12.08.2019
Alexander Burtovoy, Alexander Tretiakov
Ukrainian Law Firms. A Handbook for Foreign Clients
The main event of the year, certainly, is the coming into force of a new mechanism for the energy market’s functioning. A reminder that from 1 January 2019 the provisions that provide for the separation of companies that supply electricity to consumers and companies that distribute electricity across networks, come into force.
The former are exclusively responsible for electricity supply, while the latter provides services for connecting or disconnecting, installing electric power meters, operating and renovating electricity lines.
Long before 1, January 2019 all companies must have re-signed electricity supply agreements with the new companies which provide services.
For those who failed to do so, the supplier of electricity is the so-called (as specified by legislation) “supplier of last resort”, LLC Ukrinterenergo.
In a technical sense this company will be the supplier for those who were rejected by other electricity market operators in the provision of services. For today, in fact, all legal entities which did not have time to conclude an agreement on their own are now with this company.
Actually in January 2019 new suppliers didn’t appear, and mainly those who were previously engaged in independent supply remained working. Most consumers were transferred to companies affiliated with “oblenergos”, i.e. regional supply companies. The reason for this is the absence of clarity taking into consideration pricing policy and conditions upon further work on the market. The creation of a real competitive field cannot be expected until the wholesale electricity market begins to work.
Also, some administrative gaps in the regulation of procedures should be mentioned. For instance, the consumer’s transition to a new supplier (if selected) must be agreed upon by the operator (in fact, the subsidiary of an “oblenergo”).
It is questionable whether coordination will not be an administrative element of pressure on consumers. For instance, by establishing such a negotiation procedure which the consumer simply would not want to deal with.
We should point out the potential bomb for the market embedded in the functioning of the “supplier of last resort” LLC Ukrinterenergo.
Today, according to the rules on the “supplier of last resort” all institutions and organizations that are traditional defaulters of consumed energy have come to this company. Among them are various social institutions, as well as institutions with high technological hazards. For example, where a power cut can lead to significant problems of a social or environmental nature. Obviously, neither LLC Ukrinterenergo nor the state would be willing to give instructions to these non-payers to be cut off, which means the company’s debts will start to grow. State-owned company Energorynok had, due to its monopolistic position on the market, a necessary resource, due to which they covered losses from non-payment by such institutions. LLC Ukrinterenergo will not have such resources. How the obvious losses of this company will be covered is not known.
At the same time, the launch of a new market format from 1 January 2019 is only the beginning of reform involving the launch of a retail electricity market.
The main changes are awaited in June 2019, when electricity auctions will be launched. This should be the beginning of a competitive wholesale market for the sale and purchase of electricity.
How will the expected wholesale market set for launch in the summer of 2019 work?
The new model of operation is scheduled to include a number of contractual schemes:
1) Bilateral agreements between large business-suppliers and energy generators.
2) Day-ahead market — agreements which are concluded according to these rules will last for one trading day.
3) Intraday market — where supply agreements will be concluded on the same day.
4) Balancing market.
However, even today we see the first problems with the planned reform of the electricity market.
The possibility of launch of the wholesale market segment in June 2019 is being questioned. For example, in January 2019 there were accusations in the media that the Ministry of Energy and Coal Industry of Ukraine was allegedly impeding the development of software necessary for launching an electricity auction system, as provided for by the Law.
There are also several other unresolved issues.
For example, what will happen with non-competitive electric power generation (especially combined heat and power plant), who will act as a donor for the Guaranteed Buyer, who will redeem the “green” generated energy and several other issues.
Just as important is resolving the situation with the state-owned company Energorynok. Apparently, it will have to be resolved at legislative level and according to the established tradition — exclusively at the expense of the state budget.
Another critical problem arises in green energy. The new law sets out some provisions which should have guaranteed the interests of renewable energy producers. In particular, the law establishes a “guaranteed buyer”, namely Energorynok, which is obliged to buy energy under the green tariff.
Moreover, the potential producer has the right to conclude an agreement to sell energy to a guaranteed buyer even before the construction of the energy station is completed.
At the same time, this agreement comes into force only if several conditions set by Energorynok are met. This gives the possibility for manipulation as completion of construction is not the only condition.
There are still no answers to other questions and they are unlikely to emerge by summer 2019. That’s why the predictions about the launch of the wholesale market are already being perceived by experts quite skeptically.
The list of suppliers on the retail market will always be limited without a working wholesale market and an understanding of the pricing policy and structure of its work, and truly independent companies will be wary of entering this area of activity.
In general, the reform of the energy market is an important step towards the creation of a more or less transparent market mechanism in this field.
Obviously, it was no longer possible for monopolists to continue using the old scheme with “oblenergos” and, therefore, reform was very necessary.
Now only time will tell how this reform will be implemented in practice.