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Ukraine’s energy reforms and integration: a path forward

In the midst of ongoing challenges and geopolitical complexities, Ukraine remains steadfast in its commitment to energy sector reforms and integration with the European Union. As the largest Contracting Party of the Energy Community and an EU candidate country since June 2022, Ukraine’s journey towards EU integration continues, marked by significant progress in 2023. In this op-ed, I highlight key developments from our Ukraine Energy Market Observatory Q3 report and outline the path forward.

Energy Reforms for Market Integration

Ukraine made progress in 2023 by introducing crucial laws and regulations aligning its national energy legislation with the Energy Community and EU acquis. These reforms are pivotal steps towards deeper integration of Ukraine’s electricity and gas markets with those of its EU neighbours.

One notable achievement was the successful implementation of joint cross-border capacity auctions, marking the end of a decade-long journey. The introduction of these auctions, beginning with the pilot project on the Ukraine-Romania border in November 2023, required comprehensive changes to national legislation in areas such as the electricity market, VAT, and currency policy. Agreements have been reached with neighbouring TSOs, including Hungary, Poland, and Slovakia, to conduct joint auctions on the JAO platform since 2024, fostering harmonisation among market participants. The introduction of joint allocation between Ukraine and Moldova is also expected in early 2024 and currently, daily auctions are in place, but the market’s demand for long-term products remains evident.

Additionally, the removal of transmission charges for import/export trade with EU countries from January 1, 2024, will significantly reduce transaction costs, facilitating cross-border trade and strengthening market integration.

Transparency and Compliance

The adoption of legislation on integrity and transparency in Ukraine’s energy markets is another significant milestone. Ukraine transposed the Energy Community Framework Regulation (EU) 1227/2011 on wholesale energy market integrity and transparency (REMIT Regulation) into national law, going even beyond the Energy Community requirements. This legislation encompasses reporting on transactions with wholesale energy products and data collection by the national regulator, bringing Ukraine closer to the EU REMIT Regulation.

Implementation of the REMIT Law in Ukraine is proceeding according to the set timeline. The National Energy and Utilities Regulatory Commission (NEURC) is guided by the regulations and recommendations of the Agency for the Cooperation of Energy Regulators (ACER) in forming national regulatory practices. Furthermore, the NEURC has opened registration for wholesale energy market participants and adopted regulatory acts governing market abuse investigations and penalty calculation, with more consultations underway.

Future Outlook and Challenges

Ukraine’s top priority in 2024 is the transposition and adoption of the Electricity Integration Package legislation, a crucial step for market coupling with the EU. Although the initial transposition deadline was missed, strong political will is required to adopt the EIP and meet implementation deadlines, such as creating conditions for Nominated Electricity Market Operators (NEMOs) and submitting a Market Coupling Operation Integration plan.

Moreover, the full implementation of the “Green Transformation” law adopted in June 2023 is vital. This includes the establishment of a system of guarantees of origin, support for renewable energy through feed-in-premium models, and the transition to net-billing mechanisms. These developments promote decentralisation and resilience against external disruptions.

Challenges persist, including price caps and public service obligations, which affect the financial stability of the energy sector. Addressing these issues is crucial to ensure a robust and sustainable energy market.

Additionally, on gas TSO reform completed in 2023, a roadmap for reducing state ownership in the energy sector is essential, as is reevaluating gas market fundamentals abolished during the war. The removal of the gas export ban and the upcoming end of the Gas Transportation contract between Naftogaz and Gazprom in 2024 present challenges and opportunities for the gas sector.

A Collaborative Effort

The Energy Community Secretariat remains committed to supporting Ukraine on its journey towards energy sector reforms and integration with the EU. Our Ukraine Energy Support Fund, established in collaboration with the European Commission and the Ministry of Energy of Ukraine, serves as a platform for financial assistance, addressing the immediate needs of Ukrainian energy companies, providing essential equipment, spare parts, technical resources, fuels, and services for restoration and maintenance, with pledges totalling EUR 405 million to date.

Additionally, the Ukraine Support Task Force efficiently coordinates the delivery of specialised energy equipment, fuels, and materials, with 100 shipments successfully delivered. The Ukraine Energy Market Observatory ensures unbiased monitoring of energy market developments and advises on key reforms, and the Pro Bono legal assistance initiative assists Ukraine in holding Russia accountable for energy infrastructure destruction. In addition, we are also committed to providing comprehensive assistance in the development, implementation, and monitoring of Ukraine’s NECP.

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