state-owned Energoatom and DTEK, which is part of SCM Rinat Akhmetov, who control more than 80% of the market – say they are ready to work on the new rules from July 1. Among the critics of the new market are international organizations and players in the market. One of the biggest opponents is Ihor Kolomoiskyi, which owns ferroalloy plants. The only thing that everyone agrees so far – a large-scale and complex reform has not yet affected how much the population pays for electricity. At the same time, disputes about who should pay for the difference between market prices for electricity and its price for the population – are continuing. Similarly, the first days of the market under the new rules did not clarify how one more task of the reform would be solved – demonopolization of the market, and hence more competition and better prices for consumers.

The Law “On the Electricity Market” provides for the launch of a new model of the electricity market, including the bilateral contracts market, the day-ahead market, the intra-day market, the balancing market and the market for ancillary services.

Thus, large consumers of electricity will be able to buy it directly from the manufacturer, and not through intermediaries. Small consumers will buy from intermediaries. But due to the great competition between traders and producers, it is likely that it will be possible to achieve a reduction in the price of electricity both in the country as a whole and for the consumer directly.

Such changes will take effect within a two-year period.

It should be noted that the law is a lot of “stocking” and for the real launch of the market, the development of secondary legislation is necessary. In particular, the document introduces the concepts of the commercial accounting code, the code of transmission systems, market rules, which should still be developed by the power system operator and approved by the National Commission, which carries out state regulation in the fields of energy and utilities. The code under which the market will work for a retail buyer also needs to be developed.

The adopted law introduces the norms of the Third Energy Package of the EU, including the issue of separation of companies in the areas of distribution and transmission of electricity.

First results

According to the results of the first exchange trading in electricity sales, DTEK (a member of the SCM group controlled by Rinat Akhmetov), ​​which controls about 80% of thermal generation, has reduced prices by 12% compared to the first half of this year.

The leading role in this was played by another monopolist – the state “Energoatom”, which produces more than half of all electricity in the country. His price offer turned out to be better when there were direct bilateral contracts between the manufacturer and the buyer.

Moreover, the offer to Energoatom was so attractive to buyers that the price of electricity sold by Energoatom increased by 35%.

On the other hand, manufacturers are beginning to talk about rising electricity costs for industry. For example, the Interpipe holding, controlled by businessman Victor Pinchuk, announced an increase in electricity prices for industrial consumers by 22% compared to June.

The average weighted price of electric energy for industrial consumers in the new wholesale market on the basis of the first ten days of the new model has increased by 30% compared with the price in June.

Also, there should be noted next results:

  • The power system is in normal mode. There is no interruption in electricity supply to consumers due to the launch of a new market model.
  • All major segments and functions of the new market are working.
  • The results of the first trades on the market for the day ahead were formed at a level lower than the price limits set by the NCCREC.
  • Electricity prices for households have not changed and remain the lowest among European countries.
  • Fixed technical failures in the operation of systems and platforms were promptly eliminated.

How has the “market” worked before?

The electricity market in Ukraine was previously operating on the model of a single “boiler”. All generating companies sell electricity to the state enterprise Energorynok at a state-specified price. For each manufacturer a separate price is established.

With the previous model of tariff formation, the most expensive was “green” energy, and the cheapest electricity was produced by nuclear power plants. The fact is that Ukraine has low taxes on fossil energy emissions, and the cost of electricity generated by the Nuclear Power Plants does not include the cost of decommissioning.

In Energorynok electricity is bought by distribution companies – so-called oblenergos. They deliver it to consumers at a regulated rate. Most oblenergos are private and belong to large business representatives. The state has its share in a number of enterprises.

At an unregulated rate, there is a narrow circle of companies that buy and sell electricity at a contractual price.

For the population there is a preferential price, it is lower than the market price. The whole difference lies on the shoulders of the industry. Under this model, money from the consumer to the manufacturer goes up the chain: from consumers to oblenergos and then to Energorynok. After that, funds are distributed between the producers and the operator of trunk networks – the state-owned company “Ukrenergo”.

How were electricity tariffs set before?

Previously, electricity tariffs for businesses were set at the average weighted hourly consumption rates in each oblast.  That is, enterprises in the territory of a certain region received an average tariff, regardless of whether they worked at peak times, when the cost of electricity in the wholesale market was maximum, or around the clock, when the value for them was much lower.  The subsidized three-zone tariff still operated; however, it was economically interesting only to a narrow circle of consumers.

What changed after January 1, 2019?

The first part of the electricity market reform in Ukraine started on January 1, 2019. She touched the retail market – players who work with the end user. If before the business bought energy in oblenergos, now he can choose any convenient supplier.

The oblenergos themselves have been divided into two parts since January 1: one will act as an electricity distribution operator, that is to serve the grid, and the other will become a supplier. In other words, oblenergo now deals only with wires and transformers, and for electricity the consumer pays to another supplier structure.

However, the market started to work fully on July 1. The second part of the reform affected the wholesale market, which involves the work of generating companies under the new rules.

In particular, the cost of electricity for nuclear power plants and hydro power plants will be set by the market, and coal generation will not substantiate NERC coal prices, as it was before. Suppliers will be able to negotiate with manufacturers on various payment schedules for electricity.

The cost of electricity under the new rules will depend on volumes of consumption, payment schedules, payment discipline and consumption in the context of the day. As you know, during peak hours, electricity is more expensive, and at night it is cheaper.

What should change after a full start?

From July 1, the second part of the electricity market should be launched – the reform of the wholesale market.  After that, the rules of work for the generating companies will change. In particular, prices for nuclear power plants and hydro power plants will be set by the market, and not by the state, and coal generation will not justify NERC prices for coal burning.  Suppliers will be able to negotiate with generating companies on different payment schedules for electricity. In addition, participants in the wholesale market will have financial responsibility for complying with the amount purchased in the generation and delivered to consumers energy.

What is a provider of last resort?

This is a peculiar airbag. This supplier will automatically supply electricity to a bona fide consumer if something happens to his supplier. This means that such conscientious consumers will not remain without electricity during the search period for a new supplier. The only nuance – such consumers can receive current energy at rather high prices.

What will the new market change for producers, suppliers, consumers (business and population)?

The population in Ukraine is a subsidizing part of consumers and will not feel significant changes.

Other consumers will have to build accurate forecasts of consumption, suppliers – individually tailor to each customer, taking into account seasonal and daily consumption, generating companies – to compete with each other in production.

There may be some increase in the average purchase price by about 10%, but this tariff is significantly lower than in the EU. However, as some experts predict, rising cost of electricity for manufacturers can be much higher and reduce their competitiveness, and then will affect the end user – the population.

Estimates of possible price increases ranging from 10-25% to 200%.

What are the risks inherent in the new electricity market?

There are about a dozen problems that other market participants and consumers will face.

Among them, participants and market experts point out the following:

  • Low level of competition in the market, since more than 80% of the generation are held by two players – Energoatom and DTEK. At the same time, there is no opportunity to import electricity. Hence a growth of tariffs is possible;
  • Absence of an exhaust system of commercial accounting and system operator;
  • Unresolved problem of multibillion-dollar debts in the industry and those who cover them. Today they amount to about UAH 36 billion;
  • It is unclear who will compensate lower than market tariffs for the population, as well as higher than average in the market, “green” tariffs. On the first and second, it is estimated that 70-90 billion UAH a year will be required.
  • The technical problem is the provision of correct hourly data on the consumers of each supplier, as with incorrect data on electricity consumption over the course of a day, suppliers will lose a lot when compensating for the imbalances. Prices on the wholesale electricity market vary on an hourly basis, so it is extremely necessary to understand how much the enterprise consumes energy at a specific hour: at night, when the current is the cheapest, or when the day is expensive.