The cycle of bills, edits for these bills, scandals around these bills, interviews about these bills, interview denials, hysterics in the energy media community and endless jokes, was closed: on July 1, 2019, a new electricity market based on the auction system had started its operation in Ukraine. This is an event for that (not) everyone was expecting, an event that happened not because of, but against: initiatives by high-level officials to delay its implementation; the interests of Ukrainian oligarchic clans; early parliamentary elections; gossips about huge increase of taxes and bills, and a lot of other obstacles.
Anyway, we congratulate all of you with the implemented reform!
The meaning of causation or "why it has not been better before"
The development of Ukrainian energy sector in general and specifically RES is traditionally happening within the framework of international economic cooperation. The way of its influence to improving of investment climate and the reasons of irreversible future development of the field, we had already discussed here. But if reforms within the framework of United Nations Economic Commission for Europe, the Energy Community and the Energy Charter Treaty guarantee the market capacity growth; then implementing the provisions of the Third Energy Package is quite pragmatic: new system is prerequisite for receiving new financial tranches of 500 million euro from the EU.
We will try to follow the global retrospective and future prospects of the current situation.
First things first: electricity tariffs. A competitive market is the only way of keeping tariffs comparatively to financial incomes of citizens who are concerned not by the level of tariffs, but by the fact that they are too difficult to pay. The energy reform is the only way to balance these two indicators. Indeed, where a monopoly exists, the establishing of a fair price is not realistic. The elimination of monopoly is the only condition for attracting investments and increasing the citizens solvency. Competition is the only instrument of a fair free market. That’s why it has not been better before.
“Rotterdam Minus”, elections and changing of political elites
In essence, this energy reform involves modifying of formula "the cost of coal at the port of Rotterdam plus the cost of delivering it to Ukraine" and eliminating the lobby interests of certain political groups and big business. This fact is the starting point in the chain "Demonopolization of the market – improvement of the investment climate – liberalization of prices for the consumer – raising of standards of service". However, ex-monopolists are still in the game and are bidding:
- DTEK reduced its prices by 12% in the first days of trading;
- Energoatom raised prices by 35%, but it was driven by increased demand. The company offered such terms of delivery and service that consumers were ready to pay.
These two companies (ex-monopolists) that form the bulk of the balancing power reserve for successful generation of RES, offsetting possible network disruptions. At this point on more point is added to our chain – the legacy network equipment. For the participants of the renewable energy market, it is important to preserve the interests of “traditional energy”, because only long-term close cooperation between all of market participants can bring network equipment to the European level. Only in this way it will be possible to completely “reboot” the energy complex to alternative rails.
Unfortunately, in the Ukrainian context, it is impossible to talk separately about big business and big politics. Ukraine is a country with a unique case for implementing the largest energy reform in its history, with dissolved Parliament and the President, elected several months earlier. Business and political representatives are public figures and opinion leaders: following a series of high-profile statements by Mr. Groisman, Mr. Kolomoisky and other influential individuals, the Ukrainian expert beau “bursted through” to simplify or support their theses and statements. The same thing happened with the representatives of political forces: the new market became a “litmus test” of belonging of certain politicians to certain business structures
Nowadays, any events related to European integration become the base for political agitation and speculation on the image (positive or not) of the initiators of the integration process. We believe that the postponement or cancellation of such a meaningful event for the European integration process, such as energy reform, which implies connection of Ukraine to the EU energy system; is a delay in the country's financial stabilization and market economy development. Energy independence from the CIS countries is also an urgent security issue for Ukrainians.
How are the energy complex investment climate and the wallet of the average citizen related?
Competitive pricing has already attracted a number of foreign investors who are ready to implement traditional and renewable energy generation projects under new, more transparent and familiar capitalist conditions. For decades, foreigners have been waiting for the Ukrainian economy to have a “rule created – rule enforced” system, and its successful implementation in the energy sector will inspire other industries to develop as well.
Prices for the population will be still at the same level with slight fluctuations. By the most pessimistic forecasts, they will increase by a maximum of 15-20%. But the same circumstances that led to this increase will attract foreign capital by 150-200%. Then, the population will indeed be able to pay for these bills. Optimists also predict that prices will fall by the same 15-20% caused by competition (as we see in DTEK's case), when new companies start actively competing with existing ones. The system of "cross-subsidization" also continues to operate. It means that businesses buy energy at a higher price than the population to compensate for keeping tariffs at an acceptable level. And the realists point out: most contracts between manufacturers and wholesale consumers (business) are already concluded at + - old tariffs, so food prices should remain at the old level. In any case, Ukrainians have state insurance in the form of a system of state regulation and a set price limit for electricity.
Have you ever considered how strongly your air-conditioning schedule is linked to geopolitical processes?
The market regulation of energy supply, like most instruments of capitalism, originated in the West countries and is related to dissimilar electricity consumption during a year. The months of the biggest slump in the energy schedule are September and May, when the air conditioners are already or not already used (in addition to the daily peaks of system load). According to forecasts, the consumption of air conditioning will form the main share of the payment bills for electricity of the average European within next 10-15 years, which is related to climate change. The desire not to overpay in the month of non-consumption prompted the development of a fair competitive system of pricing and energy supply:
The functioning of green energy in new conditions
The new conditions will stimulate the development of innovative processes and price competition in the "green" segment, opening new doors for investors. The NKREKP has defined the following procedure:
- The obligation to regulate and buy the electricity produced under the CT is assumed by the newly established SE "Guaranteed Buyer" in accordance with the Law of Ukraine "On the Electricity Market".
- Until the moment of creation and launch of the Guaranteed Buyer Subsidiary on the basis of the Guaranteed Buyer Branch of the Subsidiary, its functions had been performing by Energorynok.
- The introduction of the auction system does not cancel the feed-in tariff.
- To determine quotas for the RES participants support, the government has to set annual support quotas for the next five years annually by December 1st. These quotas should be allocated to different types of generation: not less than 15% for solar, not less than 15% for wind, not less than 15% for other types of RES.
Since the July 1, 2019, to sign the contract of sale and purchase of electricity (with the "feed-in" tariff), it's necessary to follow the next bureaucratic procedures:
About auctions shortly: they don't cancel "feed-in" tariff; are mandatory only for generations implemented after 01/01/2020 with capacity of 5 MW for wind and 1 MW for sun, and those that do not have prepared contracts signed by 12/31/19.
Quotas. As the cost of energy from RES is bigger than cost of energy from traditional sources, the state government is ready to offset the difference by quotas. They will be determined once a year until December 1 (next year's plan) and will be distributed as follows: not less than 15% for the sun, not less than 15% for wind, not less than 15% for other types of RES.
Antitrust Restrictions: setting of annual limits for participating in "green" auctions for companies with a common beneficial owner who have already received a 25% of annual quota this year.
The law distributes auctions for each technology specific, but does not group participants by capacity criteria (less than 10 MW or more than 10 MW).
Electricity Market: The Rules of the Game
According to the Law “On the Electricity Market”:
- Intraday electricity market (IEM) is a segment of the electricity market where electricity is bought and sold continuously after the day-ahead trading and during the physical supply of electricity.
- The day-ahead market is a segment of the market in which electricity is bought and sold on the next day of the day at free competitive prices.
- The day-ahead market and the intraday electricity market are managed by the market operator (MO).
Thus, liberalization of such segment of the economy as energy is a global democratic change in society. The new market, full of new possibilities, was created.
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