The Law on the Electricity Market: What It Has in Store for Us
Україна зробила важливий крок в побудові конкурентного енергоринку — Верховна Рада ухвалила законопроект № 4493 "Про ринок електричної енергії", а 8 червня Президент Петро Порошенко його підписав.
Ukraine has taken an important step toward the establishment of a competitive energy market: the Verkhovna Rada adopted Bill No. 4493 on the Electricity Market, and on June 8, President Petro Poroshenko signed it.
The Law on the Electricity Market will take force the day after its publication in the official press. The document introduces a new approach to electricity production and distribution, introducing new market players and new tariffs. Who will calculate the new electricity prices, how these prices will be calculated, and when this will take place – the website 24 takes a look.
How it was
To understand what's new in this law, it is necessary to understand how the market is currently operating. Today, this is a wholesale market that buys out all electricity generated by all types of producers. The cost is evaluated in different ways, depending on the type of generation. Then, this electricity is sold at a certain price, without differentiation by price or type of generation (a kind of mixture of all types). It is sold to suppliers at regulated and unregulated tariffs. They, in turn, supply it to the population at tariffs set by the NEURC for the population and industry.
Suppliers with unregulated tariffs (licensed economic entities) may sell it to economic entities. To supply electricity to a legal entity, supplier with an unregulated tariff needs to have access to distribution systems (electric grids within the region where the entity is located). However, in practice, it is difficult for them to obtain sufficient access of this type, as local distribution enterprises are associated with suppliers, which, in turn, are associated with producers.
Although everything is allegedly processed by the wholesale market, in practice, grids are hardly interested in being operated by third persons, so they block access to grids. But this is just one issue.
What the new law changes
Analyst Andriy Vigirinsky told 24 that in theory, the new law will allow producers to conclude bilateral sales-and-purchase agreements with market players (commercial consumers). Distribution enterprises (even ones that are part of vertically integrated structures, like DTEK) must be, in organizational and managerial terms, separated from producers and suppliers (as with the natural gas market, where regional gas authorities were divided into traders and distribution grids two years ago). The law also provides guarantees of independence and free access to grids for market players on the basis of public agreements.
It remaind to be seen how this turns out in practice. "It is highly probable that producers will make every effort to compete on price and retain high-quality consumers, with high levels of consumption and good settlement indicators, both at the stage of setting the conditions of settlement and with the price,"
says Vigirinsky.
The multiple other electricity markets are another innovation: the next-day market and the intra-day market, the balancing market, and the supplementary services market. Each will have a separate operating goal, operating procedure, electricity sales and purchasing procedure, calculation of the cost of electricity based on results, and conditions for setting obligatory electricity sales volumes. The regulator still has to approve all of this, as we explain below. Soon, there will be several electricity markets in Ukraine
As now there is no entity buying up all electricity and then selling it, the notion of balancing accounts has appeared: electricity produced and consumed, and the obligations of market players to announce and fulfill hourly electric power schedules in accordance with the amounts of electric power sold and purchased and to be financially responsible for correcting imbalances. For this, such concepts as responsibility for the balance and the balancing group (a group of market players established through a special agreement, which will designate one of the members as bearing responsibility for the balance) are introduced.
According to the head of the energy sector of the Office for Efficient Regulation, Oleksiy Orzhel, given the critical state of the Ukrainian energy sector, this is an extremely important decision. In the medium term, a stable competitive market should help attract investments that the power generation sector badly needs.
Economist Pavel Kukhta believes that with the adoption of this law, Ukraine is taking a huge step toward civilized rules for the energy market and economic growth resulting from the implementation of such rules.
"The law provides a legislative framework for making the Ukrainian power market compliant with EU rules. These rules are elaborated in such a way as to provide the most correct and neutral rules of market operation for the energy industry,"
he said.
In general, experts say, the law is built on the principles of transparent and efficient connection to distribution companies' grids and significant reduction of monopolists' influence on those who purchase connections. How these principles will be applied in practice is another issue.
For the law to start working properly
Oleksiy Orzhel stressed that the energy law will not bring consumers instant positive changes. The effectiveness of its competitive principles will mostly depend on its implementation.
Consumers will see positive changes only when new players and new capital enter the market, according to Orzhel. The energy regulator is tasked with ensuring the correct implementation of the law. However, the regulator is still not independent and is ineffective. Without changes to its composition, the implementation of the new law will be delayed, Orzhel said.
"After the Verkhovna Rada, it's the regulator that will be the most important actor in the implementation of this law in the real, functioning market. A market where 70% of TPPs are concentrated in one company, where the amount of cross subsidies between consumers has reached 45.8 billion hryvni, where there are significant differences in the costs of various types of generation with various forms of ownership, whose associated markets, particularly the coal market, are minimally competitive,"
said Orzhel.
In a decree, the president of Ukraine approved a plan for the rotation of the chairman and members of the National Electricity and Utilities Regulatory Commission. It's in the interests of the state to perform this rotation properly.
For actual reform of the electricity market, it is necessary to address the issue of the composition of the NEURC.
Without settlement of the regulator issue, the future of the legislation is rather unclear. Normal operation of the electricity market will require the development of market rules, rules of the next-day and intra-day markets, codes for transmission and distribution systems, a code of commercial accounting, and rules for the retail market. These need to be approved by the regulator and coordinated by the Antimonopoly Committee of Ukraine. Further, the Cabinet of Ministers is responsible, among other things, for the establishment of the market operator and the guaranteed buyer, as well as the approval of procedures and specifics of regulation (which also need to be elaborated).
Finally, but not most importantly, the regulator has to approve a range of methods for price- and tariff-setting in accordance with the functions of market players as distributed by the law. This is why today, it is impossible to say how the new rules on the energy market will affect exact figures in payment orders. They haven't been calculated yet.
According to the law, the methods need to be developed within a month. We'll see how long this actually takes.
Paper doesn't blush?
According to Andriy Vigirinsky, one of the main reasons the law could turn out to be good on paper only is mentality.
"At the stage of normative regulation through subsidiary laws, at the stage of providing foreign suppliers access to grids, at the stage when consumers (mainly the population) will not have time to, will not be able to understand the new provisions properly, they will be obliged to sign long-term contracts under unfavorable conditions with a lot of fine print,"
the analyst explained.
Also, he said, the market provides civilized methods of profit and income accumulation, and it is important that the energy sector not follow the example of Naftogaz of Ukraine and terminate allegedly loss-making activities after a year or two at the expense of the interests of the less informed population.
The Energy Sector Reform: The Long Haul?
The Cabinet of Ministers has established a Coordination Center for the energy sector reform, but this is just the first step of a long journey. What are the risks and inevitable challenges for Ukraine as the new electricity market forms?
The Cabinet of Ministers has taken the first significant step toward the establishment of a new, competitive electricity market to replace the obsolete post-Soviet system. This step was the establishment of a special governmental body, the Coordination Center.
Its members will include the heads of more than a dozen agencies: the parliamentary committee for the fuel and energy sector, the Ministries of Energy, Finance, Social Policy, and Economic Development, the NEURC, the fiscal service, the presidential administration, and more. It will be headed by the deputy prime minister.
Why is this an important event?
The Coordination Center will be a sort of "heavy artillery" in the implementation of provisions of the Law on the Electricity Market, which laid the foundation for the coming transformations.
Whether everything is properly and fully implemented will depend mostly on the newly established authority.
There is reason to worry: Ukraine has already failed in this once. A law on reforming the power market was passed in 2012, but its implementation failed at the stage of development and implementation of a regulatory and legal framework.
Today, the political will to complete the reform is much stronger. There is significant support from international partners. However, there are still major risks.
1. Extremely fast deadlines VS bureaucracy. According to the law, the market should become operational in 2019. No European country to date has been able to implement a reform in two years. Still, it is not possible to wait any longer; if we do, negative processes in the industry will get even worse. To do everything on time, the organization of the implementation of the reform needs to close to perfect.
But we cannot say at this point that officials have shed their inertia and eagerness to shuffle off responsibility.
The Coordination Center needs to become a high-level platform where roles will be defined and actions synchronized. It's where notes should be compared, necessary decisions made, and problems settled.
2. Discussions of technical details. The law sets out the main rules for the operation of the new electricity market. However, particular nuances depend on the contents of subsidiary legislation, about which opinions might differ among different agencies, market players, and experts.
It is important that attempts to settle such differences not bog down the reform. The task of the Coordination Center is to find a balance between various opinions and elaborate a coordinated position, taking all parties' interests into account.
3. Approval of subsidiary legislation. Approximately 95% of all documents that are part of the reform need to be approved by the National Electricity and Utilities Regulatory Commission (NEURC). However, there is a risk that as early as this autumn, this agency will be unable to function due to the failure of the regular rotation of its members stipulated by law. In late November, some of them will have to leave their posts, but the assignment of new officials is still an unsettled issue, as neither the Rada, nor the Cabinet of Ministers, nor the president has sent representatives to the nomination commission.
This means that subsidiary laws for launching the market might be developed on time but remain without signatures and seals.
There are hopes that the work of the coordination committee will change state representatives' understanding of the importance of approving NEURC members and help bring the situation out of the dead end it finds itself in.
4. Low consumer awareness. The reform is being implemented to a large degree for consumers. Therefore, its success will depend on how the changes are perceived. At present, though some customers of energy companies have heard about the new market, the level of awareness is generally low.
One of the most important tasks is to explain clearly why the reform is needed and what its consequences are for electricity consumers, the energy sector, and the country.
Ultimately, the electricity market reform is an historical event for Ukraine and will affect the development of its economy, social sphere, and European integration. Is it at all possible for such an important process to take place without the involvement of top (or at least second-level) state officials?
In the case of Poland, the reform was personally overseen the prime minister on an almost daily basis.
The establishment of a Coordination Center in and of itself does not mean that the reform will get the same level of attention in Ukraine. In essence, so far, only the formality envisaged by the law has been fulfilled. Back in 2012, too, a center was launched de jure. De facto, not one meeting ever took place.
Let's hope that our statesmen don't step on the same rake again and remain actively involved in the implementation of the reform, showing initiative and taking responsibility. After all, the more professional and proactive the crew, the higher the chances the ship will make it to its destination.