Maxim Timchenko: Ukraine’s power liberalization showcases its European aspiration
Ukraine launched a new liberalized electricity market on July 1, marking a major milestone in the reform of the country’s energy sector and a vital step toward Ukraine’s European integration.
The launch comes at an opportune moment, just ahead of commitments made in a joint EU-Ukraine statement, to undertake further gas and electricity market reforms, following their summit in Kyiv on July 8.
The EU Support Group for Ukraine, the Energy Community Secretariat, the European Bank for Reconstruction and Development, the European Investment Bank, USAID and the World Bank all consulted on this latest power sector reform. The new electricity market adopts best practices from international models that have been proven to work effectively.
Ukraine was the second-to-last country in Europe to liberalize its electricity market. Until now, it operated as a single-buyer market, where generating companies sold their electricity to a single operator — Energorynok. It, in turn, sold the power to distribution companies who supplied it to their consumers.
Since the new market came into force, electricity has been traded through bilateral contracts between producers and consumers or traders as well as through transparent stock market segments: the day-ahead market, intraday market and balancing market. There were no failures in the liberalized market functioning, and all of its segments operate in the normal regime.
The new model for the electricity market has created opportunities for free trade between the EU and Ukraine through Burshtyn Island, the area in the Ukrainian electricity grid that is synchronized with the EU. In the few weeks since the market launched, we have already seen imports of electricity from Slovakia and Hungary through Burshtyn Island. Imports help create a fact-based price benchmark and contribute to increased levels of competition for Ukrainian electricity producers.
The Ukrainian electricity system’s synchronization with Europe’s grid — through the European Network of Transmission System Operators for Electricity (ENTSO-E) — will significantly increase the trade between Ukraine and the EU, serving to enhance competition, secure a more reliable supply of electricity, and ultimately make Ukraine more energy independent. The new electricity market model and further synchronization with ENTSO-E is expected to increase Ukraine’s exports by more than three times, from 6.2 billion kilowatt-hours in 2018 to 20 billion kWh in 2023.
As Ukraine’s largest private sector energy company, DTEK is optimistic about the latest developments in the market. We will remain focused on adjusting our trading operations so they’re in line with new market rules, using the market opening to showcase how seriously Ukraine takes its European aspirations.
If we want to continue in this direction, Ukraine’s energy sector reforms must adhere to the Energy Community’s recommendations. The next step is to substitute cost-plus tariff regulation for electricity distribution using incentive-based tariff regulation. This will encourage investments in the modernization of Ukraine’s worn-out grids, which have now reached 80 percent wear and tear and have about 10 years of operating life remaining.
Updating the energy grid will help Ukraine become more energy-efficient and ensure the infrastructure can support the inclusion of new renewable energy sources, consumers who have more power over how and when they use their energy and electric vehicles.
Finally, the launch of the liberalized electricity market is a clear signal to international investors and partners that Ukraine can carry out complex reforms. As shown by the model the country adopted for its new electricity market, we are already working in line with the principles and values of the European system.
As a result of these latest reforms, the Ukrainian electricity market is set to become the country’s first commodity market with a modern trade infrastructure and transparent market indicators.