Monday, September 28, 2020
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Ukraine: the “homework” needs more EU attention

Modern systems of energy sector management, given their complexity, require knowledge, time and resources. Moving to the goal of integration of its energy sector with the European one, Ukraine has already succeeded in the gas sector, which was under Russian pressure and the European Union attention, but still needs more time, knowledge and resources for more complicated electricity sector reform, which is more a Ukrainian “own homework”. 

After the Revolution of Dignity in 2014, the new Ukrainian government confirmed the country’s intentions to create a common energy market with the European Union. To realize this goal, Ukraine had to transpose the basic EU legislation and create a sectoral management system similar to the European one. That means, inter alia – unbundling of transmission and distribution system operators in gas and electricity sector, better competition among suppliers– both in industry and household consumer segments, clear and transparent market rules, creation of the new energy regulator etc. It took some time and efforts for many Ukrainian government officials, members of the Parliament and experts – to understand these rules, incorporate them into Ukrainian legislation, and make people follow them. 

In the gas sector, the process of bringing Ukrainian rules in line with the European ones was faster and easier. First, Ukraine appeared without Russian gas imports in spring 2014 – it was “punished” for the revolution and the EU integration course – and had to solve the problem until the autumn. Both the Ukrainian and European parties managed to develop a strategy for future integration of the energy markets for this period and in the next several years, when the country still was under the constant pressure of Russian coercive foreign policy, implementation of this strategy had real support among decision-makers in Ukraine. It was a classic case when a threat was transformed into the opportunity – and yes, Ukraine seized it. Another lesson learned from the gas market reforms is the understanding of the importance of playing by the rules. The victory of Naftogaz in the arbitration against Gazprom showed that any contract should be designed of the best quality, to have interests protected in the future.

At the same time, when the treat became no longer visible, Ukraine could survive without direct gas imports from Russia and had many possibilities to buy gas from its European partners, the reforms process slowed down. Long and painful discussions on the models of unbundling of the Ukrainian gas TSO in 2017-2019 and implementation of the new tariff system for distribution system operators are an example here. 

Another reason for a faster and more effective gas sector reform is that the gas market architecture is more simple than the one of the electricity market. There are no different types of generation here, which need different types of regulations. The industry sector in Ukraine experienced competition among gas suppliers before – so further liberalisation of the market was quite understandable for them and easier to follow. The Ukrainian government officials, experts and members of the Parliament had constant communication and support from the Energy Community, EFET, and those EU companies interested to export gas to Ukraine. All these European partners, including European companies interested to supply gas to the Ukrainian market, contributed to the knowledge transfer to Ukraine and brought a lot of resources to make the gas market reform happen. 

Unlike the gas market, the electricity system of Ukraine does not have immediate perspectives to be integrated with the EU grid (ENTSO-E). Despite the clear statements in the Energy Community Treaty and the Association Agreement regarding creation common electricity market in the future, the country should first demonstrate that its electricity system is stable and works effectively before integration to the ENTSO-E. The government had some support from the Energy Community Secretariat, USAID and the European Commission in the development of new legislation – but proper designing of the new market required far more work and modelling. And here Ukraine had neither enough time nor knowledge. 

Before the new wholesale market model was launched in July 2019, the country lived 20 years with a completely different system of market organisation. With the lack of knowledge, weak communication and lack of experience, after new market opening all market players met with problems: the nuclear generation carried (and still carries) the burden of PSO (public service obligations) and has to sell electricity for lower than market prices; coal-fired generation and hydropower generation have decreased production (due to drop in consumption); the renewables, having a priority dispatch in the system, could increase the production of electricity, but since the market generated a lot of debts, they cannot get compensation of the feed-in tariffs in time. 

The new government of Ukraine, which was formed in April 2020, has its priority of harmonising all processes in the electricity market – solve the debt issues, find a compromise with renewable generation companies on feed-in tariffs restructuring, reduce cross-subsidisation in the sector (a long-awaited decision to increase retail prices for households). However, unlike the developments in the gas market, all these issues constitute mostly an internal problem of Ukraine, with no external threats and the direct EU interest, it is our “own homework”. Until the problem is visible for consumers – like blackouts – it is also not a focus of media and public attention. That is why, most likely, this part of Ukraine’s energy reforms will take much more time to complete.

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