The new electricity market has been operating in Ukraine for more than half a year. Its central element, which forms the price benchmark for all others, is the day-ahead market. The newly created state-owned enterprise Market Operator SE sustains the work of this segment and the domestic electricity market. In a short term, Market Operator SE was able not only to launch the day-ahead and intraday electricity markets, ensured 100% payment discipline, escrow accounts for suppliers, but also started implementing ambitious plans for introducing netting, escrow accounts for electricity generators and other new market trading instruments.
Volodymyr Yevdokimov, director of the company, told ExPro about his company experience, future plans, price situation, and results of the day-ahead market and the intraday market.
In general, how do you evaluate the results of the Market Operator's work for the first six months of the new electricity market?
Our company is really very young, but we have set ambitious plans. For us, the most important thing is to adhere to European standards. We are starting to build a market that is in line with European practices. If I talk about the first half of the year, I would talk about two segments of the market, the day-ahead market and the intraday market, and I think that we have successfully started and keep up our work.
We set a task to organize our business in a transparent and open manner. The first is European standards, and the second is transparent and open work. We can say that we have launched electricity trading on commodity exchange. We are probably the first in Ukraine, who launched the way the exchange should work.
How is it in European countries?
So. That is, the Market Operator is a central counterparty that simultaneously buys and sells electricity, and most importantly, makes 100% payment on a daily basis.
We've got good results over the past six months and we're building it up, wanting to improve and get more out of the automated stuff. Since we operate in 24/7 mode, the system should work like a clock. I think we have a positive start and are gaining momentum.
How has the number of participants changed, the market liquidity, since the beginning of July 2019 to the present?
Each month, the number of participants increases by 5-10 companies. Initially, there were about 300, and now there are 385 bidders, active bidders. I think it's a large enough number.
As for liquidity. Liquidity depends not only on quantity but also on volume. Today, about 35-40% of all electricity consumed by all types of consumers of Ukraine, depending on the month, is sold to the day-ahead and intraday markets. Compared to European countries, we have a large enough volume in those segments of the electricity markets.
In future, should the bilateral contracts market take on more volumes?
There are many components in this matter, including the PSO, which accounts for such a large percentage of the bilateral contracts market. Plus the obligation for state-owned companies to enter the bilateral contracts market.
Speaking of bilateral contracts, they are currently done on the Prozorro and other e-procurement portals that makes it possible to auction relevant bids transparently. Moreover, an e-procurement portal, as the organizer of the auction does not participate in the contract, but only gives an opportunity to conclude such contracts.
If one looks at the European experience, most of the countries of South-Western Europe, the ones that have joined the market in recent decades, have a single market, where they trade both bilateral contracts, day-aheads, intradays, say, on EPEX SPOT, for example.
Firstly, it is easier for participants, and secondly, so-called clearing, i.e. netting of commitments for all three markets, is carried out. This helps participants reduce financial burdens, as fewer transactions occur and fewer bank guarantees are required.
Do nowadays prices in the day-ahead electricity market fully fulfill the function of indicators?
In November, December 2019, and January 2020, there were surpluses, rather than market deficits, of electricity in day ahead market of the Integrated Power System of Ukraine. That means that the market operated the way it should, and the train of the "electricity market" has started to move and nothing will not stop it.
We also publish daily indexes of base, peak, and off-peak electricity loads, comparing them with the corresponding prices in the neighboring markets of the Eastern-European countries. What did we see? That prices in Ukraine (with the exception of the ones in the Burshtyn TPP Energy Island because it is scarce in electricity suppliers) and in Europe do correlate with each other.
If you look at the price dynamics on a weekly basis, the trend in Ukraine is the same as in Europe. For example, on Saturdays and Sundays prices drop. This indicates that the market is starting relevant comparisons: manufacturers and consumers look at prices in the neighboring markets, importers estimate the price thresholds emerging in Ukraine.
About the so-called price caps. In July-August 2019, the day-ahead prices were close to price caps. Already in October-November 2019, they began to decline, and in December 2019 and the first days of January 2020, they were well below the price caps. That indicated that market mechanisms have started to work.
That is, haven’t suppliers and manufacturers been lowering prices to stay in the market?
Initially, there was a certain fever, everyone was learning how to work under new market rules. Now, everyone understands the situation, one looks at what is in the yard [warm weather in winter of 2019/2020 - Ed.] and most importantly, one looks at what is in the yard of the neighbors. Before the new year start, we had days with very low prices. Compare those days in Europe - they had the same situation.
Recently, Market Operator SE has launched a simple block nomination test. What kind of a tool is it, what’s its purpose?
We work to create attractive conditions for participants to buy and sell electricity in the day-ahead electricity market and in the intraday electricity market. The philosophy of work in the day-ahead and intraday markets is the same as in the EU - maximizing volumes, minimizing prices.
To do this, market participants needed to be outfitted with different mechanisms or trading tools. One such tool in the European market is the block nominations. This tool is very interesting for a manufacturer. If you sell on an hourly basis, a manufacturer may sell at certain hours during the day or may be unable sell at certain hours.
The supplier, in turn, buys those certain hour electricity volumes, and some doesn’t. Hence, they go to the intraday or the balancing market.
First of all, it is not profitable for the manufacturer, because he would like to sell, for example, the entire daily generating schedule (but different volumes at different hours) at the average weighted price, for example, of 1.3 UAH / kWh.
If a manufacturer sells volumes separately for each hour, at certainhou9s) he may not sell anything. At the same time, the block nomination allows to realize the entire volume nominated, providing that the average market price is above 1.3 UAH / kWh.
Does hourly volume in block nomination cost the same at every hour?
Not at all. It doesn't really matter if the price is the same every hour. It is important that the weighted average bid price is below the market average when it relates to a sale order, and vice versa, to a buy order. In such circumstances, the nomination will be accepted. With block nomination, competition increases, as hourly and block nomination will participate in price formation.
We are currently testing this tool, it will last until January 21, 2020. We wanted to fully introduce this tool into the market starting on January 13, 2020, but manufacturers asked for more time to see how it works.
There are many such products in Europe, there are block nominations for holidays, for weekends, there are separate for nights. It all depends on the needs of the market. We have launched a survey among market participants, have got first feedbacks from them to understand their needs in the medium term.
What other innovations is the Market Operator planning?
We have now started testing escrow accounts for manufacturers. They requested it themselves as saying: "Why do we pay money separately for your services?" So, we conduct biddings for participants, then invoice them, and in 3-4 days they pay the cost of services for each MWh. It turns out a huge number of operations that are very difficult to carry out in terms of administration and accounting.
So, the manufacturers themselves offered to open escrow accounts. To these accounts we pay a portion of the cost for their electricity and automatically deduct from these accounts the cost of our services.
The escrow system will fully work automatically starting February 1, 2020. This escrow system is convenient for generating companies, and it can serve as a bridge to transfer to other financial mechanisms.
In its Development Strategy, the Market Operator SE offered itself as a e-platform for trading bilateral contracts.
Yes, we have suggested that the Cabinet of Ministers of Ukraine consider this possibility.
It takes time and money to run this segment. It is about half a year of preparation. If there is a political will, trading in bilateral contracts can be on e-procurement platform of the Market Operator sometime in this summer. Some believe that changes to the law are to be done. Although, one can quickly do with by an approval decision of the NEURC, viewing it this as an additional service form the Market Operator SE.
We do not want to be a competitor of the Ukrainian Energy Exchange (UEEX), it performs its functions well. We want to offer a completely different mechanism.
Are there any demand from market operators for such a service?
I think it will be. Because, for the convenience of market participants, we propose a single platform at which bidding under bilateral contracts be conducted for both day-ahead and intraday electricity.
This is quite risky, because no one will pay you for the month or the year ahead. Therefore, comprehensive financial mechanisms should be appropriate. We are not inventing something new. We just want to take those things that work well in Europe and refine them in terms of financial instruments. We say that as we administer both day-ahead and intraday, we can provide a comprehensive financial mechanism as well.
Could you please tell us more about market coupling? This is the direction you also set out in your Enterprise Development Strategy.
We are now very active in working with European operators and have proposed signing memorandums of cooperation. We have signed the first memorandum with ]the Slovak electricity market operator [OKTE - Ed.] that will allow us to work on the issue of possible integration with the European markets. There is a single market in Europe, but so far at a regional level. Currently, four neighboring countries share a common market space, that are Hungary, Slovakia, the Czech Republic, and Romania.
Should we couple them?
We can couple them and then couple the single European system. However, such integration can be really possible when there is a technical connection. To date, only the Burshtyn TPP Energy Island has this connection.
Providing that, wouldn’t there be more offers in the market?
Sure, there would be. But there are many legal points, first of all, and second, technical ones.
Wonder how does the system work there? One of the operators (they change every time) conducts a general bidding, everybody send bids to them, and that generates general demand and supply. Then the transmission system operators check that there are no system restrictions. If there are no restrictions, then the price in all these four countries is the same.
However, one should not forget that there is a very complicated mechanism for determining this price. If the price in the Burshtyn TPP Energy Island, for example, is higher the one in Europe lower, then the flow should go from Europe to the Burshtyn TPP Energy Island. This means that in the Burshtyn TPP Energy Island the average price goes down, and, conversely, in Europe the average price goes slightly up.
When is this real to happen?
Providing a political will, it is possible to integrate the Burshtyn TPP Energy Island into the European market within a year. That would be reasonable, because the Burshtyn TPP Energy Island there is a deficit of electricity, prices are high, the market is not liquid enough. Moreover, market coupling with Moldova is also realistic.
But Moldova is not integrated into ENTSO-E, is it?
True, that it isn’t so far. It is, like Ukraine, a participant in the Energy Community and the European energy market.
Does the Moldovan side have such aspirations?
This is a political question. Technically, it is feasible to implement this.
Can you tell in brief about the goals set out in the Market Operator's Development Strategy?
The first is corporatization. We are included in the list of state-owned enterprises in which corporatization should take place. Secondly, we proposed to consider the Market Operator in the medium term as a platform to host trading in bilateral contracts. Third comes the market coupling. Fourth is REMIT [Regulation on Wholesale Energy Market Integrity and Transparency - Ed.). This is an European monitoring system.
On January 8, we had a great meeting with the Antimonopoly Committee of Ukraine (AMCU) on this issue. We are looking for a mechanism of interaction between the NEURC, the AMCU, and the transmission and distribution system operators. In Europe, the monitoring system works automatically, i.e. different market indicators are calculated, concentrations are monitored, and one can immediately see who, how, and where the market is not appropriate …
The system will calculate the market share of the group of companies?
Precisely, but it's not new either. We want to do the same as in Europe. There are appropriate standards, information systems, calculations. They monitor the operation of regional markets on a daily basis, and then make a general report and submit it to the Agency for the Cooperation of Energy Regulators (ACER) in a format of advice. To do that in Ukraine takes time, money, and understanding who will do it. We are now working very actively with NEURC and USAID in this regard.
How is the financial plan for 2020 going?
We timely submitted the draft financial plan for 2020 for consideration by the Cabinet of Ministers of Ukraine. We, as a state-owned enterprise, we cannot use money for capital investments without an approved financial plan. Defending our in the Ministries, I say: "We have no cars or other luxury goods in the financial plan, we need to protect the bidding system. "We are cyber-attacked every day. We are currently resolving this issue through the efforts of our highly skilled IT professionals. When finalized, 90-95% of the costs are for information technology development and cybersecurity.
How do estimate your need for cyber contingency in 2020?
It is about UAH 10 million for information technology development and cyber security.Author: ExPro