For various reasons, 2017 was a remarkable year for the electricity sector in Ukraine. Chief among them, no doubt, was the long-awaited adoption of the new law on the electricity market. Ukraine’s electricity market has been liberalized not only because of the country’s commitments under the EU Third Energy Package, but also as the benefits of competition became evident in the wholesale gas market. This liberalization started almost three years ago and is still on-going, though admittedly not without challenges.
The case with electricity is no less complicated. To begin with, Ukraine effectively remains cut off from the power grid of continental Europe, except for Burshtyn Island – three power plants in Western Ukraine that are synchronized with the European Network of Transmission System Operators for Electricity (ENTSO-E). It is quite well understood that Ukraine’s full integration into the European system is crucial both for energy security and for opening the market. In particular, integration is expected to increase Ukraine’s power exchange with the EU from the current 885 MW to 4,000 MW in ten years.
To this end, in June 2017 Ukraine signed an agreement to merge its power system with the energy system of continental Europe. The agreement contains a list of requirements and a road map of actions for the next five years that are necessary to achieve EU synchronization by 2025.
In technical terms, integration is not possible without an upgrade of the grid – particularly the construction and reconstruction of the networks and high-voltage substations – which requires significant investments in the infrastructure in the next few years.
Investors see these opportunities, but they also want to have more clarity and predictability in the rules of the game. Accordingly, they have welcomed the new law on the electricity market, which was adopted after nearly a year in parliament, and which came into effect in early June 2017.
Based on the new law, Ukraine has to reformat its single-buyer model, which does not comply with the EU Third Energy Package, into a competitive market with direct contracts between suppliers and consumers and other essential elements of free trade (e.g., balancing, day-ahead, and intraday markets). Opening the market should attract new entrants – for instance, foreign traders – who were not allowed to do business in Ukraine under the previous rules.
The liberalized model has to come into full operation by July 1, 2019. Market participants will have to adapt not only to completely revised regulations, many of which are currently in the process of being drafted, but to a new economic reality; one that is loaded with additional competitors and different priorities, such as environmental sustainability.
Apart from developing the market in general, Ukraine has to speed up to reach its targets on power generation from renewable sources. While Ukraine has committed to reaching a 11% renewable energy share in its gross final energy consumption by 2020, at the moment – only three years prior to that deadline – it is not yet 2%. Therefore Ukraine is looking to attract more investments in the construction of renewable energy generation facilities. The government continues to offer producers of green energy one of the highest levels of feed-in tariffs fixed until 2030 in EUR equivalent and guarantees that the state off-taker will purchase all produced power (except for the portion used for own needs of the generation facility) at the feed-in tariff rate. With significant input from the international financing institutions – who are very active investors in the sector – the model Power Purchase Agreement (PPA) for energy produced from renewable energy sources is being gradually aligned with investors’ expectations. For instance, currently, the PPA provides for effective mechanisms of redress, including international arbitration and step-in rights for creditors.
The Ukrainian electricity market and regulations are undergoing significant changes, which are expected to result in a completely new market set-up by 2020. Although the reformation is not expected to be smooth, these changes will bring many opportunities to various stakeholders.
By Olena Kuchynska, Partner, Kinstellar Ukraine
This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.