In 2016-2017 Ukrainian authorities introduced many important legislative changes in the energy sector in line with the country’s commitment to implementing the Third Energy Package as a member of the Energy Community and as a party to the EU-Ukraine Association Agreement.
New Electricity Market
On June 11, 2017, the newly-adopted Electricity Market Law came into force. The Law envisages a transfer from the current single buyer model market to a liberalized market, with associated unbundling of the transmission and distribution of electricity. After a transition period, full implementation will be executed no earlier than July 1, 2019. The new law launches the following markets: bilateral contracts; a day ahead market; an intra-day market; a balancing market; a market of auxiliary services; and a retail market.
As to the electricity infrastructure, on June 28, 2017 the Ukrainian national energy company Ukrenergo – the transmission system operator (TSO) in the power sector – signed the Agreement on Synchronization with ENTSO-E. This agreement is a starting point for the integration of Ukraine’s unified power system into the electricity system of continental Europe, which will result in the full synchronization of the Ukrainian power grid system with the electricity systems of European countries.
Notably, the Electricity Market Law secured the existing favorable regime for renewable energy, but imposed responsibility on companies for imbalances.
Gas Market Developments
The highly-discussed topic on unbundling of NJSC Naftogaz resulted in a plan approved by Resolution of the Cabinet of Ministers of Ukraine No. 496 dated July 1, 2016.
With the Order of the Ministry of Finance of Ukraine dated April 4, 2017 the storage of gas in the regime of customs warehouses was launched. According to the Order, customs clearance of gas transported to Ukraine by a non-resident for purposes of storage at gas storages shall be made in the regime of “customs warehouses,” which frees non-residents from paying the 20% import VAT. This innovation enables European partners to order services for storage of natural gas for a period of up to three years from PJSC Ukrtransgaz (the gas transportation system operator).
Previously, on February 4, 2016, the Parliament granted PJSC Ukrtransgaz the right to conduct gas transmission as backhaul operations (i.e., virtual reverse gas operations). Backhaul operations are defined in Ukrainian legislation as the TSO’s replacement of the original amount of gas (transported under the periodic customs declaration) with the same amount of gas already kept in storage or located in the gas transportation system of Ukraine. Customs clearance of such gas shall be performed on the basis of the data on the original amount of gas which is subject to replacement.
One more important development is related to the elimination of gas stock reserve requirement. Legislation requires that any supplier shall secure a natural gas stock reserve of up to 10% of the planned monthly supply volume for use in emergency situations.
Energy Efficiency Challenges
Energy efficiency has become a significant part of Ukrainian government discussions. On July 23, 2017, the Law of Ukraine on the Energy Efficiency of Buildings came into force, even though it will only be implemented in July 2018. This law aims to set forth a new regulatory framework for energy efficiency that will apply to the majority of the buildings in the country. The law establishes minimal requirements for energy efficiency of buildings in Ukraine based on EU standards and also implements a mandatory certification system. These compliance and mandatory certification requirements shall be applicable, with limited exceptions.
Extraction of Oil and Natural Gas
On June 30, 2017, the new Rules for Development of Oil and Natural Gas came into effect. The Rules govern oil and gas exploration and production covering the basics and fundamentals of development activity, establishing definitions, categories of wells, stages of exploration, technical regulations applicable to different types of activities, and so on.
To Be Continued
Recently the Cabinet of Ministers approved the Energy Strategy of Ukraine Until 2035: Security, Energy Efficiency, Competitiveness, which provides for a twofold reduction in the energy intensity of the national economy and an increase in the production of both traditional and renewable energy sources. This plan is a narrative for future developments in the Energy sector of Ukraine.
By Armen Khachaturyan, Senior Partner, and Yaroslav Petrov, Counsel, Asters
This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.