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Reforms in the energy sector during the summer: results of expert monitoring

Kyiv, September 06, 2017.

What has changed in the energy and environment sectors within the framework of implementing the EU-Ukraine Association Agreement and what is an agenda for the authorities in the new political season? Find the answers in the expert comments on the results of June-August 2017 monitoring, conducted by Ukrayinska Energetyka and DiXi Group. The findings of the monitoring were presented at a press briefing at Ukraine Crisis Media Center.

Electrical power industry

The major event was entering into force the law on the electricity market. In August, the government approved a resolution on a coordination center for the introduction of a new market. Corporatization of Ukrenergo and certification of the transmission system operator will be among the first organizational arrangements, said Svitlana Holikova, Independent Expert, Head of TransEnergoConsulting Company. However, we can see neither steps to corporatize and unbundle Ukrenergo from other actors nor a model showing how to do it. Overall, implementation of the Law requires developing and approving more than 100 normative legal acts, 86 of which – by June 2018. Of these, 60 are in the area of responsibility of the NKREKP (the National Regulatory Commission on Energy and Utilities). So far, only one of them has been approved – the procedure for certification of the transmission system operator. Given that the NKREKP will probably not have a quorum for decision-making starting November, there is a risk that not everything will be adopted on time.

Another significant event was the signing of the Agreement on the terms of future unification of Ukrainian and Moldovan power systems with the Continental Europe grid between ENTSO-E and State Enterprise NPC Ukrenergo on June 28. Now it is necessary to make appropriate organizational arrangements for the integration.

Gas

The main positive summer event was a preliminary decision of the Stockholm arbitration in favor of Naftogaz, although there is no final settlement of the dispute under the gas supply contract with Gazprom yet, said Roman Nitsovych, Project and Program Manager at DiXi Group. Another thing worth mentioning is a review of the norms of gas consumption for households without an energy meter: they have been reduced by 25%. Reduced norms should encourage regional gas managements to install energy meters and contribute to achieving 100% gas accounting. The third positive achievement was a decision to create a customs warehouse on the basis of gas storage facilities, where traders can store fuel without paying customs duties up to 3 years. This will help fill the storages by more than 50%.

Among the problems is the fact that in August the Secretariat of the Energy Community initiated proceedings against Ukraine due to the provisions imposing special obligations on gas market participants regulating prices for the population, religious organizations and heat supply providers, which do not comply with the EU Directives. “First of all, it is necessary to abolish the Naftogaz monopoly on the purchase of gas by state-owned companies – it primarily concerns Ukrgazvydobuvannia, and to abolish regional gas managements monopoly to purchase this gas from Naftogaz Ukraina for the consumer to have an opportunity to freely choose and change the supplier at the retail gas supply market,” Roman Nitsovych explained. Another challenge is that gas production is growing slower than expected – by 3% instead of 8%. The situation with gas distribution tariffs remains unresolved.

“The progress of gas reforms this autumn will depend on the disputes between the government and Naftogaz over the management of Naftogaz itself and on the reform of the gas transporting system (GTS) operator. We mean a plan for GTS modernizing, the gas price, which will come into effect on October 1, and the sequencing of the separation of Naftogaz assets from transportation and storage of gas. Unbundling will be a key task for the government this autumn,” said Roman Nitsovych. Development of Naftogaz strategy is still a separate challenge.

Oil

According to Hennadiy Ryabtsev, Director of Special Projects of the Scientific-Technical Center “Psychea”, the only breakthrough this summer was the adoption of the Energy Strategy. Other reforms are postponed – adoption of a new Code on Mineral Resources, implementation of Directive 98/70/EC on the quality of gasoline and diesel fuel and Directive 94/63/EC on the control of emissions from oil reservoirs. For unknown reasons, the issuance of special permits for the use of subsoil was suspended, which has already affected the volumes of extraction. “It can put an end to the plans to increase gas production announced late last year,” said the expert.

According to the oil expert group’s participants, the achieved results become progressively less correlated with those planned. “As an example, on August 18, it was reported about the approval of the Energy Strategy. However, we have not seen the document yet. On June 2, the concept of the coal industry development was approved by the Government. However, it has not been made public yet,” noted Hennadiy Ryabtsev. Besides, the published acts of financial audits of the enterprises responsible for the fulfillment of Ukraine’s international obligations revealed that the work on the headline projects had been stopped. The Ministry of Energy and Coal Industry, Ministry of Natural Resources, Public Service of Geology and Mineral Resources consider that a number of tasks in the oil sector have been fulfilled despite the fact that the State Regulatory Service has returned the draft decisions for finalization because of their non-compliance with the regulatory requirements. “There is a certain list of expectations. This list was set forth on July 6, 2017, in the appeal made by 22 independent experts to the President, Prime Minister and Speaker of the Verkhovna Rada,” the expert reminded.

Ecological component

The greatest achievement in the environmental sphere can be considered the signing of the law on the assessment of the environmental impact and the law on the protection of virgin forests by the President, said Zoriana Kozak, the Senior Analyst at the Resource and Analytical Center “Society and Environment”. In summer, the Cabinet of Ministers approved a plan for developing legal acts for their implementation. Among them is the register of environmental impact assessment that involves many organizational and technical challenges.

Tomorrow, the Verkhovna Rada will consider the law on strategic environmental assessment in second reading. However, some of the amendments proposed by the deputies contradict the obligations under the Association Agreement and national legislation, noted Zoriana Kozak.

Business climate in energy sector

The reforms of public procurement and control over the distribution of state aid are moving according to a standard schedule, informed Andriy Bilous, an analyst at DiXi Group. In August, a new portal for state aid to business entities began to work. It will help market participants notify the Anti-Monopoly Committee of cases of unjust cases of receiving state aid. There is progress in the field of public procurement: EDRPOU has been joined to the ProZorro system, which will speed up procedures for tenderers and customers; the system of risk indicators is implemented, which will allow the suspicious tenders to be detected.

The reform of the regulator (NKREKP) lags behind the schedule, and this will adversely affect the business climate. A Competition Commission intended to select candidates for new members of the NKREKP has not been created yet. Currently, only 4 members of NKREKP have authorization. In November, the term of office of two more members will expire, which will result in the absence of a quorum and the impossibility to make decisions. “The lack of a quorum and impossibility to make decisions mean that the energy sector will be without a governing body for a long time (1.5 – 2 months, if the Competition Commission is created in October), and therefore the regulator will be unable to issue licenses and approve investment plans, as well as to fulfill other functions,” explained Andriy Bilous.

Energy efficiency

Among the positive results of the summer in the field of energy efficiency is the adoption of three out of the four laws necessary for the reform: on Energy Efficiency, On the Energy Efficiency Fund, and on the Commercial Accounting, informed Yuliya Cheberyak, expert of the Civil Network OPORA. Although the secondary legislation to these laws is already being developed, some questions related to the publicity of the Ministry of Energy arise because none of the results of these working groups has become publicly available. The reimbursement of subsidies for housing and public utility services and the proper financing of the “warm loans” program remains to be the problems (this program is underfunded now).

The key task for the autumn is the adoption of the law on housing and public utility services. “If a new law on housing and public utility services is not adopted, many acts will not be implemented, and their development and adoption will be a waste of time. It is necessary to finally adopt Law No.1581-d on housing and public utility services, which will be indicative of the full implementation of reforms in the housing sector, energy efficiency and energy conservation,” stressed Yuliya Cheberyak.

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