Ukraine has made an important step towards the reform of the energy sector in line with European standards.
The National Commission for Energy, Housing and Utilities Services Regulation has for the first time introduced methods of forming a wholesale and retail price of electricity and the limit prices of the power grids, having thus fulfilled the requirements of the Antimonopoly Committee of Ukraine. The market-oriented procedure for determining energy prices allows for minimizing administrative interference in the energy sector and fully meets the European principles and international commitments of Ukraine. Work on the new approach lasted for more than a year and a large circle of participants were engaged, namely these were experts, representatives of power generating companies, the regulator itself and related ministries.
Since the creation of the current model of Ukraine’s electricity market, no document has been prepared before to regulate the formation of the wholesale market price: its components, criteria and the grounds for review. It resulted in the situation when power rates were set in far from the transparent way, assets between power generation companies were distributed in a manual mode, the market remained unpredictable, and there was no correlation between the prices of energy resources in the world and Ukraine.
Previously, the price of coal produced by state enterprises in Ukraine was set up by the regulators, and often did not cover production costs. Senior analyst at Dragon Capital Denys Sakva said that “the new approach will help break the vicious circle of mutual debts owed by thermal power plants, state-run enterprise Energomarket, and Ukrainian coal mines.”
Head of Ukraine’s National Commission for Energy, Housing and Utilities Services Regulation Dmytro Vovk sees two steps that one may take to resolve the situation. “The first one is to develop the guidelines for the formation of the wholesale and retail price while the old model of the market is in operation. And the other step is a new law on the electricity market, which would foresee a liberal pricing model for power generating companies with a fully competitive market, and the Commission will set prices for power rates. What is more, we think that several synchronized measures need to be taken to ensure a comprehensive approach,” Vovk said.
Amid the absence of the full-fledged coal market in Ukraine, global indices: API2 (Amsterdam, Rotterdam, Antwerp), API4 (Richards Bay, South Africa), Argus / McCloskey’s Newcastle were used as the benchmark for prices. Thus, the formation of prices of energy resources on the basis of prices in the international markets is already used in the gas sector of Ukraine.
“To form the prices of coal to set tariffs, we should consider the following parameters: API2, logistics and fixed costs. API2 is a key index for Europe, used for coal shipments to Europe. 90% of coal derivatives in the world are quoted on the basis of API2. Logistics is calculated in the following way: freight – delivery to Ukraine and rail transportation inside Ukraine. The reasons for this are the following: 40% of the coal that should be shipped to the Ukrainian thermal power plants in accordance with the Energy Ministry’s balance is A grade coal, which is not produced in Ukrainian-controlled territory. And the Commission takes measures to create conditions for regular and smooth coal supplies to the thermal power plants,” Dmytro Vovk said.
Denys Sakva adds that the formation of the wholesale and retail price based on the global indices makes pricing more transparent and minimizes the subjective factor of intervention by officials. “Pegging coal prices to international indices and avoiding forcible fixing of prices by the Fuel and Energy Ministry will remove the subjective component in setting tariffs. This is a more market-oriented method, which has not been used before at all,” Denys Sakva said.
Transparent pricing in the electricity sector is one of the basic conditions for the integration of the power grids of Ukraine and the EU (ENTSO-E). In 2011, Ukraine became a member of the Energy Community. One of the main objectives of the organization is to attract investments in power generation and boost competition. The transition to the unified principles of market pricing of electricity to stimulate its economy and transparency of energy markets is part of the coalition agreement.
“We believe that today we need to move the way as the Europeans did. [We need to] merge the markets to ensure that a larger number of players could come up with their bids. This requires technical measures and capital investment, but the Commission is ready to support these requests, allocate funds in the tariff for Ukrenergo, a backbone operator, in order to let the merger happen until the electricity market has been introduced. According to the draft law, which we have developed, the market will finally start operating from January 1, 2019.
Even if we move to market-oriented prices of coal, we still have the problem when Ukrainian thermal power plants are unable to compete. It could firstly be solved by replacing old facilities with newer ones. Because almost all of them are significantly worn out. They should be replaced with more efficient equipment that will meet international standards or at least the standards of the market which we are being merged with,” Vovk said.
It should be noted that the Commission on March 3, 2016, issued resolution No.289, which endorsed the procedure for forming the target wholesale and retail price of electricity.
