Ukraine: Energy Community Implementation Report
by Yàrîslav À. Petrov, Îlånà Ð. Sichkîvskà
On 1 September 2016 the Energy Community Secretariat published its Annual Implementation Report (the Report) that outlines the progress made by the Energy Community Contracting Parties, including Ukraine, in implementing the acquis communautaire under the Energy Community Treaty. The Report covers the period from September 2015 to September 2016. It includes sections on electricity, gas, oil, national regulatory authorities, renewable energy, energy efficiency, environment, competition and statistics in the Contracting Parties. The Report includes a separate chapter on Ukraine.
Why Ukraine needs to implement EU legislation on energy?
In 2011, Ukraine became a member of the Energy Community with a particular obligation of implementing the Second Energy Package1. This obligation and the timelines for implementation of the Second Energy Package were reflected in the Protocol of Accession to the Treaty on Establishment of the Energy Community. By the time Ukraine became a member of the Energy Community the Third Energy Package was adopted, and consequently right after entering into force for Ukraine of the Energy Community Treaty, Ukraine obtained obligations to implement the Third Energy Package without finalizing the work with transposition of the Second Energy Package. The key aim of the Third Energy Package is increasing the level of competition, entry of new participants and reduction of energy prices.
Electricity
The Report states that electricity market of Ukraine still operates under non-transparent, overregulated conditions with excessive cross-subsidization based on a “single buyer” model (Energorynok, the state-owned enterprise). In 2013, the On the Principles of Functioning of the Electricity Market in Ukraine Act of Ukraine No.663-VII was adopted, which was generally compliant with the Second Energy Package, but did not meet the requirements of the Third Energy Package. This Act was updated several times but the Third Energy Package requires other terms and conditions for the electricity market’s functioning. The Report determines adoption of the new Electricity Market Act as the highest priority for Ukraine as it is a starting point for the implementation of reforms. There are other priorities named by the Report in this sector, e.g. approval of secondary legislation, unbundling of Ukrenergo (TSO), development of trading platforms and electronic technology for real-time balancing, etc. It should be mentioned that the new Draft Electricity Market Act, compliant with the Third Energy Package, has been elaborated during the last 2 years together with the Secretariat of the Energy Community. After publication of the Report on 22 September 2016, Draft Act No.4493 On Electricity Market (the Draft Act) passed the first reading in the Ukrainian Parliament. The Draft Act launches a new model for the electricity market that is aimed at liquidating the “single buyer” model and introduces several trading platforms, or “markets”, in particular the (a) market of bilateral agreements; (b) day-ahead and intraday markets; (c) balancing market; (d) auxiliary services market, and (e) retail electricity market. In these conditions, electricity market participants will be able to trade electricity through any of the markets, save for certain regulatory limitations. In addition, customers will be allowed to choose their supplier of electricity. The liberalization of the electricity market will be the primary result of the said flexibility and competitive electricity prices. According to the Report, Ukraine has been working on developments in the electricity sector since September 2015. The Secretariat’s project office in Kiev developed and submitted to the National Energy and Utilities Regulatory Commission of Ukraine (NEURC) draft secondary legislation acts compliant with the Third Energy Package in support of the new Draft, in particular related to:
— Licensing conditions for network and market operators and suppliers;
— Unbundling for operation system and supply activities;
— Electricity supply and switching the supplier, methodologies for setting prices for regulated services and service agreements;
— Market concept design defining new functions and architecture of the electricity market, rules for bilateral and day-ahead markets, ancillary services and balancing market, balance responsibility and settlement rules;
— Network codes for transmission and distribution, rules for cross-border capacity allocation; and
— Commercial metering (provided through EU assistance).
Gas
The Report discusses real progress in the fields of the market’s opening in the gas sector. Around 20 new traders entered the Ukrainian gas market by importing gas from the EU using physical reverse flow via Slovakia, Poland and Hungary. Ukraine’s gas demand continues to fall with 33.8 bn cu.m. consumed in 2015. Ukrgazvydobuvannya and Ukrnafta are the country’s largest gas production companies controlled by Ukrainian energy company Naftogaz Ukrayiny. Independent producers account for 15%-16% of Ukraine’s total annual gas output. Now import of gas from the Russian Federation on the Ukrainian gas market represents about 0% since the winter season 2015-2016. Currently, Naftogaz is the sole owner of the public joint stock company Ukrtransgaz, which operates the transmission system, including the transit pipelines that pass through Ukraine for supply of Russian gas to Europe, and the storage system. According to the Report, the On the Natural Gas Market Act of Ukraine No.329-VIII adopted on 9 April 2015 (the Gas Market Act) is in line with Directive 2009/73/EC and Regulation (EC) 715/2009. The government adopted the Decree on Public Service Obligation, Tender Procedure for Designation of Supplier of Last Resort and a procedure for creation of commercial gas stock reserves, whereas the Ministry of Energy and Coal Industry of Ukraine adopted Security of Supply Rules and a national action plan; all documents were adopted by November 2015 in line with the Gas Market Act. The majority of secondary legal acts stipulated in the Gas Market Act were adopted before the deadline, which helped to increase the transparency of the gas sector.
After analysis of the Gas Market Act, the Energy Community made the following observations in the Report:
— The unbundling requirements of Directive 2009/73/EC have been transposed, but there is a delay in implementation of the unbundling.
— The Gas Market Act grants the right to connection and third party access under regulated conditions to all system users.
— All customers have the right to choose a supplier and switch the supplier free of charge. The procedure for creation of commercial natural gas stock reserve (effective until 1 Novem- ber 2016) imposed significant financial limitations on suppliers.
— The Act prescribes the minimum content requirements for contracts between service providers and consumers.
— The government determined criteria for defining vulnerable customers, their categories, volumes of support and other special measures in case of disconnection.
The obligation of keeping a mandatory gas stock reserve was affecting the gas market of Ukraine. This requirement entailed the increase of gas price for final consumers due to additional financial commitments by suppliers. According to the Report, the existing gas stock reserve obligation is “considered not proportionate or in line with ensuring equal access”. Right after publication of the Report in terms of implementation of the Third Energy Package, Draft Act No.3617 On Amendments to the Act On the Natural Gas Market (regarding Gas Stock Reserve) was adopted. The Act is aiming to reduce the burdensome 50% natural gas stock reserve obligation, stating that any supplier shall secure natural gas stock reserve of up to 10% of the planned monthly supply volume. The exact amount of the natural gas stock reserve is established on an annual basis by the Cabinet of Ministers of Ukraine for all suppliers. The Act was signed by the President of Ukraine on 13 October 2016 and came into effect on 1 November 2016. On 16 November 2016, the Cabinet of Ministers of Ukraine issued the Decree on approval of the exact amount of the natural gas stock reserve. Pursuant to this Decree the Cabinet of Ministers of Ukraine established an obligation for suppliers of gas to create a 0% gas stock reserve for 2016-2017. At the same time gas suppliers are obliged to create a natural gas stock reserve in the amount of 10% of monthly volume only in emergency situations foreseen by the National Action Plan No. 687 of 2 November 2015.
Regulatory Authority
The National Energy and Utilities Regulatory Commission of Ukraine (NEURC) is the single authority for regulating gas, electricity and utilities. It has been established and can be liquidated by an act issued by the President. The current regulator’s organization fails to comply with a significant number of independence criteria stipulated by Directives 2009/72/EC and 2009/73/EC:
— Transparent procedure and accurately determined requirements for Commissioners is missing.
— No rotation scheme.
— The NEURC’s decisions are not final — the legal acts elaborated by NEURC should be agreed with the Antimonopoly Committee and the State Regulatory Service prior to their adoption.
— Imperfection of the system of prohibitions for particular persons to execute functions of Commissioner.
— Lack of proper financial independence.
The conclusion drawn by the Energy Community is that Ukraine has not yet transposed the Third Energy Package with regard to the regulatory authority. The Secretariat of the Energy Community helped Ukraine in elaborating the draft laws on the national energy regulator in terms of the Support of International Partners Conditioned on Energy Sector Reform. As a result of cooperation between Ukraine and the Secretariat of the Energy Community, Draft Act No.2966-d On National Commission for State Regulation of Energy and Public Utilities (the Draft Act On the Regulator) was adopted on 22 September 2016. It focuses on the peculiarities of the independent National Regulator and on the proper functioning of energy markets and issuing of licenses. For now, the Draft On the Regulator is pending signing by the President of Ukraine. According to the Draft Act On the Regulator, the National Commission for State Regulation of Energy and Public Utilities is a legal entity of public law, has separate property in its use, which is public property, accounts with the State Treasury Service of Ukraine, a seal with the State Emblem of Ukraine and its name. The key features of the independent National Regulator are the following:
— It performs state regulation, monitoring and control over the activities of economic entities in the energy and public utilities sectors.
— The Regulator’s decisions are not subject to approval by public authorities, except in cases provided by the legislation on protection of economic competition. The option of appeal has also been introduced.
— The Regulator has sufficient human and financial resources to carry out its tasks. The Regulator independently distributes funds allocated by itself for the relevant year.
— The rotation scheme with an element of public vacancy announcement for Members of Commission is developed.
The Report also overviews developments involving Ukraine in the oil sector, renewable energy, energy efficiency, environment, competition and statistics, but these sectors remain without significant progress. Thus, the results of the reporting period show progress in all spheres related to energy. However, the gas sector is the most developed sector for now. The transposition of the Third Energy Report is only at the starting point of implementation in the legislation of Ukraine.
1 The EU Energy Packages are legislative packages in energy sector elaborated by the EU to improve the implementation and harmonization of legislation and standards of EU countries. The latest set of the EU energy market legislation, known as the Third Package, has been enacted to improve the functioning of the internal energy market and resolve structural problems.