Yuliya Nosulko: The current model of the electricity market is not attracting investors

Yuliya Nosulko: The current model of the electricity market is not attracting investors

Interview with Yulia Nosulko, Head of the DTEK Regulatory Policy Department, on why Ukraine should reform the electricity market.

Yuliya Nosulko: The current model of the electricity market is not attracting investors

Interview with Yulia Nosulko, Head of the DTEK Regulatory Policy Department, on why Ukraine should reform the electricity market.

More often than not, women are becoming the top managers of large Ukrainian companies, possessing no less professionalism than men. Yulia Nosulko, Head of the DTEK Regulatory Policy Department, proves that only your mind, interest, and the openness to changing is what matters in making you well versed in the electric energy market. And most importantly – the love for the Motherland and the desire to make it better. These feelings alone make up the catalyst of introducing reforms, and they never let you stop, but, on the contrary, compel to make the country more successful, in order not to leave the future generation with problems unresolved by predecessors.

Yulia Nosulko told LDaily about the pitfalls of the electricity market reform, as well as why it was necessary to change the rules of the game.

LD: The electricity market of Ukraine is now preparing for a large-scale reform. And this is not the first change in the electricity market during the time of Ukraines independence. In your opinion, when did the large-scale reform truly start?

Yulia Nosulko: We have been reforming the market since 1995. At that time, the initiative came from Oleksii Sheberstov, the Minister of Energy. He was inspired by how energy works in Europe, in particular, in the UK. The British model was later taken as the basis for the Ukrainian market. This was the first step in the conversion to European standards.

The reform began with a separation of those large industrial energy companies, which have been producing, distributing and supplying electricity over several regions. That is, enterprises were segregated into those generating electricity and those distributing and selling it to end users (regional power distribution companies). This was the first stage.

At the second stage, “Energorynok”, a separate subdivision, which later became an independent enterprise – the wholesale electricity market operator, has been formed on the basis of the state-owned NEC “Ukrenergo”. British advisors and USAID helped Ukrainians to implement this first reform.Then the Agreement between the members of the Wholesale Electricity Market was developed and signed in autumn 1996. It is valid now – in 2016 it was the 20th anniversary of its signing. And today the market is still functioning on the basis of this document.

 The model works like this: Energorynokis a state-owned enterprise, which is the sole buyer of all electricity generating in the country and its sole seller for suppliers. The whole flow of electricity and money passes through it and cannot circumvent it by no means. That is, direct sales of electricity can only be made by small producers small stations, as stipulated in

LD: What are the main disadvantages of the fact that the state fully controls the electricity market?

Yulia Nosulko: The problem is that neither the energy companies can influence their activity in the medium, and even more so in the long-term outlook, nor consumers can find a balance of interests with their supplier. If the market worked, then it's likely that there would be no rotating outages that we experienced in 2014. Obviously, in such a situation, the price would increase in short term due to difficult conditions. But these are the market laws.

This is how balancing of supply and demand works.

In 2010, Ukraine joined the European Energy Community. Within this membership and the Association Agreement with the EU, we are committed to implement the European legislation in the energy sector. At that moment it was the second energy package. And indeed, the proposed model repeated the one that exists throughout Europe – a liberalized market model. It has never been implemented. In July 2017, the Law of Ukraine “On the Electricity Market” came into force, launching the current reform. The Third energy package of the European Union was the basis of the law.

Europe had been making their market open in a progressive way. First, the largest consumers were put into the free market, after a certain period – the average ones, and afterwards – all consumers, including the population. However, in Ukraine this process is becoming busier at max because of the lack of time, so we have to open everything at once. Ukraine was given two years for the reform, 10 months of which are already behind.

LD: Tell us more about how the Ukrainian energy market may change?

Yulia Nosulko: According to the law, it is planned to create several market segments. The first segment refers to bilateral agreements: any consumer / supplier may enter into an agreement with any producer and purchase electricity directly from him. However we should keep in mind that electricity is not just kilowatts per hour. Electricity is also an established schedule by which it is consumed both by the population and by the industrial enterprises and the service sector. Accordingly, when you enter into agreement with someone, you not only agree to buy a certain number of kilowatt-hours per month. You have to agree on how it will measure up during the day, in which period you will use more electricity, and in which – less.

For example, you have entered into an agreement for a month, a half year or a year. But predicting electricity consumption in such a time interval is quite difficult. Here, the intraday market will help you (where electricity “today-for-today” is sold, but three hours ahead) and the day-ahead market (where electricity is sold “today-for-tomorrow” on an hourly basis respectively). This way we can shorten the gap between the real consumption and the one we have been planning. And finally, the real-time market — the balancing market. Here, in case of failure to comply with the schedule previously announced, in the event of upward or downward deviation, you will have to pay a fine.

LD: Is there any criticism of such changes?

Yulia Nosulko: Many populists are now claiming that this reform will open the market for large consumers who will buy cheap electricity from the state-owned enterprise “Energoatom”, and all others will have to buy expensive electricity. First, “Energoatom” simply cannot sell electricity in such a way, as they are unable to cover all the needs of the buyer. In particular, they cannot sell to everyone who needs it according to the schedule that they need.

And secondly, there is yet another logical thing that everyone forgets about. Why should “Energoatom” sell cheaper electricity? You should not forget that they also have their needs for enterprise development. And they also have problems with the outflow of skilled personnel abroad.

LD: In this case, should the state maintain its control over the market?

Yulia Nosulko: If you look at European experience, in spite of the liberalization of the market, the state still provides some control, for example, there are serious requirements for the publicity of data. But how do European institutions work? They work post factum to some extent, that is, if something happens, and the anti-monopoly authority recognizes violation therein, an investigation is initiated. If a company has indeed committed a violation, then the result and the sanctions will be such that other market participants are unlikely to repeat such experience. That is, nobody stands over you every day, but if there is a violation, then the punishment will be appropriate.

LD: And yet, are you sure that this reform will take roots in Ukraine?

Yulia Nosulko: I regret that we have been trying to reform for many years, but still haven’t implemented it. When we started reforming the market in 1995-1996, I worked in the Regulator (today – National Commission for State Regulation of Energy and Public Utilities). At that moment, we were the leader in reforms among all post-Soviet countries. And today it is very sad to realize that we have lost these leadership positions long ago. I am convinced that only the market will be able to form adequate relations between the seller and the buyer.

Of course, there is one peculiarity. There should be mechanisms of control by the state, as we discussed above. Of course, in any country natural monopolies – network owners – are under control. They are regulated more strictly in terms of rate formation, and precisely because they are monopolists. And the rest of the market should also work according to certain rules, and simultaneously, the mechanisms that exclude manipulation should operate. And then everything works fast and smooth.

LD: Everything sounds good and right, but despite this, the implementation of the reform has been going for a very long time. In your opinion, why is it so difficult for Ukraine to reform the electricity market?

Yulia Nosulko: In my opinion, the most serious problem is the lack of a leader for reforms. Ideally, there should be one person in the country who structures the entire process. But we, unfortunately, do not have such a person today. In many countries, such reforms are headed by senior government leaders, because there are very global changes, which affect every citizen. Therefore, there should be the one who sees the entire process, understands bottlenecks, realizes the direction in which more serious efforts are to be applied, and has leverage of this process. A simple example: today, there is lack of information in the media that electricity market in the country will change dramatically in the near future. Few know what will happen. And this is quite unfortunate. Because such information should be accessible to the general public, there should be social advertising as well. As a company, we work in this direction to give our consumers a certain insight into what will happen to the market, what can be expected in the future, what is the experience of reforming in European countries. The next major change will be in December, when those regional power distribution companies, which we know, will stop their work in the market and since then they will no longer supply electricity to consumers.

LD: That is, we have to enter 2019 with the new market?

Yulia Nosulko: Yes, but this applies to the retail market, changes in it will occur first. This year, the concept of the retail market should change in terms of “supplier-client” relations. The competitive wholesale market will start working next summer.

LD: Are we moving according to the schedule?

Yulia Nosulko: Yes. But there remains one important unresolved issue – the situation with the regulator. As you know, the National Commission for State Regulation of Energy and Public Utilities has difficulties with the quorum. Theoretically, everyone believed that the first competition to nominate five persons would have been completed by May. But this did not happen, and today there is no capable regulator. And the bulk of decisions should be taken precisely by the regulator.

In the meantime, we are trying to continue our work; we suggest how to move on, reminding them: if, until a certain moment, the necessary documents are not adopted, then we simply will not have time to make a transformation. We must obtain new licenses, enter into new agreements, inform consumers so that they do not fear that with the disappearance of regional power distribution companies, the electricity supply will stop. And this is not done quickly.

But we shouldn't say that everything is already lost. The process is going on. From the point of view of private participants of the market, everyone is trying to form up their processes. But since we are in the regulated field, we cannot take all the decisions and solve all the problems on our own. There should be a very active dialogue between the regulator and the market participants in order to ensure that consumers are not affected in the end. If we do not provide this process, everyone in the country will feel the negative consequences. And we do not want to be those who are accused of failure of the reform.

Therefore, we need to work, move on to get the desired results.

LD: If the electricity market becomes open and transparent, will it be a decisive factor in attracting investment?

Yulia Nosulko: I cannot say that all investors will want to invest in this market. But I know that while we have the current model of the market, serious investors will not come. Because they want to work under clear terms, when the rules do not change every day.

Think about it, which energy sector does attract private investments? Green energy. Because there, laws are adhered to, and the work framework is clearly defined. And it is quite stable. Investments in different energy sectors will also come if they have the same clear terms.

LD: Does such a difficult situation not make you to think about moving to another country?

Yulia Nosulko: I like our country absolutely in all respects: we have a beautiful country, wonderful, creative people. Unfortunately, the political situation is worse. More precisely, not so much the politics itself, as the excess of populism. Therefore, we just have to act and not be afraid of changes. And I believe that these changes will lead us to the good.