Aleksey Dubovskyi: Our ambition is to turn the Ukrainian market into a gas hub

Aleksey Dubovskyi: Our ambition is to turn the Ukrainian market into a gas hub

The electricity and natural gas markets are still in their infancy and are still reforming. In this context, the gas and electricity market entry has become a new stage of development for gas and electricity market players. What opportunities will it provide for gas and electricity market participants? How will it turn out for energy buyers?

More information about new exchange instruments, the increasing role of the exchange in the market regulation of energy markets (and not only), the Chairman of the Exchange Committee of the Commodity Exchange "Ukrainian Energy Exchange" and co-chairman of the Committee on Fuel and Energy of the European Business Association (EBA) Aleksey Dubovskyi told in an interview to "EnergoBusiness".

Alla Eremenko

You spoke enthusiastically about the Law No. 738-IX "On Amendments to Certain Legislative Acts of Ukraine to Simplify Attraction of Investments and Introduction of New Financial Instruments" adopted by the Parliament and already signed by the President. What will it do, in particular, for UEEX?

This law was developed for quite a long time by a working group, which, in addition to PDs, included representatives of the National Commission on Securities and Stock Market (regulator of this market), representatives of the Office of the President, EBRD, UEEX and other stakeholders and organizations. 

What "new instruments" are we talking about? How can the adopted changes help to attract investments?

The main thing is that this document has legalized such concepts in Ukrainian legislation as derivative, forward, clearing. These are exchange instruments, which are used all over the world and due to which, first of all, energy markets have the opportunity for more flexible work, which is reflected in the price of energy resources for buyers. They are also a signal to investors that the market is transparent and therefore attractive.

The law gives one year to bring the activities of energy markets in line with its norms. The Exchange has the right to carry out clearing of the central counterparty independently up to 1.01.23 and further, if no central counterparty is created.

FOR THE INFORMATION: The main derivatives (as it is still the case today) are forward, futures, options, swaps and their varieties (for example, futures option, swap option). The NSSMC may also refer to other types of contracts (agreements) as derivatives in accordance with the criteria established in the Law No. 738-IX. Futures is a contract concluded by participants only at the exchange with the obligatory intermediary of the central counterparty. Forward transactions - as a rule, it is a contract that is concluded directly between business entities, but in order to reduce the counterparty's risk. Parties to such a contract may carry out clearing through the central counterparty or entity that has a license to carry out clearing activities to determine the obligations.

So the opportunity to prepare exists?

Absolutely. The adopted Law gives new opportunities for work, first of all, on energy markets. We can say that it establishes more civilized rules of the game in these markets.

It should be noted that the Ukrainian Energy Exchange still provides clearing services (in the sense of the Law №738-IX) - provides clearing of the obligations of bidders: defines, calculates the obligations of bidders (in money and commodities) to each other and to the exchange (before, during and after the auction), applies to bidders warranty, compensation mechanisms, fines and penalties.

Depending on products, compliance is applied to exchange participants, and a "set" of risk management tools is used to reduce the risk of trading participants failure to meet their obligations under transactions concluded on the exchange. Now simply all these processes are described in the law.

In what way / how will this stimulate the development of energy markets?

The NSSMC will be required to create and approve a mass of regulatory documents (the so-called "secondary"). We hope that a year before the enactment of the law, the National Commission will cope with this. We have offered our assistance, are ready to provide our experience and participate in the process of creating a regulatory framework. Despite this, after its adoption, the UEEX will have to undergo the compliance procedure and obtain licenses for a number of activities.

Do you see any conflict of interest? Or is it standard, but not yet legalized lobbying? Are you involved in the process of creating regulatory legislation according to which UEEX is to obtain licenses for new activities?

What is the conflict of interest if we all strive to create the most acceptable rules for all participants in the open market? Lobbying? Yes, we try to communicate to legislators and regulators the full range of market interests and our vision of how to find a mutually acceptable compromise. Is this what you call lobbying?

Including, but not calling, I am asking. Licenses for what activities will UEEX receive on the eve of the entry into force of the above law?

At the first stage, it will be obligatory to obtain a license to organize trade in products and a license for clearing activities to determine the obligations.

The number one topic of recent weeks in the gas market is imbalances. At the same time, each gas market player presents a solution to this problem in his own way. Do you have a reasoned solution to this problem?

There are two problems with imbalances. First, let's call it "non-specific trading". The second is unpaid gas withdrawals (debts).

If we talk about the first problem, the variant of its solution, which is not my idea at all, is a clear instruction, described in the Pan-European Network Code on Gas Balancing of Transmission Networks (BAL NC). Before it was adopted, TSOs (Transmission System Operator) performed network balancing by purchasing gas through long-term contracts or using gas storage facilities.

BAL NC was aimed at stimulating liquidity in the short-term market, as well as providing network users with incentives to balance their portfolios independently.

Thus, the target model of Regulation 312 and, accordingly, the GTS Code is that market participants settle their imbalances independently on the trading platform (exchange), and the GTS operator performed only the residual balancing of the GTS on the same exchange platform. This is done by buying/selling short-term standardized products. Based on the results of such trades, margin prices for gas purchase and sale are formed. These prices should be motivating (penalties) for the participants to close their imbalances independently.

But this is the reason for the first disaster. The daily balancing market has been operating for a year and a half, and the Law that would allow the GTS Operator to purchase gas at the exchange has not been adopted. The necessary bill № 3176 of 5.03.20 is waiting for consideration by the Verkhovna Rada.

Thus, the GTS Operator did not perform balancing actions by selling/buying short-term standardized products on the exchange, but purchased gas to balance the GTS on ProZorro. The supplier of about 84% of such purchases was Naftogaz. Therefore, margin prices were calculated at ProZorro based on the cost of such purchases.

Although the tender procedure contained a formula that was supposed to bring the purchase price in line with the market price, the reality was different. Thus, marginal prices always differed from market prices and for sure did not motivate participants to settle their imbalances.

For example, the marginal purchase price is 3670 UAH per thousand cubic meters, and the market (exchange) price is 4370 UAH per thousand cubic meters. That is, it is profitable for market participants to create a negative imbalance - to take gas from the GTS and pay the GTS Operator the price for it, which is much lower than the market price. This mechanism has long ago become an instrument of speculation of individual participants. There were periods when it was more profitable to create an artificial positive imbalance.

That's why I called this problem "non-specific trading": A GTS operator buys gas from ProZorro to resell it through commercial balancing.

The GTS operator is not a trader, he should not be engaged in gas sales and purchases for someone to earn money on it. He is responsible for the GTS safe operation. If he sees that the withdrowals are bigger than the injections into the system, he should buy gas, if the injection is bigger - sell the surplus, but his role is residual, he should do it if someone could not close his own imbalance.

By the way, ProZorro is not intended for trading in standardized products, all over the world it is a function of exchanges, and MEDT has distributed a letter recommending market participants to focus on import parity prices and trading prices on our exchange.

I cannot say that market participants see the solution to this problem differently. Everybody knows what the exchange should earn in the short-term market and now it seems that we all have come to this. The GTS operator is also actively involved in the market opening process.

As for the second problem - unpaid withdrowals - it is not quite a balancing issue.

On August 17, a meeting of NEURC was held, during which representatives of almost all participants of the gas market spoke about balancing, or rather in connection with the regulator's draft decision on amendments to the GTS Code.

You also were a participant in this lively discussion. And…

Once again declared the readiness of the Ukrainian Energy Exchange to launch trading in short-term standardized products to enable participants to balance their portfolios, and the GTS Operator to balance the network.

Exchange trading systems have long been integrated with the GTS Operator and Oschadbank to use escrow accounts. Everybody understands that this is the only way to establish normal operation of the daily balancing market. (The interview took place before the decision of NEURC on the amendments to the Code of the GTS - Ed.).

In your opinion, why and is it really not possible for GTSOU to enter the stock exchange every day, for example UEEX, to regulate imbalances in a market way?

There will always be two answers to this question. First - GTS Operator can purchase gas without ProZorro. Many are inclined to do so, as the Law on Public Procurement contains a list of goods that can be purchased by individual entities without applying the procedure. And we are talking about gas to balance the GTS and to cover the technical and production needs. After all, why the bill on amendments to the Law on Public Procurement was not adopted earlier, although such initiatives were taken not once? Because there was a response to the draft laws from the central authorities: such a law is not needed, the current legislation allows TSO to buy gas not on ProZorro.

But, obviously, there is another opinion among the lawyers of the GTS Operator and their legal justification of what it should do. Now we have an internal working group with the GTS Operator, we are discussing the possibility for the Operator to "stand in a Trade Blotter" to buy/sell gas at the exchange on a daily basis for the PTN (production and technological needs). Therefore, we are optimistic about the future. And, of course, we are waiting for the adoption of draft law #3176 in the nearest future.

We also plan to launch in the near future a trading platform, working on the principle of bilateral counter auction - "Trade Blotter" - for "trading providing" of imbalances by participants. I hope it will be interesting for them, as at present there are difficulties with gas lower/raise to the UGS facilities, and this instrument may work.

What else will the Ukrainian Energy Exchange do to secure the right of superiority in energy trading?

Already have done. Between the Ministry of Energy of Ukraine, Energy Community Secretariat, EBRD and the Ukrainian Energy Exchange signed a memorandum on the development of exchange trade, conventionally speaking, the development of European gas exchange on the basis of the Ukrainian Energy Exchange.

Will it be a separate platform?

No, the gas exchange will be developed on the basis of UEEX. The signatories of memorandum will advise us on European energy legislation, peculiarities of using new exchange instruments, best world practices, help with expertise, etc. The Exchange is currently undergoing due diligence with one of the Big Four companies. The first step in our efforts is the launch of the short-term natural gas market.

Sounds promising. But the memorandum does not legally bind either party to anything. Nevertheless, does UEEX intends to become as powerful as the Dutch TTF, for example?

Generally, yes. But our goal in itself is not an aspiration to make UEEX influential, our task is to build a competitive gas market in Ukraine, and, yes, Ukraine has a large potential and opportunities to become one of the largest hubs in Europe.

Sounds loudly …

We not only signed the memorandum. We are seriously working to become an exchange platform, first of all, for transparent trading of energy resources. Naftogaz's entry to our exchange a year ago became another impetus in natural gas trading. But if we look at the dynamics of trading in the first half of 2020, that we can see that out of 750 million cubic meters of gas only 250 million cubic meters are Naftogaz sales. Private production companies and traders have come to our exchange platform. More than 300 traders, both domestic and European, are already trading with us. Therefore, I hope that the gas market will evolve and develop in the direction we all need.

If there are three hundred traders traded on your exchange, why does the GTS Operator not exist on it? It is in his interest...

Our trading system is integrated with the GTS Operator and Oschadbank to work together. Once the GTS Operator makes a decision, we are ready for daily trading. GTSOU head Sergey Makogon talks about the operator's intentions to do this in the near future.

And if S. Makogon will not lead the GTSOU? For example, will he be invited to more interesting and highly paid work? What will happen to the project of the exchange cooperation with the GTS Operator?

We have developed a "road map" for the work of a gas exchange essentially without reference to names. If necessary, well, we will get acquainted with the new head of the GTS Operator.

Now the first task is to make changes to the Law "On Public Procurement". Second, we will teach all gas market players to work in this platform. Third, it is work with Oschadbank in terms of clearing and settlement. If by large swabs, this is a "road map".

Is this what you should do, i.e. the exchange?

We will do it. We have done it in other markets on several occasions as well. Also, the Exchange Board (a kind of advisory/observisory board) will include representatives of the EBRD, Energy Community, Ministry of Energy, possibly the GTS Operator to coordinate work on the gas exchange development.

We consider the gas market a priority in 2020-2021! And we will focus on its market development. Ukraine has gas resources, gas transmission infrastructure, underground gas storage facilities, plus its geographical location - all this allows Ukraine to become a large, liquid gas hub. This is what we are going to work on. The success (technologies and systems) that will be achieved in this market will be extended to other UEEX markets.

The launch and development of the gas market should be done quickly together with "Naftogaz", GTS Operator, market participants, especially taking into account the challenges facing Ukraine in connection with the construction of gas bypass pipelines Turkish Streams and North Streams. This aggravates transit risks for Ukraine. That is why liquid gas trade with binding to Ukraine is so important now. Later we will launch futures for the Ukrainian Energy Exchange index.

For so many years I have been listening to professionals, writing about it. I would like to see this suffered hub ... But still we are not talking about it. Aren't you alarmed by the statements of Maxim Rabinovich, Director of GSC "Naftogaz of Ukraine", that NJSC intends to create its own exchange? In conditions of fierce competition of gas suppliers for domestic consumers (after the cancellation of the PSO), it sounds like a warning. Having the resource of "Ukrgazdobycha", NJSC can easily beat you...

I don't think so. We are already used to such statements. The idea is not new. Before M. Rabinovich, Yury Vitrenko declared about his own stock exchange. But who will go to trade with "Naftogaz" in its field and with its gas resource? The exchange should be equidistant from all market participants. I don't think Naftogaz needs it, because if gas prices rise, the first stones from politicians and accusations that it is the largest market participant and he is interested in price grose will fly to Naftogaz.

I think it would be more correct in the strategy of "Naftogaz" to gradually increase sales volumes through the exchange, so that participants would not accuse it of exceeding the market power and using the resource of the UGV for their own purposes.

We have a fruitful cooperation with "Naftogaz", we are discussing the possibility of other large energy companies being market makers on the exchange. Believe me, this is much better than creating your own exchanges. Plus, Naftogaz representative is a member of the Exchange Committee of the Ukrainian Energy Exchange.

Is it possible that large-caliber traders who have been working with Naftogaz for a long time will go to its exchange?

Why do they need it? It is illogical from the business point of view. If they do not immediately sell gas to Naftogaz, they will be attracted to an open exchange platform with high competition and equal rules of the game. The Ukrainian Energy Exchange is such a platform. In Europe, large energy companies are withdrawing from the exchange's capital to prevent allegations of abuse. I think Ukraine will follow this path as well.

You are chairman of the UEEX Exchange Committee and are also a co-chairman of the EBA. How do your European partners feel about your initiatives?

They support and help. The EBA Committee on Fuel and Energy actively cooperates with government officials and international organizations such as the Energy Community, EBRD, the European Commission's Ukraine Support Group, EFET and others in many legal and business matters.

The Committee also serves as a platform to discuss industry issues, provide advice and develop regulations.

So my co-chairmanship of the EBA Fuel and Energy Committee is another opportunity for our Exchange to receive competent and, most importantly, timely advice on all aspects of our work.

Traders and the Energy Community continue to insist that the natural gas produced by UGV does not become a resource of Naftogaz, and at least one third of it (out of 13-14 billion cubic meters of annual production) is sold on the exchange.

There are enough people willing to buy this gas at market price. And the proceeds, Ukrgazdobycha could be used for geological exploration and gas field development. However, I do not see an opportunity for our exchange to increase sales of the UGV resource. Unless Naftogaz increases the share of this gas sales, as I mentioned above.

If we look at natural gas sales volumes at UEEX, they are far from prevailing. And although the largest gas volume is traded on our exchange than anywhere else, this segment has not yet reached even the level of self-sufficiency. We make money on other markets. At we earn 3% commission, at home we earn 0.05% commission.

At the same time, you declare that this and the next year will be "a gas year" for UEEX?

We have been dealing with the gas market for a long time and systematically. But it is impossible to convince everyone at once and, moreover, to oblige them to sell gas on the exchange. In Poland, for instance, PGNiG (an analogue of NJSC) was legally obliged to sell a significant part of its gas resources on the exchange in order to have reference (market) prices. Moreover, the company was obliged to sell not only gas but also electricity on the exchange.

Yes, business should pay off, but I haven't taken the issue of making money for a long time. There are tasks that every conscious citizen of his country must perform. We are building markets, which should strengthen the economy of the whole country. Without too much modesty - yes, we want to perform the role, which is performed by EЕX in the European markets, we are ready to create the history of formation of organized markets in Ukraine.

Still, the main task and purpose of the exchange is to make the price, which is formed as a result of open trades to be market-oriented and referential. And bidders should look closely and trust this price. And, therefore, trust the UEEX.

Total trading volume - 50 billion UAH

SOURCE CE "Ukrainian Energy Exchange".

"Energobiznes" №34 (1176) of 01.09.2020