Oleksii Dubovskyi: We managed to form reference price for the electricity on the bilateral contracts market

Oleksii Dubovskyi: We managed to form reference price for the electricity on the bilateral contracts market

Since July 2019, for the first time in Ukraine, electricity exchange trading has appeared. For more than a year market players (the number of which exceeds 260 companies) on the platform of the Ukrainian Energy Exchange are already using a whole range of new tools - trading in coefficients, block orders, etc. The exchange has managed to accumulate the history of trading and form representative price indicators for various types of load, the variety of which, by the way, has increased. In addition, the Ukrainian Energy Exchange is actively transforming in the light of dynamic changes in the mechanism of PSO.

ExPro agency interviewed Oleksii Dubovskyi, Chairman of the Exchange Committee of the Ukrainian Energy Exchange, on the achievements of the market of bilateral contracts, its exchange segment and future challenges.

How do you evaluate the first year (and even more) of the new electricity market?

Liberalization of the electricity market, transition from a closed, fully regulated market to an open, competitive electricity market is a global trend. It is a pledge of further economic transformation in all sectors of the economy. Of course, at such a young age the market still suffers from "childhood" diseases. The mission of the Ukrainian Energy Exchange is precisely to create a reliable, transparent and effective mechanism of market trade and trust of market participants to price benchmarks.

In your opinion, which results have been achieved and what challenges still need to be overcome?

Only the first steps to build the market have been taken. It is necessary to stimulate the development of competitive environment and reduce the possibility of "manual" control. During this year it was possible to make the electricity market open, but it was not possible to avoid many problems, which were gradually accumulating. We managed to form a reference price in the market of bilateral contracts, which is dynamically changing and is a reference point for the participants. Thus, the achievements include a significant increase in market transparency and the institute of trading founding.

What can you tell about bilateral contracts market segment, how does it develop, which trends are taking place?

Companies began to use more actively the new tools offered by UEEX. I would like also to remind you that in the overwhelming majority of European countries and the day-ahead market segment traded on the exchange market, and if we compare it by segments, the DAM should be 5-15%, and long-term contracts - 70-80%, of which 30- 40% are exchange contracts. I understand that the State Enterprise Market Operator was created artificially, because it was necessary to place the employees of Energymarket somewhere. Unfortunately, the Coordination Center for Reform Implementation under the previous Cabinet of Ministers did not prepare a qualitative reform, which is evidence of incompetence and, unfortunately, these problems have been transferred to the market, which is also evidenced by the manipulations repeatedly noted by the Regulator and the Antimonopoly Committee. Let me remind you that the model of escrow accounts, which now work for the State Enterprise Market Operator, was developed by UEEX specialists together with JSC Oschadbank. This model allowed all market segments to earn money, open a new electricity market and now it is successfully operating.

Recently, state enterprises have also been able to use various bidding mechanisms. Participants have started to conduct the auction in the mode of coefficient trading (formula-based pricing). For example, the Guaranteed Buyer actively trades by the formula.

Now there is a high level of competition at state generation auctions. The number of buyers at the auctions reaches several tens, the auction is held anonymously, lasted for several hours, formation of a reference and transparent price is ensured.

Holding auctions on the UEEX electronic platform helps to reduce corruption risks. Also, all traders have "access" to the resource of state generation on equal terms, and for the state it is transparent terms of sale and formation of price guidelines. Until the end of the auction session, the initiator seller does not see the companies taking part in the auction.

How would you comment the changes in the PSO mechanism and the increased sales of Energoatom and Ukrhydroenergo in the free market? Or maybe you consider this as a positive shift?

We consider the partial release of electricity volumes from the PSO mechanism as a positive step, as it will smooth out price fluctuations in the market and the saturation of the short-term market.

All parties that deal with the sale of electricity from state generation through the exchange, note a positive economic effect for both market participants and the economy as a whole.

Producers of state generation have been working under conditions of planned economy and guaranteed sales for years and are transforming into effective traders on the UEEX trading platform. In addition, the mandatory payment of purchased volumes by the purchaser prior to delivery ensures stable operating activity of state generation companies.

How do you think, which PSO mechanisms are necessary? Is it necessary to move to financial PSO?

It is well known that now electricity tariffs for households cover only a part of the costs, while the rest is compensated by the government to producers and suppliers through the PSO mechanism (special duties). Yes, I believe that PSO is an objective solution in modern conditions, but it should be temporary and should gradually move towards financial PSO. It is necessary to move away from the commodity PSO and give Energoatom and Ukrhydroenergo an opportunity to become full-fledged market participants. Now changes have been made to PSO, we will monitor how it will affect the financial results of public generating companies. For example, in the gas market the PSO for the population has been ceased, I believe that in the long run it should also be abolished in the electricity market.

PSO – is an objective solution in the current environment, but it should be temporary and gradually move towards financial PSO

New trading instruments, such as special debt load, block orders, coefficient trading, begin to be used during trading on the exchange. How are they used (does interest about them growing among the market players?), their advantages compared to the usual peak, off-peak and base loads?

The trading instrument "special duties load" can be used only by the Guaranteed Buyer in auctions according to the PSO. At other auctions, he quite often uses coefficient trading - also a new tool. As for the use of block positions, we note a steady upward trend. The advantage of block positions over established load types is in more flexible electricity planning and supply conditions. Thus, the participants started using block positions only in 2020 and now they are presented both in specialized and commercial sections. But the best performance of these tools will be characterized by the following figures: since the beginning of the year, almost 170 thousand MWh of electricity has been sold in block positions using coefficient trading - almost 370 thousand MWh.

What is dynamics of trading at UEEX among private companies?

The growth is noticeable both on the side of initiators and participants of auctions. At the beginning of the market operation, the opportunities for auctions were limited by the Procedure of Electronic Auctions of electricity conduction. To expand trading opportunities, commercial sections were introduced. Block positions and trading with coefficients were also presented for the auction participants. Such measures contributed to increased activity of companies in commercial sections. On the other hand, private companies are buyers of the state generation resource.

Thus, at present 262 bidders are represented at UEEX in the direction of Electricity, most of them are private companies, which are both sellers and buyers in different directions of auctions. The number of participants in 2020 increased by 71 companies.

Currently, 262 participants are represented at UEEX in the Electricity direction, most of which are private companies

Do you support the change in the rules of auctions conduction, according to which it is proposed to allow foreign companies to participate and buy energy from NJSC Energoatom for its export outside of Ukraine? How do you assess the prospects of conduction of auctions for export?

The increase in participants and trading volumes is a positive trend for the entire market. Since 2011 Ukraine is a member of the Energy Community. Membership in this organization is an important step towards the integration of the national energy sector into the EU energy markets. Taking into the steps already taken by Ukraine on the way to integration with European markets, electricity exports are a logical continuation of this path. But besides political decisions, it is necessary to solve purely technical issues of joining the UES to Europe. Since now it is technically possible only to export energy from NJSC Energoatom to Belarus with subsequent re-export.

Today the function of "green" auctions is entrusted to the Guaranteed Buyer, could UEEX ensure their holding (as a competitive platform)?

Now alternative energy is sold at special, "green" tariffs, according to which the state pays a fixed price to private owners of solar and air power plants. The domestic tariff for "green" energy is one of the highest in Europe, which is a limiting factor for the development of the alternative energy market. This also makes the price of "green" electricity too high for the end consumer, but the strong interest of the parties and the global trend to preserve the environment finally will provide formation this relationship.

To reduce the "green" tariff for electricity in Ukraine can help its open sale at electronic auction. Transparency of electronic bidding will attract a maximum number of participants to the sale of "green" energy and form a fair market price for this resource. The modern mechanism of online auctions for the sale of green electricity ensures fair and equal treatment of all participants. In its turn, a large number of those wishing to purchase renewable energy provides healthy competition, automatically leads to lower tariff for green energy.

Sale of renewable energy through electronic exchange trading - has already been tested in the world practice. The issue of "green" auctions should be divided into technical and legislative components. Technical capabilities of UEEX allow holding such auctions. A decision should be made at the legislative level.

What instruments, opportunities for trading does UEEX preparing?

Now we are working on the development of term energy market instruments, namely forward contracts. Of course, for further development of the wholesale market and introduction of more understandable its rules for foreign traders, in particular, we need to standardize contracts. In other words, it can be periods per week, monthly, quarterly, annual and other contracts.

What prospects do you see for coal trading at UEEX, in particular, for increasing trading liquidity and determining the price indicator in the domestic market of Ukraine?

UEEX is dynamically developing in parallel with the development of energy markets of Ukraine. Since the global trend is a gradual transition to clean energy, we consider it appropriate to focus on the development of exchange products for those markets that have a tendency to grow, such as electricity and gas.

Dmytro Sydorov