How the consumer should proceed in a competitive electricity market

How the consumer should proceed in a competitive electricity market

On December 1, the first phase of the liberalization of the retail power market will begin, involving changes to the pricing formula for industrial consumers

How the consumer should proceed in a competitive electricity market

On December 1, the first phase of the liberalization of the retail power market will begin, involving changes to the pricing formula for industrial consumers

The DTEK Academy held a training for representatives of a number of large industrial enterprises and utilities in July under the name "The New Law on the Electricity Market: How It Will Affect Your Business."

What are the benefits and risks for consumers in the new power market? How much will it cost? How to conserve energy resources? Oleg Maksimenko, the Power Sales Development Manager on the Domestic Market of DTEK Energo, Ekaterina Berezovskaya, the Head of the Department for Development and Analysis of Regulatory Projects of DTEK Grids, and Vladislav Yakovenko, the Head of Sales for Power Supply of DTEK Energo, tried to answer these and other questions from consumers. The speakers shared with consumers what is known and unknown about the future market as of today and, in their turn, received from listeners a number of unresolved issues to consider.

Mind found the issues raised by the DTEK Academy highly relevant and timely, worth dwelling on it for a moment.

Talk about reforms, leave the consumer until later. "The consumer doesn't understand the meaning of the power reform," Oleksandr Svetelyk, the ex-deputy minister of the energy and coal industry, said recently at the Energy Forum. One can go even further: the meaning of the reform is not even fully understood by energy specialists at the level of energy companies. There are several reasons for this.

The power reform itself consists of three parts: regulatory, organizational, and technological. One year before the launch of the competitive market, the regulatory part has been 50% elaborated, and the documents approved or developed contradict each other on many points. Many organizational aspects related to the competitive selection of certain suppliers, the functioning of various segments of the wholesale market, and the system of commercial power metering, for the implementation of which there is still no modern technological infrastructure, have not been clarified.   

Despite the numerous energy forums, conferences and round tables that have been held in Kiev, the industry lacks direct bilateral channels of communication between energy specialists and consumers  in the field, and instead of a professional discussion about the reform, we often get a showcase presentation in the capital, aimed at inspiring Western donors that Ukraine is moving in the right direction. Meanwhile, many industrial consumers have a rather superficial understanding of what awaits them after July 1, 2019, or even after December 1, 2018.

Free tariffs for industrial consumers. However, the date of the first phase of the reform in the power supply sector is widely known: December 1 of this year. The liberalization of the industry will begin with the retail market. That date can be pushed back to January 1, 2019, but this is a minor detail.

By December 1 of this year, all oblenergos must be fully divided into two companies: distribution system operators (DSO) and  suppliers of general services. The Law on the Electricity Market obliges general suppliers to supply up to 1 kV of electric power to the population and small consumers, without fail.

All other consumers will have to choose a new, independent electric power supplier within 21 days. However, the law does not prohibit a general supplier from selling power to all other categories of consumers. Therefore, the probability is high that the majority of consumers will remain  customers of the former oblenergos, just under a different name.

Nevertheless, on December 1, a fundamental innovation will appear in the system for supplying power to industrial consumers. Namely: whereas now oblenergos supply power to industrial consumers using a binomial tariff averaged over the region, starting December 1, electricity sales to each individual consumer will be carried out under a free-pricing regime and using an individual price schedule.

This schedule for the consumer will correspond to another hourly schedule, according to which the supplier itself buys power from Energorynok on a daily basis. Therefore, after December 1, the beneficiaries will be those enterprises that operate using a regular daily schedule and buy a large amount of power at night, when the price is lower. Conversely, prices should increase for medium-sized and small enterprises.

Another, the third, scenario for an industrial consumer after December 1 is to acquire its own supplier. However, this process is not straightforward; it requires additional administrative costs and also involves significant financial risks in the rather complicated power-exchange business. Coming to grips with this business hardly makes a sense for consumers, who would only be drawing resources away from their core activities.

Supplier of Last Resort. Contact in case of emergency. However, what will happen if the former regional energy companies refuse to sign contracts with problem water utilities or any other public utilities that are mired in debt, and these enterprises are unable to find other power suppliers?

In this case, suppliers of last resort will be created in the regions. It is undesirable for consumers to become their customers. The thing is that the supplier of last resort does not have a permanent customer base and is obliged to accept any troubled consumer, which means that its power will be the most expensive.

The supplier of the last resort is established for three months. What happens next is still unknown, as there is no corresponding regulatory base. There is still no procedure for holding tenders for the selection of such suppliers; the relevant document is under development in the Ministry of Energy and Coal Mining. Presumably, if no one decides to take part in the tender, the state will establish the supplier of last resort on its own. How and from which companies? Again, no one knows.

However, it is most likely that the current regional power companies will try to preserve their former customer base, as well as the territory of their influence. It should also be remembered that in the liberalized European energy markets, local monopolists are involved in dozens of activities in addition to the transfer or supply of power, effectively using their infrastructure in the battle for the consumer.

How to ensure that there is competition between suppliers? In 2017, the proportion of so-called power suppliers of unregulated tariffs (SUT) was 7% in the total power supply in the retail market. Today the number of SUTs on the market is about 25-30.

Currently, both regional power companies and SUTs acquire power from Energorynok according to the hourly schedule one day in advance.

Generally, independent suppliers compete with regional power companies on the basis of the optimization of power purchase schedules from Energorynok and load schedules for consumers. However, as already mentioned, starting December 1, once unbundling is completed, the current regional power companies will also begin to sell power to industrial consumers on hourly schedules. It is a separate issue that general service suppliers will still have the most inert consumer mass in the form of the population and small non-domestic consumers, who pay for consumed power on a monthly basis. The proportion of such consumers for Ternopiloblenergo, for example, is now about 70%. At the same time, Energorynok requires advance payment from suppliers. Perhaps this will make the lives of general suppliers a little more difficult in comparison with those of independent power suppliers, at least in the first phase of liberalization.

However, it is necessary to simplify the procedure by which a consumer changes supplier as much as possible and to completely eliminate the chance that future distribution operators will influence this process. This is necessary to ensure that there is full competition between suppliers in the retail market. Indeed, this is the ultimate objective of the liberalization of the retail market.

Under Resolution No. 1406 of December 27, 2017 of the National Commission for State Regulation of Energy and Public Utilities, the distribution operator is obliged to provide free, non-discriminatory access to the electric grid for all suppliers, without exception. However, that is easier said than done. In order to realize this opportunity in practice, it is necessary to provide distribution units with appropriate information technology infrastructure.   

To this end, this spring, Ukrenergo presented a project involving establishing a centralized system of data collection and exchange, Data Hub. A similar system was developed in Denmark, and now regional Danish power companies do not know who the suppliers are and to which consumers in their territory they sell power. True, the Danes developed and implemented the system over a 15-year period to achieve this.

Data Hub allows you to collect and store information about all consumers. As a result, all market participants get access to information on each consumer through his or her code. The system allows the consumer to change suppliers easily and quickly. In the future, suppliers will also be able to generate invoices for consumers using the Data Hub.

However, regional power companies respond that the proposed system is the most complex in Europe and that Ukrainian grids are not yet ready for its implementation, either technically or financially.  

The second phase of the liberalization. The second phase of the reform will bring much more radical changes to the retail market, starting with the launch of the competitive wholesale market on July 1, 2019. From this date, industrial consumers will have the opportunity to become direct participants in the wholesale market, independently buying electricity from producers and selling surpluses. At the same time, domestic consumers, like industrial ones, will also have the right to change power suppliers.

It is unlikely this will be attained by July 1, 2019, as the law stipulates, but representatives of the power sector are still talking about that date.

As participants in the wholesale market, industrial consumers will be able to trade power on an equal basis with generation companies, traders, and power suppliers, and work on all trading platforms of the market: direct contracts, the day-ahead market, the intraday market, and the balancing market.

In the near future, Mind will discuss how soon the competitive wholesale market will be operational, as well as the advantages and risks for consumers.