Price caps undermine market signals, low prices for households cause financial deficit in the market – Kopač

Applying price caps in the Ukrainian electricity market segments (the day-ahead market, the intraday and the balancing markets) undermines market signals, besides, electricity selling for households for low prices causes significant deficit in the wholesale market.

Mr. Janez Kopač, the Director of Energy Community Secretariat, noted it on October 21, 2020, commenting the main problems in the Ukrainian electricity market for ExPro agency.

“The wholesale market is subject to many regulatory interventions that undermine market signals. Prices at the day-ahead market, which is the centralised and reference market segment, are restricted through price limits set by the regulatory authority. The framework that ensures market integrity is not transposed yet and this together with the lack of transparency makes the market prone to abusive behavior,” he said.

According to Mr. Kopač, the other significant problem is low price for electricity for households which lead to financial deficit of all sector.

“The PSO mechanism… is designed in a non-sustainable manner. Low household tariffs, which do not cover the cost of supply and are available to customer categories well beyond households and which impose an obligation on the incumbent state-owned generators Energoatom and Ukrhydroenergo to sell electricity at 10 UAH/MWh (almost for free), are the source of the sector’s significant financial deficit,” mentioned the Director of Energy Community Secretariat, adding the situation has been worsened by high feed-in tariffs, that is why the PSO mechanism is needed to be reformed.

“The PSO mechanism should be reformed in line with the guidelines provided by the Energy Community Secretariat. Physical trading in the market should be distinguished from the public service obligation whose nature is financial. A well-designed financial PSO would ensure protection of household consumers, while keeping the market segment unaffected as much as possible,” stated Mr. Kopač.

Energy Community Secretariat has also paid attention to the improvement in the process of procurement of ancillary services. It would allow TSO Ukrenergo to use the services more effective, avoiding speculative behaviour of market participants in the balancing market.

In Mr. Kopač’s opinion, the changes to the Electricity Market Law are necessary to enable certification of Ukrenergo.

“Ukraine has not yet implemented joint and coordinated cross-border capacity allocation with neighbouring countries. This is hindering cross-border market integration and efficient import and export,” noted the Director of Energy Community Secretariat.

The Secretariat stated that Ukrainian authorities should make the following steps:

  • to make a revision of regulatory interventions, such as price caps, special bilateral auctions for specific consumers - equal access shall be ensured for all market participants;
  • to amend the Law to ensure swift implementation of the joint and coordinated auctions for allocating cross-border capacity;
  • to transpose and to implement the market integrity and transparency framework (REMIT);
  • to reform the balancing market to increase its transparency and ensure its proper functioning, improve ancillary services segment.

Mr. Kopač suggested, that during the medium and long period Ukraine should work on the integration into the inter-TSO compensation mechanism applied by ENTSO-E; develop a centralised platform for bilateral trades through standardised contracts; work towards market coupling with Moldova; work with ENTSO-E to ensure the requirements are met for synchronisation.

13:25 / 21 October, 2020

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