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Panel discussion: The Law on Electricity Market is a big step forward, but the reform success also depends on subsidiary legislation

Kyiv, June 10, 2017.

The adoption of the law on electricity market is a big step forward for Ukraine that will promote competition in the market, improve service quality and attract investment. However, successful implementation of the new model also depends on subsidiary legislation, coordination of actions between all parties to the reform and quality of communication with consumers. This was stressed by experts, representatives of ministries and industry during the discussion at Ukraine Crisis Media Center.

What changes to expect?

The new model introduces a division of electricity production and transportation and creates competition among market players. Competition will motivate players in both segments to offer the better quality at the better price and allow consumers to choose, informed Lev Pidlisetskyi, MP of Ukraine (faction “Union ‘Samopomich’”), member of the Verkhovna Rada of Ukraine Committee on Fuel and Energy Complex, Nuclear Policy and Nuclear Safety. A new type of player appears – a trader, i.e. an organization that buys electricity for resale and not for supply. The monopolies – transmission system (“Ukrenergo”) and regional power distribution companies – remain regulated. Electrical energy distribution will be the sole kind of activity of regional power distribution companies. According to the Third Energy Package requirements, they will be obliged to provide equal access for all electricity sellers and will not have the right to sell electricity independently.

The emergence of the market will attract investment in the energy sector. In the coming 20 years, Ukraine will need $15-20 billions of investment depending on the consumption growth scenario. Without large-scale investment in energy sector for modernization and construction of new facilities, Ukrainian consumers will continue to waste money due to inefficiency of networks and generation, as well as will face the energy deficit when the country’s energy needs increase. “We get to choose: residential customers and Ukrainian business will pay for these investments, resulting in its lower competitiveness in the foreign market, or we will attract private financing. Without rules of the game set out investors will not enter our market, because they want to see the same rules as they are following in other countries. […] It is very important to ensure stability and security of what has already been laid down in the legislation, because such projects attract long-term capital,” emphasized Yuliia Kovaliv, Head of the Office of the National Investment Council under the President of Ukraine. She noted that after launching the gas market, three large traders have entered it and significant investment has been made in the sector.

When will the market start working?

It is planned that transition to the new model will take two years. During the next 6-24 months the Cabinet of Ministers has to reorganize SE “Energorynok” and corporatize NPC “Ukrenergo” taking into account the requirements to separate the transmission system operator. Regional power distribution companies should be reorganized within 7-18 months. They will be separated from generation, transmission and supply of electricity, and the new appropriate business entities will be established. Not later than in 2 years, trading activity will be introduced in the electricity market.

It is expected that the balancing market, ancillary services market, day-ahead market and intra-daily market as well as bilateral agreements will take effect from July 1, 2019. To this date NKREKP has to assure the absence of cross-subsidization between the different categories of consumers. A detailed action plan is available here.

Risks and challenges

Major challenges include the development of subsidiary legislation and implementation of statutory provisions. “Our European colleagues who have implemented such a model point out that almost all the risks are associated with subsidiary legislation. The preliminary analysis of the market rules included in the project reveals that we have not even begun to learn and understand, what will happen to energy companies after the transition to the new market,” noted Andriy Perevertaiev, independent expert.

“It is very important to avoid ‘distortion’ of the reform at the level of by-laws. For this purpose, it is proposed to create the Coordinating Council. The best option would be to involve experts from Eastern and partially Western Europe, who are using this model. Then we would adopt the existing market rules and not invent ‘from scratch’ the Ukrainian specific regulations that may create additional obstacles when large companies enter the Ukrainian market,” emphasized Yuliia Kovaliv. “We have to create all opportunities for competition and ensure that all agencies entrusted with the obligation to implement the law, e.g. NKREKP, should work effectively and ‘do their homework’; that is, they should adopt non-legislative acts that are equidistant from all participants and allow consumers to receive a quality service,” added Lev Pidlisetskyi.

The experts also noted that a two-year period for launching the new model is too short time, given the number and complexity of tasks. The most difficult task is launching the balancing system, which requires special software. Andrii Nemyrovskyi, director of market development and customer service of the NPC “Ukrenergo,” noted that this software is planned to be ordered from a company that has experience in developing similar software for European countries. Another task is to interconnect the Ukrainian power grid with the European one, instead of Russian. Without this the new model will not yield the expected result. The success of these and many other changes depends on the quality of coordination of all involved state agencies through a special coordination center and calculation of risks.

Besides, it is required to establish quality communication with consumers. “We should clearly explain the end user what we do and why it is required. If such an understanding is not reached with local governments and regional businesses, the reform will fail,” stressed Andrii Perevertaiev. “To balance the interests of all actors in the market, it is important that consumers understand what tools and market power they will have,” added Yuliia Kovaliv.

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