Overview of the Electricity Market in Ukraine in Q3 and Q4, 2021

There were very few improvements in the electricity market in Q3 and Q4 2021. It is still subject to restrictions and regulations. The pricing procedure remains non-transparent, as the price caps have been frequently reviewed by Regulator. There were attempts to transfer to financial PSO, although, it turned out to be different from what was envisaged by the Energy Community. The generating companies have no opportunity to effectively sell electricity and provide sufficient operational costs. The investment opportunities remain vague. Tariffs for households are kept below the cost of electricity production and transmission. Accumulated debts between the market players exceeded UAH 54.5 billion. There is a lack of a legal framework to improve competition, integrity, and transparency in the markets.

Price distortions on the market segments

The most complex and unresolved is the issue of price distortions in all market segments.

The liberalization of the market provides a single mechanism for pricing electricity for all categories of consumers. In Ukraine electricity tariff for the population has not yet been economically justified. Tariffs are preferential and have been recently amended through changes to the PSO model.

The market price in Ukraine is set only for business. It is for this segment of consumers that the price is formed in a new market.

Day-Ahead Market (DAM) price has become an indicator for electricity prices across the country, although, there is also a tendency to move to long-term contracts. When the market started, the share of DAM and IDM in the total electricity consumption in Ukraine was 34%, and then it decreased to 30%.

The Government has attempted to undertake measures as follows:

• A Resolution by the Ukraine Cabinet of Ministers (CMU) dated July 28, 2021, obliges all generating companies to sell electricity through an exchange auction.
• Amendments to the same Resolution, (dated September 22) clarifying and supplementing it, which was a significant step towards promoting the market for bilateral agreements in Ukraine.
• The launch in September on the Ukrainian Energy Exchange (UEE) of monthly price index publications. Apart from the baseload, the other products became available as follows: individual hours, peak load, off-peak load, and night hours.

Law of Ukraine No. 1639-IX dated 14 July 2021, imposed the following restrictions on the Ukrainian electricity market:

• Until 1 November 2021, the total amount of electricity sold by electricity suppliers and traders on DAM could not exceed 10% of registered electricity volume purchased under bilateral agreements from electricity producers and/or the Guaranteed Buyer (this does not apply to the electricity imported in Ukraine.
• Until 1 April 2022, the sale of electricity by producers of electricity either of state, municipal or private ownership (except for the producers of electricity under the green tariff) under the bilateral agreements is only possible through the performance of an electronic auction according to Procedure approved by CMU.
• In case of significant fluctuations in DAM, IDM, and BAM Regulator shall have the right to set price caps based on Regulator’s methodology for each trading area with appropriate justification. Such marginal prices to be reviewed by the Regulator at least once every six months.

PSO

The Government attempted to introduce financial PSO in the electricity market. The recent amendments were adopted by No. 859 CMU Resolution[1] dated 11 August 2021, which took effect on 1 October 2021 and shall remain in force until 30 April 2022.

The state-owned producers were supposed to sell electricity at market prices and compensate universal service suppliers (USS) for the difference between the market price and the fixed one for the households. It was envisaged as follows:

• Sales by Energoatom of electricity via electronic auctions directly to Universal Service Suppliers (USSs) operating within Unified Energy System (UES) of Ukraine at the price amounting to DAM index base for the third month preceding the month of electricity supply.
• Mandatory purchase by Distribution System Operators (DSOs) of the baseload electricity from Energoatom at a fixed price (of UAH 1,700 per MWh) via electronic auctions to cover their technical losses (in the number of technical losses that have occurred in the same month of last year accounting for the ratio for such technical losses established by NEURC). The price is subject to quarterly indexation, and the source of funds for the purchase of these volumes is the distribution tariff. To revise the tariff, the DSO may apply to NEURC.
• Sales by USSs electricity to households under the fixed price.
• Sales by Energoatom to Guaranteed Buyer electricity required for households’ consumption during October-November 2021 at the price of 150.00 UAH/MWh.
• Sales by Ukrhydroenergo to Guaranteed Buyer of electricity required for households’ consumption (Burshtyn TPP Energy Island) in October and November 2021 at the price of 10.00 UAH/MWh.
• Sales by Guaranteed Buyer to Universal Service Providers (USSs) of the volumes required to meet the needs of the household consumers in a particular region.
• Guaranteed Buyer pays to USSs the difference between the cost of universal service, and the amount earned by USSs after selling the household's electricity at the fixed price.
• Household electricity prices amount to UAH 1.44 per 1 kWh for households consuming less than 250 kWh/month, and UAH 1,68 per 1 kWh for households consuming over 250 kWh/month (including apartment buildings’ co-owners associations, dormitories, and religious organizations). At the same time, CMU was assigned[2] to work out and approve the procedure of bringing the households’ electricity prices to a market level.
• Lowering coefficients (0.5 and 0.4) apply for two-zone metering and three-zone metering respectively.

Ukrhydroenergo had to provide the Guaranteed Buyer (by September 27, 2021) an advance payment for the service of ensuring the availability of electricity for the household consumers in the amount of UAH 1 billion. Guaranteed Buyer has to return the unused funds to the Ukrhydroenergo by January 15, 2021.

The main shortcoming of the model is that it is not working as the financial PSO. Energoatom is selling electricity directly to USSs via special auctions instead of Energoatom and Ukrhydroenergo selling the electricity on DAM, IDM, or Bilateral Agreements Market (BAM) at the price developed at these segments, and the USSs are purchasing electricity on the free market (as envisaged by Energy Community). In so doing the difference between the prices of purchasing electricity on the market and selling to household consumers at the regulated prices would be reimbursed out of the profits earned by Energoatom and Ukrhydroenergo.

PSO model participants are overburdened with it as the current mechanism leads to significant financial difficulties for its participants.

• As per Energoatom’s data, the Company has paid under the PSO model to Guaranteed Buyer in October the total UAH 6.1 billion (including VAT), and UAH 9.1 billion in November, and is supposed to pay more than UAH 10 billion in December. (This is the cost of the service to ensure the availability of electricity for the households).
• In view of the upcoming increase of tariffs by NEURC from January 1, 2022 (i.e. TSO transmission tariff by 20%, the dispatcher’s services tariff - by 58%, the distribution tariff for the second voltage class - by 16.5%, the universal tariff service - by 14%) the Company claims the additional burden would reach at least UAH 6 billion. Energoatom maintains that such an increase of tariffs by the Regulator would also destroy the current PSO model.
• The cash gap occurred due to the difference between the purchase prices and the price of the Guaranteed Buyer’s service, which leads to an increase in the financial burden on Energoatom and Ukrhydroenergo and poses a danger of failing to finance their production activities.

It is worth noting, that in accordance with the updated Memorandum[3] on the economic and financial policy under the stand-by program, approved by the IMF Board of Directors on November 8, 21, Ukraine took a number of obligations, in particular:

“Energoatom will maintain a level of income that at least covers the costs of generating electricity and basic investment needs after payment of compensation specified in the Resolution of the Cabinet of Ministers No. 859 dated 11.08.21 (on responsibilities for servicing the population (PSO), including by canceling the regulations that allowed NNEGC "Energoatom" and other producers to sell large volumes of electricity at prices significantly lower than market prices for other business entities”.

The shortage of USSs funds can be associated with the following:

• The presence of receivables for transactions in the balancing market, while USSs pay on time for imbalances in order to avoid default status.
• The lack of possibility to attract credit funds, due to the insufficient cost of working capital in USSs’ tariff.

In fact, USSs incurred the costs for the purchase of electricity and did not receive compensation, which may lead to an increase in accounts payable of USSs, including also before Energoatom. This deviation was supposed to be corrected in subsequent periods with a 3 months’ delay.

Here is an example of individual USS’s performance over the two months of the new PSO model’s functioning (Volynelektrozbut LLC[4]).

Due to the “universal service” calculation mechanism, which was months behind the real DAM price, the October “universal service” price was calculated based on the DAM price for August. Accordingly, the November price was calculated based on the September price.

Thus, the problem is that the benchmark was taken from the past, without taking into account current or even future prices.

In addition, due to the fact that the prices in DAM were significantly increased - up to 4000 UAH/MWh, this particular USS was encountered with cash deficiencies as follows:

• In October - almost UAH 100 million;
• In November - about UAH 78 million;
• In December it is forecasted to make almost UAH 48 million.

Although, the calculation procedure is changed under the respective NEURC Resolution[5] and the price of December will take into account the first 10 days of November, yet, there may still be a gap if the prices rise.

With the TSO transmission tariff increase beginning 2022 – still, the additional cash gap will amount to UAH 9 million, and if a new distribution tariff for DSOs is adopted there will be an additional UAH 26 million to the cash gap. Also, for this particular player, it makes it easier as it is associated with the two more suppliers that would hedge risks.

USSs in carrying out their obligations may lack working capital, which in turn will trigger the mechanism of transferring the household consumers to the Supplier of “last resort” (in case USSs acquire default status), and aggravate the existing financial problems in the market.

Since 2020, the PSO mechanism for the households has been in constant deficit - UAH 7 billion in 2020, and with the new model introduction, the deficit issue has not been resolved. According to ESP (Energy Security Project) calculations, the PSO deficit (taking into account adjusted to actual consumption) in October 2021 approached roughly UAH 2.3 billion (excluding VAT), and at least UAH 3.4 billion (excluding VAT) in November 2021.

In addition, the reduction of electricity prices for household consumers and the rapid introduction of the current PSO mechanism during the heating season without proper preparation of participants for trade operations and in the absence of standard products in the bilateral agreement's market has significantly complicated the situation for PSO participants.

These issues have to be addressed urgently; otherwise, the accumulation of the deficit may jeopardize the functioning of the market and the financial stability of USSs, Energoatom, and Ukrhydroenergo.

REMIT[6]

The principles and approaches set out in European Union (EU) Regulation No.1227/2011 on wholesale energy market integrity and transparency (REMIT) should be transposed in Ukrainian legislation as the country is struggling to integrate with the European energy market and network operators.

Ukraine, in accordance with the updated Memorandum on the economic and financial policy under the stand-by program, approved by the IMF Board of Directors on November 8, 2021, took a number of obligations, in particular:

• accelerate work on the full implementation of the REMIT, provided for by the Association Agreement between Ukraine and the EU.

According to the Energy Community report[7], amendments to primary legislation required for transposition of REMIT are still pending.

The Case[8] was opened against Ukraine for non- transposition of the REMIT Regulation which had to be implemented 29 May 2020.

The technical assistance was provided to NEURC and Parliament by the Secretariat of the Energy Community within the EU4 Energy program[9] to draft amendments to the Law of Ukraine “On Introduction of Changes to Certain Legislative Acts on Prevention from Abuse on Wholesale Energy Markets”. There are several draft laws being considered in various committees of the Verkhovna Rada, two of them have been rejected, yet none of them seem to give a priority in the Parliament.

• Draft Law No. 4503 dated 16.12.2020 canceled
• Draft law No. 4503-d dated 08.06.2021 canceled
• Draft Law No. 4503-1[10] of 31.12.202 has received re-opinion of the Committee
• Draft Law No. 5322[11] dated 01.04.2021 included in Committee Agenda
• Draft Law No. 5322-1[12] dated 19.04.2021 - included in Committee Agenda

The discussion in Ukraine has been concerning the type of REMIT implementation in Ukraine – complete, incomplete, or light.

The draft laws aim at the implementation of REMIT light, however, they do not provide the reporting information by energy market participants, no requirements to disclose inside information[13].

The Energy Community has selected REMIT light, relying more on competent national authorities as well as cooperation with the national regulator.

All of the drafts primarily focus on other aspects of the energy sector in Ukraine rather than the full implementation of REMIT. Among other issues, they contribute to implementing an “adapted” version of REMIT. The availability of alternative draft laws indicates that the process is far from complete. Once, there is one final version, it would be reasonable to evaluate whether or not the draft law transposes the most of the REMIT Regulation.

As soon as the Law on REMIT implementation is adopted, the secondary regulations should be drafted (by NEURC) to define the procedure of their application.

NEURC is to cooperate with the Energy Community Regulatory Board (ECRB[14]) s to perform the functions and tasks defined by REMIT.

ECRB uses certain instruments for the elimination of detected or registered violations (Procedure Law No. 1/2020), The Energy Community is said to endeavor to arrange the data about violations and inform ECRB about the infringements. ECRB would have to decide about further investigations.

In Ukraine, an essential element of REMIT Regulation i.e. Registered Reporting Mechanism (RRM[15]) is to be created within the National Energy and Utilities Regulatory Commission (NEURC). Under the REMIT Regulation, RRMs shall have sound security mechanisms to guarantee the proper exchange of information between Regulator and RRM. The proper verification procedure for RRM would prevent the risks of data corruption and leakage, unauthorized access, etc.

NEURC will be enabled to act as ACER in Ukraine and collect the necessary information from Market Participants daily, take responsibility to investigate and penalize abuses, thus it has to be independent and competent enough to perform unbiased surveillance duties.

It was also suggested that the administrator of energy market monitoring be created on the basis of a state-owned Market Operator. This would facilitate more effective monitoring of the country's energy market, in line with REMIT requirements, and enable all market participants to assess the overall supply and demand and, as a result, identify the causes of wholesale price fluctuations.

Regarding the REMIT model for Ukraine, the European experts advised focusing on integration with the EU energy market, which is an important part of the government’s goal to create transparent and clear conditions for market activities to integrate with the European Network of Transmission System Operators for Electricity (ENTSO-E) by 2023.

ENTSO-E

Ukrainian UES joining the European energy market is challenged by the following factors.

Heating season 2021/2022.

The current lack of domestic electricity generation is primarily a result of two factors: the old age of many of Ukraine’s stations, and a severe coal shortage in the country over the last several months.

Shortage of coal in the warehouses of thermal power plants is associated with:

• Lack of free working capital for its purchase (caused by price caps on DAM)[16].
• Record number of emergency repairs at coal-fired TPPs and CHPPs in February 2021 and signed on the eve of the winter of 2021–2022.
• Failure to implement by Ukraine of the National Emission Regulation Plan (NERP), (to be more precise, financial sanctions leading to complete halt of coal generation.

Due to the coal shortage, 24 blocks at thermal power plants with a combined capacity of 8,5 gigawatts have stopped generating electricity on 25 October.  By November 15, 2012, 23 out of 85 TPP and CHPP units were out of operation.

Worsening the situation, Russia halted all thermal coal exports to Ukraine in November.

According to the State Inspectorate for Energy Supervision of Ukraine (State Energy Supervision), 472 emergency failures were recorded at power units of electricity producers within 10 months of 2021, which is 2.4 times higher than compared to last year (194 failures).

The Government maintained there would be no shortage of fuel, and the current power outages are not allegedly related to energy savings, but due to repair work, however, the country is feeling anxious about possible restrictions of electricity supply. The lack of shunting and storage capacity required for balancing is also particularly acute in the Ukrainian power system. To date, this need is met mainly by the resources of Ukrhydroenergo, as well as by the available equipment at TPPs to cover the daily load schedule.

Thus, the key factors in stabilizing the process of fuel supply during the current heating season could be as follows:

• Maximum electricity output to be secured by NPPs (nuclear generation. According to Energoatom, 14 of the 15 nuclear power units to be in operation during December 2021– February 2022 in Ukraine (by comparison, last winter, 10 nuclear units were being operated in the system).
• Coal imports for TPPs/CHPPs are planned to reach 2 mln tonnes.
• TPPs/CHPPs switching to gas: roughly it would amount to 2-1.5 bcm. Timely financing of thermal power plants using natural gas will increase the available power reserve if necessary (in peak modes). The relevant procedure was approved by NEURC on November 8, 2021. For electricity generated under the CHP service, they will receive an additional payment from TSO (Ukrenergo) in the amount of up to UAH 2.5 per kWh of electricity (at night – UAH 0.1/kWh).
• Household Consumers using electric heating will not be limited to 3000 kWh / month. If there is a dual-zone meter, the night tariff is twice lower (UAH 0.84) than during the day, and the amount of consumption is unlimited.

Imports from Belarus

Given the shortage of coal, the import of electricity from Belarus (Russia) was supposed to help successfully go through the heating season 2021-2022. The Government hoped that deliveries in November and December would save coal for the period of peak frosts in January-February.

At the end of October, NEC Ukrenergo held a tender for the distribution of interstate crossings with Belarus (1,000 MW) and Russia (1,520 MW). However, imports did not start on November 1: the Russian and Belarusian sides canceled auctions for the sale of electricity to Ukraine. Imports from Belarus began only on November 6 and in much smaller volumes and were suspended on November 18.

On November 2, Ukraine had to resort to electricity supplies to the Ukrainian Energy system from Belarus with a capacity of 500 MW under the emergency assistance agreement. The long-term commercial contracts (other than those concluded earlier) were out of the question in this case. Moreover, the Ministry of Energy has maintained that it was not considering the issue of commercial electricity imports from Russia and Belarus for the upcoming heating season.

On October 27, 2021, following the auction for access to the interstate crossings (electricity imports/exports), Energoatom has  bought 885 MW of 900 MW of possible access to the interstate crossing on the border with Belarus as a result of the auction of NEC Ukrenergo in November. Energoatom, though, has not yet used this opportunity, and the private companies have been engaged in imports from Belarus instead.

Beginning 29 November 2021Ukraine has more than doubled electricity imports from Belarus amounting to 900 MW per hour. However, imports from Belarus and RF are not envisaged by the forecasted balance of electricity for 2022 (Table 1).

Table1. Forecasted electricity generation balance for 2022

National Emission Reduction Plan of Major Pollutants from the Large Combustion Plants (NERP)

Ukraine has international commitments to reduce emissions from large combustion plants for 2018–2033. The corresponding NERP includes blocks of coal-fired TPPs, CHPPs, and heating boilers (heating plants with a capacity of 50 MW and above) of DTEK, Donbassenergo, Centrenergo, and other owners.

The National Plan is a transitional mechanism for derogation from the immediate implementation of the emission limit requirements defined in Directive 2010/75/EU, in order to ensure uninterrupted reliable energy supply from the power units covered by the NERP, and to establish transparent management in achieving European standards.

A potential source of financing for thermal generation modernization projects could be the investment component in the tariff provided for by the Wholesale Electricity Market Model.

If the equipment is not modernized, then powerful financial penalties would be applied to the country, and thermal generation from coal will be stopped.

In the event of a shutdown of a large number of coal-fired thermal power plants, it would lead to disruption of the operation of the United Energy System (UES) of Ukraine and a possible blackout.

An additional consequence of the blackout may be the disruption of the synchronization of Ukrainian power grids with European ones planned by the government for 2023 (joining ENTSO-E) due to the forced postponement of testing the operation of the UES of Ukraine in a mode isolated from the power systems of the Russian Federation and Belarus.

Dependence on imported resources

Energy Security Strategy of Ukraine, adopted by the order of the Cabinet of Ministers of Ukraine No. 907-r dated August 4, 2021 states that the threat to energy security is posed by a high share of imported energy resources to Ukraine - up to 30% of natural gas, 85% of oil products, 50% of nuclear fuel. In 2020, Ukraine imported oil products from the Russian Federation and the Republic of Belarus worth more than $ 2.4 billion.

While nuclear fuel supplies have been diversified since 2014 (50/50 from Westinghouse and the Russian TVEL company) there is no diversification of oil products supplies and the Government has failed to create a system of reserves for petroleum products.

Shortage of maneuvering and storage capacities

The United Energy System (UES) lacking sufficient maneuvering (shunting) and storage capacities has long been considered a great challenge.

The UES is encountered with an acute shortage of 2 GW of quick start capacities, 1.5 GW of semi-peak, which ideally should have been built in 2021 in accordance with the “Report on conformity (sufficiency) of generating capacities” approved in 2020 by NEURC (drafted by Ukrenergo).

Certain steps were undertaken to improve regulatory legal acts required for the construction and management of new storage capacities (Draft law No. 5436-d dated 17 September 2021). Relevant amendment have been introduced to the Law of Ukraine “On Electricity Market”.

How to secure heating season

Under the current circumstances, the state will have to continue to rely on nuclear energy.

The key stabilizing factor of this heating season, apparently, will really be nuclear generation. According to Energoatom, the operator of Ukrainian nuclear power plants, 14 of the 15 nuclear power units currently operate in Ukraine. In addition, to balance the power system in the winter, the Government proposed to turn on the gas power units of TPPs and CHPs.

Lack of coal against the background of gas reserves in underground storage facilities, which may not be enough for the growing needs of the generation, especially in cold winters, can hinder not only the heating season without interruptions of energy and gas supply but also Ukraine's strategic plans. Nowadays, the reserves of thermal coal in the warehouses of TPPs and CHPs (as of December 1) amounted to about 338.3 thousand tons (Chart 1).

Chart 1. Coal reserves at TPPs of Ukraine, thousand tons

It was expected to receive another 1.9 million tons of coal imports, of which 1.4 million tons - domestic production, 0.5 million tons - imports from the United States, Kazakhstan and Poland.

Despite the announcements by Centrenergo of timely supplies of the contracted volumes of coal from foreign companies, this program seems to have failed. The coal purchase seems to have been deliberately delayed by the Government in order to resort to electricity supplies from Belarus and Russia. DTEK, the largest Energy holding, has contracted 7 Panamax coal vessels to be delivered throughout the heating season.

According to Energy Minister, the operation of nuclear generation in the winter in an enhanced mode (14 or even all 15 power units) is not a guarantee of reliable operation of the power system as it is lacking maneuverable generating capacity for operational balancing of the power system. This function in Ukraine is performed by hydro and thermal power plants.

The natural gas reserves in Ukrainian underground storage facilities (USFs) as of November 17, 2021 amounted to 17.3 bcm, but of these only about 9 bcm are dedicated to consumers in Ukraine, the remaining volumes being buffer gas (4,5 bcm) and non-resident gas. Thus, the gas shortage deficit is forecasted to reach 3.5 bcm by the end of the heating season.

Given the low coal reserves and the absence or low reliability of electricity imports in the UES of Ukraine, the Government is seriously considering the possibility of disconnecting some industrial consumers from energy supply. Thus, at a meeting of the National Security and Defense Council on October 22, the Cabinet of Ministers and the NEURC were instructed to work out the schedules of potential restrictions for industrial consumers, as well as emergency charts to reduce electricity consumption.”

Thus, this winter, as part of the integration into the pan-European ENTSO-E system, the domestic power system must operate for at least three days in isolation. At this time, TSO (Ukrenergo) has to perform a number of metrological tasks in accordance with the requirements of ENTSO-E. The exact dates of the experiment will be determined by the European side, based on meteorological forecasts: work in the autonomous mode should take place during the lowest temperature, i.e. in January-February. Based on the results of the experiment, ENTSO-E will decide whether the synchronization of power systems of Ukraine and Europe will take place in 2023.

Therefore, the success of testing the operation of the Ukrainian power system in isolation will depend primarily on weather conditions and the availability of reserve capacity. If circumstances encourage government officials to apply restrictions on electricity supply to consumers, the European side may not consider the experiment a success.

The integration of Ukraine’s UES into ENTSO-E is a crucial event in terms of energy security, as it involves physical disconnection from the grid of Russia and Belarus. If the process is successful, it will allow Ukraine to significantly reduce its energy dependence on the aggressor country and its main political ally. At the same time, political and economic risks will be reduced.

Advantages of joining with the ENTSO-E

• Creating conditions for competitive pricing at the currently over-regulated electricity market.
• Improving the country’s energy security (it is currently dependent on frequency maintenance organized by the Russian grid operator).
• Facilitating competition between all market participants, more efficient interaction in the process of production, transmission, distribution, purchase, and sale of electricity, and secure supply of electricity to Ukrainian consumers.
• Promoting the reduction of greenhouse gas emissions as it will be required to introduce a significant CO2 tax.

It is renewable electricity that can largely contribute to it; however, the situation in the RES sector is far from being stable.  

RES Sector.

A large number of debts were accumulated before the RES producers (reaching UAH 28.5 bln in 2021). The state is committed to providing payments under “green” (Feed-in-tariff) under the existing legislations (and debt repayment according to the recent agreements under the Memorandum signed (June 2020) between the Government and RES investors). One of the sources of debt repayment is issuing green bonds by the Ukrainian TSO (Ukrenergo).

According to the Memorandum on the economic and financial policy under the stand-by program (8 Nov 2021), “the Guaranteed Buyer will no longer accumulate debts to RES producers from 2022 onwards, and the NERC will set a tariff for the transfer of the transmission system operator (NEC Ukrenergo at a level sufficient to cover (except for material, labor, and capital costs) payments dividends and income tax - all liabilities to producers with RES (including 100% of the value of the expected volume of produced electricity for the year), as well as financial costs associated with debt service and payment of the principal amount of existing This borrowing will include financing in the form of loans or the issue of bonds until 31.12.21 to repay all debts accumulated in 2020 and 2021”.

Ukrenergo has successfully placed five-year “green” bonds worth $825 million to repay a long-term debt to RES producers. The placement was organized by BNP Paribas, Deutsche Bank, Goldman Sachs and Ukreximbank. The European Bank for Reconstruction and Development (EBRD) supported green bonds by investing $75 million. The funds were transferred to all RES producers, except DTEK, the largest energy holding in Ukraine. Now the company demands an immediate investigation into the causes of non-payment, the case has gained international notoriety, which has had a negative impact on the investment climate in Ukraine.

On December 1, 2021, NEURC has approved TSO's tariff for electricity transmission for 2022 in the amount of UAH 345.64/MWh - 17.6% higher than the tariff for 2021 (UAH 293.93 / MWh).

Initially, the NEURC was about the transfer tariff for 2022 at UAH 352.38 / MWh (excluding VAT). It, in particular, takes into account the clarification of the cost of electricity losses. (Ukrenergo offered a tariff level of UAH 458.83 / MWh).

The Regulator did not take into account the payment of 20% of the amount of green electricity in the transmission tariff, despite the fact that MFIs, MPs, business and profile associations, and chambers of commerce strongly insisted on this.

It is according to amendments (July 2020) in the law on alternative sources of energy, 20% of the cost of forecasted production of electric energy from RES have to be paid from the state budget, but neither law on the state budget for 2021 nor its draft for 2022  have envisaged such provisions.

The tariff for dispatchers’ service, was approved at the level of UAH 62.13/MW

Can Ukraine be an asset to ENTSO-E?

Ukrainian UES is potentially in surplus of electricity while some of our neighbors have been energy-deficient over the next five years; however, under the current circumstances as the system became unbalanced, the EU is not likely to welcome an unreliable partner with the destabilized system.

This year, ENTSO-E may focus on the Baltic States: synchronization with the energy networks of Lithuania, Latvia, and Estonia is scheduled for 2025. As long as these countries have long been members of the EU, although they have maintained ties with the Russian and Belarusian energy systems within the so-called energy ring of Belarus, Russia, Estonia, Latvia, and Lithuania (BRELL).

One cannot ignore Russia using energy resources as a weapon, influencing energy partnerships between EU and Ukraine, as physical disconnection of Ukraine’s UES from Russian (BRELL) would be seen by RF as a strategic loss.

It is obvious, that Russia is not wasting the chance to take advantage of the situation with critically low energy reserves in Ukraine by refusing to export electricity and coal, blocking coal supplies from Kazakhstan, provoking a gas shortage.  On the other hand, if Nord Stream-2 is launched, Ukraine will have problems with virtual gas supplies from Europe due to lowering pressure inside the pipeline. Russia would expect that Ukraine will be forced to ask for direct supplies of natural gas from Russia and would impose political terms and conditions.

Thus, whether Ukraine will be able to successfully test isolated operation of the power system depends not only on the temperature and critically low coal reserves in TPP warehouses but also on the behavior of external and internal stakeholders in the electricity market. Although the Government claims that the situation is under control, it has to be acknowledged, that not everything depends on the Government. However, the integration of the power grids of Ukraine and continental Europe has to happen, otherwise, the dependence on the energy systems of Russia and Belarus will remain, which will significantly slow down the reform of the electricity market in Ukraine.

Some European experts believe that Ukraine still needs to do a lot to update its grid infrastructure. They estimate that total costs might exceed €1 billion while Ukrenergo only expects expenditures of around €300 million. “This may be too optimistic, as Ukraine does not yet have a deep electric interconnection with its neighbors, and the current state of its balancing technology has not yet been finally tested and approved[18]”.

According to the German Institute for International and Security Affairs (SWP[19]), Ukraine “could also be connected to the continental European grid via a back-to-back connection using a high-voltage direct current (B2B). This would allow electricity to flow across borders without the need for synchronization; however, any future expansion of cross-border capacity would again require large investments in B2B connections, which are expensive”.

On 11 November 2021 Energy Community Secretariat agreed on the final certification of Ukrenergo. The certification is to confirm that Ukraine is fulfilling its obligations (interact) in accordance with the requirements and standards of the EU, in particular, the Third Energy Package.

It is important to obtain consent for certification for TSO to act according to international standards of corporate governance. On October 1, NEURC has made a preliminary decision on the certification of Ukrenergo according to the ISO model, taking into account the transfer of the company’s management of the Ministry of Finance to the Ministry of Energy.

Synchronization with ENTSO-E and electricity markets coupling

• The level of the cross-border electricity flows is supposed to double to 2GW/year. Synchronization would allow both increased exports and imports of electricity and support the security of energy supplies for both Ukraine and the neighboring EU Member States.
• While the technical work scheduled for 2022 is likely to be accomplished, there is a deep concern regarding the implementation of the EU legislation to ensure market coupling.
• The wholesale electricity market price would be formed at the level of Continental European price and will be protected from manipulations and/or abuse.
• Within the synchronization of UES with the ENTSO-E[20], Ukraine’s electricity system has to undergo a 3-day test in isolation mode in February. Maintaining imports from Belarus poses risks of terminating transmission (supplies) due to political reasons.
• Ukrainian energy system can be self-sufficient and secure electricity demand. In order to do this, a long-term strategy has to be developed estimating the energy mix in view of the green transition declared by Ukraine. These are tasks for the new Energy Strategy being currently upgraded.

As soon as the power system of Ukraine is isolated from Russia and Belarus (in early 2022), to operate independently for several days, it is important that a load of NPP and TPP units is distributed in such a way as to minimize the consequences of the unforeseen shutdown of a large NPP unit and at the same time provide sufficient reserves at TPPs to balance the power system.

According to TSO[21], taking into account the results of the study conducted by ENTSO-E, during the operation in isolated mode, the total base load of the NPP should constitute about 9.9 GW, and the load of each of the NPP units should not exceed 800 MW. This will allow increased baseload of heat generation, necessary to ensure sufficient balancing of the system and minimize the negative consequences for the power system in case of an emergency shutdown of any NPP.

At the same time, increasing the base load of thermal power plants during the isolated mode is necessary in order for TPPs to be able to provide the required amount of reserves at their power units for effective balancing of the power system. Thus, a total load of thermal power plants during periods of low consumption in the power system (nighttime) should be about 4.5 GW, and during periods of maximum consumption in the power system (evening peak) approximately 8.2 GW (on weekdays).

Thus, testing the power system in isolation imposes additional requirements on UES to ensure sufficient resources in the system, including coal. According to TSO’s calculations, the operation of coal at thermal power plants and the load of thermal power plants will increase. The amount of coal in these few days should amount to about 300 thousand tons (excluding daily deliveries, which are expected in the normal schedule).

Conclusions

The next step towards synchronizing the power systems of Ukraine (and Moldova) with ENTSO-E will be testing their operation in isolation from Russia and Belarus, which will last for several days in winter and summer 2022.

The technical work scheduled for 2022 could be accomplished, yet, Ukraine needs to implement the EU legislation to enable market coupling i.e, the electricity market operating under EU rules. Ukrainian electricity market segments are operating with distortions (PSO-public service obligations, price caps on Day-Ahead Market (DAM) and Intraday market (IDM), artificial regulation, debts between a number of market players).

The current lack of domestic electricity generation is primarily a result of two factors: the worked our resource of many TPPs and CHPs, and a severe coal shortage in the country over the last several months.

The coal purchase seems to have been deliberately delayed by the Government in order to resort to electricity supplies from Belarus and Russia.

Although the electricity imports to Ukraine from Belarus are insignificant, however, there is a danger of failing to provide secure energy system operation in isolation (for a few days in February and a few days in July 2022).

Shortage of coal in the warehouses of thermal power plants is associated with the lack of free working capital for its purchase and a record number of emergency repairs at coal-fired TPPs and CHPPs over the 10 months of 2021.

If case the shortage of coal will persist, then starting in mid-January 2022, the generating capacity deficit in the UES would be in the range of 2-4 GW. That would lead to the need for a regular suspension of electricity supply to industrial (and even to household) consumers.

This heating season the operation of nuclear generation in an enhanced mode (14 or even all 15 power units) is not a guarantee of reliable operation of the power system as it is lacking the maneuverable generating capacity for operational balancing of the power system. This function in Ukraine is performed by HPPs and TPPs.

Taking into account the results of the study conducted by ENTSO-E, during the operation in isolated mode, the total base load of the NPP should be about 9.9 GW, and the load of each of the NPP units should not exceed 800 MW. This will allow leaving in the balance a place for increased baseload of heat generation, which is necessary to ensure sufficient balancing of the system and minimize the negative consequences for the power system in case of an emergency shutdown of any NPP.

Thus, there are risks of failing the process of testing the operation of the UES of Ukraine in a mode isolated from the power systems of the Russian Federation and Belarus. In case the experiment is postponed, the parties would have to turn to elaborate an upgraded Road Map to pursue the synchronization of Ukrainian power grids with European ones initially planned for 2023.

However, there is reason to believe in the successful integration of the power grids of Ukraine and continental Europe, otherwise, the dependence on the energy systems of Russia and Belarus will remain, which will significantly slow down the reform of the electricity market in Ukraine.

Provided that the system integration is accomplished, the level of cross-border flows would nearly double to 2GW per annum. This would allow both increased exports and imports of electricity and support security of energy supplies for both Ukraine and the neighboring EU Member States.

[1] https://zakon.rada.gov.ua/laws/show/859-2021-%D0%BF#Text

[2] President’s Order No.452/2021 dated 28 August 2021 implementing the Decision of the National Security and Defense Council  of Ukraine  of 30 July 2021, https://www.president.gov.ua/documents/4522021-40021

[3] FIRST REVIEW UNDER THE STAND-BY ARRANGEMENT, REQUESTS FOR EXTENSION AND REPHASING OF ACCESS OF THE ARRANGEMENT, WAIVERS OF NONOBSERVANCE OF A PERFORMANCE CRITERION, FINANCING ASSURANCES REVIEW, AND MONETARY POLICY CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR UKRAINE https://www.mof.gov.ua/storage/files/1UKREA2021001%20(1).pdf

[4] https://expro.com.ua/statti/cherez-zlet-cn-na-rdn-mi-otrimali-kasoviy-rozriv-blshe-100-mln-grn--volinelektrozbut

[5] Resolution by NEURC No. 1747 dated 11 October 2021

[6] REGULATION (EU) No 1227/2011 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 October 2011 on wholesale energy market integrity and transparency (Text with EEA relevance), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32011R1227

[7] Energy Community, Ukraine’s 2021 implementation performance and key energy sector benchmark data  https://www.energy-community.org/implementation/Ukraine.html

[8] Energy Community, case ECS-04/21:Ukraine/electricity, https://energycommunity.org/legal/cases/2021/case0421UE.html

[9] EU4Energy delivers technical assistance project to support Ukraine in transposition of REMIT Regulation, https://www.energy-community.org/news/Energy-Community-News/2020/06/19.html

[10] http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=70782

[11] http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=71559

[12] http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=71711

[13] Transparent electricicity: why implement RTEMIT in Ukraine, and why a case was opened against our state,  Maryna Hritsyshyna, Sayenko Kharenko law firm, Kristian Takach, independent electricity markets expert, https://mind.ua/en/openmind/20226624-transparent-electricity-why-implement-remit-in-ukraine

[14] Energy Community Regulatory Board, https://www.energy-community.org/aboutus/institutions/ECRB.html

[15] Registered Reporting Mechanism (RRM) within the REMIT compliance system is a person reporting the trade data (records of transactions and orders to trade), and/or fundamental data, on behalf of a market participant, directly to the Agency for the Cooperation of Energy Regulators (ACER or Agency), and fulfilling the ACER's registration and reporting requirements.

[16] The NEURC, Regulator has set the price caps that have caused the DAM prices to decrease to a level that was lower than the cost of generation, and even less than the break-even point of the power system as a whole (UAH 850/MWh in April, UAH 500/MWh in May and UAH 426/MWh July 2021), Improving the Wholesale Electricity Market Model in Ukraine, https://razumkov.org.ua/en/articles/improving-the-wholesale-electricity-market-model-in-ukraine

[17] Energy Ministry of Ukraine, Forecasted electricity generation balance for 2022, http://mpe.kmu.gov.ua/minugol/control/uk/publish/officialcategory?cat_id=245183250

[18] Ukraine and EU: it takes two to swing (at the same frequency) by Dr.Georg Zachmannand, Lukas Feldhaus, https://www.euractiv.com/section/energy/opinion/ukraine-and-eu-it-takes-two-to-swing-at-the-same-frequency/

[19] Lukas Feldhaus, Kirsten Westphal, Georg Zachmann, Connecting Ukraine to Europe’s Electricity Grid, Technical Details and Hard Geopolitics, SWP Comment 2021/C 57, 24.11.2021, 8 Pages, doi:10.18449/2021C57 https://www.swp-berlin.org/publikation/connecting-ukraine-to-europes-electricity-grid

[20] European Network of Transmission System Operators for Electricity, ENTSO-E,  https://www.entsoe.eu/

[21] Clarification regarding the 2021-2022 heating season and preparing  the power system for operation in isolated mode, Ukrenergo’s official website, https://ua.energy/zagalni-novyny/roz-yasnennya-shhodo-prohodzhennya-ozp-2021-2022-rokiv-ta-pidgotovky-energosystemy-do-roboty-izolovanomu-rezhymi/