The ENTSO-E synchronization provides the electricity markets expansion and the joint operation of spot segments. Opening of the European market for Ukraine will increase competition, provide more cash flow and become one of the European integration principles. The Ukrainian market has been severely shocked because of russia's full-scale military invasion to Ukraine.
More about the situation in the electricity sector during the war, the sharp decline of electricity demand and how Ukraine can enter the European market, you can read in the interview of Acting Director General of the Market Operator Oleksandr Havva for ExPro.
How did the beginning of a full-scale Russian invasion to Ukraine on February 24 shock the electricity market? What was the dynamic of the situation and what do we have now?
Ukrainian market felt the shock on the second or third day of the invasion. The supply on the spot market has significantly increased because of cancellation of the deliveries under bilateral agreements.
Let's start from the simple to complex. The simple one is a consumption and everything depends on it. Total consumption decreased by 30%. Such index for the industry was somewhere about 60-70%. In practice, this means that the entire market has reduced significantly in volumes - it is precisely the demand volume, not a supply. As a result, the Day-ahead market has also decreased, which led to the significant competition that is even hard to mention as such one.
Situation has become highly irregular, so the urgent issues has been taken: the Regulatory office has adopted price caps and the Ministry has made a number of concept proposals for the market as a whole.
What was the difference between the actual volume and a planned one?
Regarding the planned volume, it is possible to sheer such numbers: experts’ expectations, various companies’ expectations, as well as expectations of the Regulatory office. There was number that was included in the "Market Operator" tariff - the expected average daily volume of 100 thousand MWh on the DAM. In fact, it was 40 thousand MWh in March, 25 thousand MWh in April, 17 thousand MWh in May, and the amount in June was even less.
How many companies stopped their participation in the spot market?
It is better to talk about the regulatory system in Ukraine and how our market is organized in general. The entrance threshold is small, compared to European practice. It means that anyone can become a market participant. And companies have a right not to suspend their contracts to stop operating in the market. It would be incorrect to focus on the concluded contracts solely while assessing how participants operate in the market. You can focus on the number of "Default" and "Pre-default" participants, which were up to 10-20 among the 500 of active market suppliers.
If we talk specifically about the DAM numbers, the 14 participants stopped their participating on the DAM and IDM from February 25 until now (ed. - June 24). But the main problem is still the reduce of consumption. These numbers should be used to estimate market losses.
How do you assess the electricity market regulation under martial law in general?
We had many discussions with our European colleagues. There is a great need to understand that none of European legal document provides for or describes market operation during the war. Nobody knows what to do in a situation we have now, as well as nobody can advise anything. On the other hand, Europeans adopt our ideas of PSO (Public Service Obligation). The situation in Europe's energy sector is ambiguous, and we have experience of ambiguous situations.
Are there any developments of the market operation after this 4 months shock?
I believe that July will show these changes. Consumption will show, as it’s related to the cases, when people arrive their homes, as well as warm weather. It is still difficult to talk about a full resumption in such instability.
Has the share of the "day-ahead" market decreased in the overall market structure during this period?
Yes, it has significantly decreased. It reached up to 30% in winter, and now we have 2, 3 or 5% for this period.
How important is DAM for our market now?
It is possible to speak both from the theoretical and practical points of view. The theory says that there is a day-ahead market that performs two functions.
The first one is a spot trading, for tomorrow, which is difficult to predict. The supplier has consumption, he figures the alternative to stay out of balance, estimates the average price and submits a purchase order. And the producer has an understanding that he has free capacity, unrealized volumes, as well as he plans expenses for gas or coal. As the spot part of the market is unpredictable, it is as transparent as possible. There is no any possibility to enter into "arrangements" on the DAM, because there is a central counterparty.
The second function is the ability to adjust own volumes. Despite the fact that there is a minimum price cap on the DAM and the price is higher than the bilateral contracts market, companies are still come here to sell and buy.
If talking specifically on the function, it is related to the price as an indicator. It is important for us. There can be many indicators and the main thing for us is to believe them.
In Europe, a huge part of volumes is traded on stock exchanges, it is more simple, easier to legally issue them and more transparent. I mean that in Europe no one mostly trades according to direct arrangements.
Practically the most contracts in Ukraine are concluded according to a single price indicator – the DAM. Perhaps because hourly prices it has and consumers do not with such meanings as "base", products, etc., despite of all suppliers work, consumers got used to hourly prices.
The "day-ahead" market performs the indicator function, which is extremely important during the hostilities period, because it allows to simple and easy decide with the consumer on the price. And as every consumer, unfortunately, has no confidence in the future, like the whole country, this price is the most acceptable, compared to a fixed one.
What is the point of the European markets coupling, how does it actually work? How much does Ukraine really need it?
Any coupling means, first, the rules harmonization, our rules must correspond to the European ones.
For example, it was impossible to integrate the electricity import into the documents according to old wholesale market model. It is one of the glaring indicators that the rules of the coupled markets should be the same. This is how the Association Agreement with the EU had appeared and entered into force in 2017. The law "On the electricity market", which entered into force in 2019, has also appeared and it provides for everything that exists in Europe.
So the rules and procedures of work in Ukraine coincide as much as possible with European ones. Of course, there are a number of "local" features. For example, our market is less competitive than in the European one, because it is smaller and the number of participants is limited. This is much easier in Europe: relatively speaking, there is a manufacturer in the Netherlands, and a buyer in Slovakia.
When we talk about markets coupling, its about the rules harmonization. It is done in most cases.
The next step is to develop common platforms. In particular, market coupling as a term means joint trade between different countries of different market operators. We are talking exclusively about the day-ahead market and the intraday market coupling in different countries. It looks like one global DAM. Applications from different countries are collected and sent to one global center, where the outcomes are generated with the EUPHEMIA algorithm. It looks very simple in fact. Nothing actually changes for the market participant who submits the application.
* EUPHEMIA is a common coupling algorithm for electricity prices calculation in Europe. The algorithm code uses Java and interacts with the compliance system through the Oracle database.
What part will the market coupling play in the Ukrainian market and what part does it play in Europe?
The European global model envisages the market increase to have more competition there. Then there is a fair price, which benefits the consumer. Accordingly, the different DAMs coupling allows to look for reserves. The second important point is simplicity. Nothing changes for our market participants. They don't know what the cross border auctions are, they don't know who is the buyer/seller on the other side, they don't know anything about export-import transactions specifics.
Is this about the issue that companies should not buy an additional cross border intersection when trading?
No, market coupling already includes everything. Everyone buys or sells electricity exclusively. Then there are mathematics and "magic" called EUPHEMIA. What frameworks of the EU countries coupling can Ukraine use to operate in the common market? We actively began to work on the implementation of mechanisms unification, immediately after synchronization. The question that immediately arose is whether we should join those mechanisms that are already working in the European environment, in particular, SDAC (Single Day-Ahead Coupling) and SIDC (Single Intraday Coupling). Alternatively, can we agree with each of the neighbors and develop something unique? In order to understand what is more attractive to our neighbors, we had held about ten meetings with their regulatory offices and market operators.
They all say that the only option is the SDAC and SIDC mechanisms, there is no need to invent anything new, like some Ukrainian know-how.
SDAC participant countries
How much time will it take and what should be changed in the legislation?
The problem we have now is that it’s the least the “Market Operator” can do in all this situation. The question of legislation changing is debatable, as everything is related to laws in Ukraine.
There are European regulations. Now the Energy Community Secretariat is trying to adapt them in the part that is unacceptable for non-EU members. For example, Regulation 714/2009 provides for work with ACER, which monitors interstate interactions and manipulations. They work only with EU member countries, and we are not a part of it yet.
In order to implement market coupling, the first thing to be done is to introduce the allocation capacity joint auctions based on JAO. This is necessary for neighboring market operators, through our TSOs (transmission system operators) and us, to have an understanding, how much free allocation capacity is left for sales on the DAM. To understand where and how electrical energy will flow, you need to know the whole picture in general.
It is also necessary to confirm the status of NEMO - the nominated electricity market operator. There are 2 options how to work in the coupling conditions in Europe. The first one is more competitive, when there may be several market operators. The second one is the recognition of a monopoly market operator that enters NEMO.
We stand for competition. It should be understood that we must then change the legislation, the concept of market monitoring, and find other market operators under such conditions. If we introduce such option, which is not provided for by the current legislation, we delay the process by one to one and a half years averagely.
It’s possible go this way, but it will cost one and a half years. Nevertheless, it is also possible to go another way - to be guided by the current Ukrainian legislation at the initial stage, which provides exclusively for a monopoly market operator.
*ACER - the European Union Agency for the Cooperation of Energy Regulators,
* JAO – Joint Allocation Office
What else needs to be done for coupling?
First, joint JAO-based cross border auctions are needed. There is a debatable issue regarding legislation. In our opinion, it is possible to limit oneself exclusively to the DAM/IDM Rules, the market rules as a whole, and the allocation capacity rules.
If we talk about EUPHEMIA, we have to sign contracts with all SDAC market operators, as well as with all transmission system operators. There is no any problem for the "Market Operator" to sign these contracts. But such agreements must also be signed by the NPC "Ukrenergo" and the European side. In addition, we need to get confirmation from the Europeans that we are the exact nominated electricity market operator from Ukraine that meets all the requirements. We are working on this now.
What demands does the European side make for you?
First, it should be explained that we are monopolists and the sole market operator according to Ukrainian legislation. If the Europeans agree with this, then the “Market Operator” will become a nominated one. Apart from this, we have to complete the corporatization. European legislation provides that there should be corporations exclusively.
Are the opening of commercial flows and their increase more important on the current stage?
If we talk about market coupling, the participation of Ukrenergo in joint auctions on the JAO platform is important. If there was a JAO now, then we could predict the final stage of market coupling with Europe.
Does the "Market Operator" need to perform something in the IT sector for market coupling with the European one?
Definitely. At the very least, there is a need to buy the software. In general, this is a more complex process that is not well known for sure. So it is impossible to find the brochure "How to become NEMO?" in the Internet.
First, there is a need to obtain the “observer” at the NEMO Committee, which regulates this process. In order to become an observer, it is necessary to confirm that we are a nominated market operator, to provide with a "paper" (document). As long as we do not have a "paper" and there is no common understanding of whether we are NEMO or no, it is impossible to fully find out how much it will cost. There are approximate numbers and we are ready for them.
We understand the implementation of this software product, it is some operational task, but it is not difficult for us.
Are there some of the shortcomings in the mechanism of electricity markets coupling?
One of the risks is the prices arising. Earlier, it was about that if we start electricity export, the prices will rise in Ukraine and will approach the European ones. However, this is not the case.
Export itself affects prices in Ukraine only as an additional demand. We can say that the maximum impact on prices in Ukraine can only be at the level, where our high demand in winter affected pricing. Therefore, prices can have the level of this winter, without even approaching the price caps.
This happens because market coupling also includes a payment for intersection. Although the auction is implicit, the intersection payment still takes place, at the level of half difference between the Ukrainian and European prices. I mean that a sharp jump of prices associated with exports will not occur.
Will there be a need to increase the price caps on the Ukrainian spot markets? Will the Europeans demand this?
You have a look it through the view of mathematics. Entering the European market will only create an additional demand. We've had periods with the new price caps, since August of last year, when demand was significantly higher than it is now. Will we have the same demand this year as last ones? Not sure about that.
Will European demand be able to cover the loss of domestic demand due to the war?
No. After all, the export capacity is a maximum of 2 GW. The peak winter consumption used to reach 24 GW, but now it has the level of 10 GW. Mathematically, it will not be able to cover.
Can foreign companies enter the electricity market now?
The market coupling mechanism has nothing to do itself with the work of non-residents on the market. As a "Market Operator", we advocate for a mechanism for foreign companies to trade. But you need to understand that the non-residents admission to the market is not a common story even in Europe and there is no single solution for how to work with it. Each country makes its own decisions. Taxes, license and control will be the issues for Ukraine on non-residents operation in the market. In case of licenses and control, the situation is ambiguous. You could say that if you have a license in your country, you can operate in Ukraine. Then we turn to the issue of control by the Regulatory office. If it could conduct an inspection, how to issue a fine etc.Author: ExPro