Round Table: Risks and Benefits of Implementation of New Electricity Market
12:00 | 13 June, 2019 — 14:00 | 13.06.2019

Round Table: Risks and Benefits of Implementation of New Electricity Market

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On June 13, ExPro Consulting held a round table on the Risks and Benefits of Implementation of New Electricity Market to enable views exchange by leading market players and participants in the reform process as to the implementation of the new electricity market model (which, according to the law, should come into force on July 1, 2019), the procedure for assigning Public Service Obligations (PSO), problems of commercial accounting, pricing, and other important issues. The event was attended by over 120 participants, mostly acting as independent suppliers, as well as by representatives from large industrial enterprises as large scale consumers of electricity.

The Keynote Speakers of the Round Table included:

  • Ms. Victoria Voitsitskaya (MP, Member and Secretary of the Parliamentary Committee on Fuel and Energy, Nuclear Policy, and Nuclear Safety),
  • Mr. Vsevolod Kovalchuk (Chairman of the Board, UKRENERGO NPC SE),
  • Mr. Dmytro Malyar (Director of Energy Resources Portfolio Management D.Trading),
  • Ms. Olga Buslavets, (Director General of the Energy Markets Directorate of the Ministry of Energy and Coal Industry of Ukraine),
  • Mr. Alexey Lastovets (Deputy Chairman of the Exchange Committee of the "Ukrainian Energy Exchange"),
  • Ms. Olga Tagiyeva (Technical Director of the supplier company of the State Enterprise "Profit Hub").

The Round Table was opened by MP Victoria Voitsitskaya (Member and Secretary of the Parliamentary Committee on Fuel and Energy, Nuclear Policy, and Nuclear Safety) invited as the first to speak. MP Voitsitskaya criticized the Cabinet for non-transparent decision-making, in particular regarding Public Service Obligations (PSO). Moreover, the deputy stressed that the latest version of the adopted document would authorize to use 90% of the electricity generated by SE NNEGC to cover the anticipated need gaps in the PSO.

"In fact, yesterday we saw that the Ukrainian government in non-transparent manner urgently approved amendments to the Resolution of 5 June 2019 regarding the imposition of special obligations ... It was decided to increase from 60% [Share of electricity in the total output of Energoatom, which is aimed for implementation of PSOs - Ed.] to 90%, which actually removes Energoatom from the market. This leads to the fact that Energoatom will continue to operate under non-competitive conditions. Whoever's on hand and why this is done, it’s is a very big question for me, " said MP Voitsitskaya.

During her speech, Voitsitskaya stated that Energoatom produces more than 80 billion kWh per year, while the population consumes about 36 billion kWh, or only 45% of Energoatom’s commodity output, but not 90% as predicted and envisaged by the Cabinet of Ministers Resolution on the PSO.

Mr. Vsevolod Kovalchuk, Chairman of the Board, UKRENERGO NPC SE, was the next to take the floor, and shared the concerns voiced by MP Voitsitskaya: "The way the relevant decisions are taken by the government and the Ministry of Energy is that the text of the Government's rulings regarding the PSO (part of which will be vested on our company), I get from journalists. And this is the second time in turn! None of our representatives were invited to any meeting, while they were drafting the Resolution ".

At the same time, Mr. Kovalchuk noted the positive decision of the government, which withdrew PSOs from Ukrenergo, because a significant amount of special obligations and possible non-payments to the system operator in the PSO chain could jeopardize the operational security of the country's energy system as a whole. Also, the head of Ukrenergo said that the sale of electricity from the state-owned generation to the State-owned Guaranteed Buyer Company significantly affects competition in the market of bilateral contracts and leads to the fact that the volume of sales of this buyer can reach 50% of the total electricity traded in the country.

According to Mr. Kovalchuk, another disadvantage of the recently ruled out PSO Resolution is that the state electricity generation can not physically transmit electricity to the population living in the Burshtyn Energy Island (Lviv, Ivano-Frankivsk, and Zakarpattya regions), according to the order of the PSO.

“In Burshtyn Energy Island "in principle there is not any physical possibility to transfer electricity produced by Energoatom and Ukrhydroenergo ". Therefore, if we were to discuss compensation with physical volumes of electricity, we proposed placing the PSO on DTEK Zakhidenergo, the only power generator present in this synchronized zone ", said Mr. Kovalchuk.

Mr. Kovalchuk paid particular attention to the accuracy in measuring the amount of electricity consumed by the population. He noted that only 0.2% of household consumers have electricity meters that allow automatic transmission of consumption data.

Also, the head of Ukrenergo cited examples of unsatisfactory readiness of market participants in terms of commercial accounting: "If we talk about the commercial electricity distribution and accounting points in place at regional distribution systems, then they themselves have to decide who is responsible for accounting, because two distribution entities can not be responsible for the same at the same time. One of them should be responsible for the flow between the two Oblenergos [Regional Power Distribution Centers-Ed.]. Have you ever come to know how difficult it is for them to come to an agreement? Of the 153 existing inter-region electricity distribution and metering points, there are actually only 5 registered in the system! " said Mr. Kovalchuk, further adding that only 11 out of 518 points that are on the interface data exchange system between manufacturers and electricity distribution networks, and of 2460 points registered, only 366 points have been entered into the interface system.

Summarizing his remarks, Kovalchuk said: "The question of quality of data and the quality of processes leaves much to be desired, so we are firm in the opinion that under the current conditions, the introduction of the new model of electricity market poses high threats."

Mr. Dmitry Malyar, D.Trading Portfolio Management Director, said that providing a clear organization of internal structure backed up by a constructive approach, the company would be 100% ready by the July 1 new electricity market launch.

"We, as a company, three months ago, accepted for ourselves the following stance: "Market reform will take place as stated - July 1, 2019. Therefore, we simply outlined for ourselves a plan for transformation of the company's internal business processes. We have appointed responsible officials, and are moving ahead with this plan," he said.

He also added that, as to him, Ukrenergo, as well as Market Operator, would also be ready to launch the market starting July 1, 2019. According to him, market reforms should not be uptight about.

"We are amid a strange situation, when the country needs reforms, and here is the reform at the threshold, one looks out of the window and sees that the state resembles a party of conservatives in the UK. If reforms are needed, then we need to move ahead with such reforms, and if there is a question, then we must introduce a safe regime for some time and in accordance to conditions in place, but we must move on, because only movement will bring us closer to Europe, "said Mr. Malyar.

He also noted that we should welcome the upcoming start of trading in electricity on the stock exchange. Ms. Olga Buslavets (Director General of the Energy Markets Directorate of the Ministry of Energy and Coal Industry of Ukraine reminded to the event’s that many PSO versions for household consumers had been developed at various governmental sessions and workshops, but none of the suggested PSO versions was perfect.

"The state energy regulator suggested a kind of compensation by expropriating the so-called excess profits of Energoatom, and redirect them for the PSO backup needs. That was highly opposed by NNEGC Energoatom, as referring to their huge tax obligations, which they cannot clearly substantiate or explain to anybody. Therefore, this proposal was simply rejected ", said Ms. Blaslavets.

In her opinion, this issue should be resolved with compensation from the state’s budget. She also added that the compensation option for a certain fraction of the PSO through the tariff for Ukrenergo dispatch services was rejected as well, because of to the refusal of the NKREKP (The National Commission for State Regulation in Energy and Utilities) to urgently adjust its own regulatory framework in the shortest time possible. This, in turn, led to the birth of a new Resolution of June 12, 2019.

"Still, I believe that despite the fact that at early stages there will be little competition compared to the one described in the law, and we must gradually open up the market, encourage the competition, and go to the goal we have outlined", said Ms. Buslavets.

The problem of commercial accounting was also noted by Ms. Olga Tagiyeva, Technical Director of SE "Profit-Hub": "The deliveries from Suppliers of Last Resort (SoLRs) coupled with the implementation of a due commercial accounting can hardly help, and Europeans say that it is necessary to hold on and postpone ... And we say that we are ready, guys, can anyone of you explain what are we ready for?", she said.

That aside, Ms. Tagiyeva noted that all accounts in the new market would be exclusively serviced by Oschadbank, as the only authorized bank. According to her, there is no such practice in any country.

Then the word was given to the Deputy Chairman of the Exchange Committee of the Ukrainian Energy Exchange Alexey Lastovets, who said that the stock exchange was actively preparing for the introduction of the new model of electricity market.

"As of today, we have held seminars and trained about 150 companies to work in a new trading e-platform. Today we are actively working with all market participants. I want to assure you that by July 1, 2019, we will do our best to enable all of you to purchase electricity on the market of bilateral contracts, " said Mr. Lastovets.

Speaking from the hall seat, Mr. Konstantin Ivanov, President of the Chernihiv Regional Chamber of Commerce and Industry criticized the process of implementation of the reform on market liberalization.

"We have been living in a boorish and entrenched monopolism over the last 27 years, and the reform was conceived for consumer as the main subject to benefit from a competitive market. But, we’ve been killing this reform, with its essence being naped out by the NKREKP and the Ministry," he said.

Mr. Ivanov also posed stunning questions to the keynote speakers, whilst and speculated on the complete uncertainty about electricity price setup for industrial consumers in the lead-up of July 1, 2019. The issue of prices under the new model of electricity market was also raised by MP Olga Belkova, who also said that the reform did not eliminate cross-subsidization, thus little chances for the reform to succeed in the near future. "Everything is paid by us, electricity is used to bake breads, and paid for by every citizen", said Ms. Belkova, whilst commenting on consequences and cost of mistakes in the reform implementation.