ALERT: President asks the Parliament to postpone the launch of a new Electricity Market model

On June 10, 2019, the President of Ukraine submitted to the Parliament Draft¬†Law No. 10376 (‚ÄúDraft Law‚ÄĚ) on amending the Law of Ukraine ‚ÄúOn the Electricity¬†Market‚ÄĚ. The Draft Law provides for the postponement of the new electricity¬†market model envisaged in the Law for one year, until July 1, 2020.

The President filed the Draft Law with the status of an ‚Äúurgent draft‚ÄĚ. Urgent¬†drafts must be considered by the Parliament via an expedited procedure: up to¬†30 days of preliminary consideration, followed by discussion and voting in¬†Parliament.

The President argues that the energy sector of Ukraine is not ready to move to the new electricity market model. Moreover, the new model may result in a sharp increase in tariffs for citizens and businesses.

As of today, electricity prices in Ukraine are determined by resolution of the¬†National Energy and Utilities Regulatory Commission (‚ÄúNEURC‚ÄĚ). NEURC has¬†been accused of establishing tariffs that favour electricity sellers to the detriment¬†of consumers and of favouring some sellers to the detriment of other sellers.

In 2017, the Ukrainian Parliament adopted the Law ‚ÄúOn the Electricity Market‚ÄĚ,¬†which provided for a new model, essentially a self-regulating market system of¬†interaction of electricity generators, transporters and consumers. According to¬†the Law, the new model of the Electricity Market had to enter into operation¬†starting July 1, 2019.

Reasoning and proposals of the Draft Law
The introduction of the new electricity market model in Ukraine, which is currently scheduled for July 1, 2019, has been subject to a heated debate recently. The President appears to share critics’ view of the proposed introduction of the new model.

In particular, the explanatory note to the Draft Law states that:

  • some of the regulatory acts required for operation of the electricity market have not been yet adopted¬†(and may be not ready by July 1, 2019);
  • market participants do not have the appropriately tested software to operate under the new model;
  • the Guaranteed Purchaser ‚Äď a special state-owned company that is responsible for purchasing all energy¬†from renewable sources at guaranteed feed-in tariffs – has not been established yet (please see our¬†previous update for details on the changes in renewable energy regulation).

The President‚Äôs Draft Law proposes to run a limited experimental operation of the new model to test the¬†system. This ‚Äútest mode‚ÄĚ shall begin on September 1, 2019, and run until the date of introduction of the new¬†electricity market model on July 1, 2020. According to the Draft Law, the rules of the experimental operation¬†of the new model, according to the Draft Law, have to be approved by August 1, 2019. The testing of the¬†Electricity Market would allow the gathering of statistical information to estimate the maximum price for¬†electricity and to identify deficiencies in the market.

Perspectives of the Draft Law
The new President, who has just taken office, has been in conflict with Parliament and, to a considerable extent, with the Parliament-appointed Cabinet of Ministers. The launch of the new electricity market model on July 1, 2019 has been defended, inter alia, by the current Prime Minister. Furthermore, Members of Parliament are mostly preoccupied with the parliamentary election campaign, which started a few weeks ago. For these reasons, the President’s Draft Law is unlikely to be passed prior to the formation of the new Parliament.

Both the EBRD and the World Bank have stated that Ukraine is not ready to launch the new electricity market model and have both joined calls to postpone its introduction. Taking into account that the President’s initiative is unlikely to be passed by Parliament, it seems that from July 1, 2019 there is a significant chance that the electricity market will be affected by teething problems that may ultimately be felt by consumers.

For example, today the electricity market is highly monopolized with more than 75% of the belonging to only¬†two participants ‚Äď SE ‚ÄúEnergoatom‚ÄĚ and DTEK group of companies. Introducing power auctions in such an¬†environment is unlikely to allow competition to thrive, and in fact may lead to the reverse. Furthermore, the¬†technical state of the grid means that changes in consumption habits or supply, which a new model is likely to¬†create, may lead to power outages if corrective measures are not quickly put in place.

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