Two years of the electricity market: achievements and challenges

The Ukrainian energy system has been operating in an open, competitive electricity market for two years now. What problems have not yet been resolved, and what have been achieved in the second year of operation, what new challenges have been faced and what awaits the market next year, Kosatka.Media asked the market participants, NPC Ukrenergo and NEURC.

Problems "inherited" from the first year of work

Several irregularities in the electricity market have been following it since the beginning of the launch. Representatives of the energy business, the regulator and the operator point to the same problems but focus on their different aspects.

NPC Ukrenergo explained in a comment to Kosatka.Media that the most important issue that needs to be addressed today is the financial balancing of the market. Two factors create arrears on the electricity market: the imperfection of the public service obligations mechanism and the problem of arrears on the balancing market (BM). The latter is caused by the insufficient paying capacity of consumers who do not pay for imbalances (electricity purchased at the BM) due to lack of funds, but they cannot be disconnected for non-payment from the power supply due to the threat of an environmental or social catastrophe (state mines, municipal water utilities, SoLR clients, etc.)

“Also, there is still a problem of the efficiency of state-owned companies in the electricity market. First of all, this concerns the largest trader on the market, which is State Enterprise Guaranteed Buyer and the largest Ukrainian electricity producer NNEGC Energoatom. Both companies still have a significant amount of positive imbalances compared to others, that is, electricity produced but not sold on the main market segments (the DAM, the IDM and the MBA) and therefore are sold on the balancing market at an extremely low price (from 0, UAH 01 per MWh). This leads to a loss of profits by two companies. And the shortfall in profit by Guaranteed Buyer creates an additional burden on the transmission tariff of NPC Ukrenergo, the company added.

Olha Babii, a member of the National Energy and Utilities Regulatory Commission noted in her comment to Kosatka.Media that the main problem of the Regulator is the lack of a market monitoring mechanism.

“We do not have a regulated Ramit monitoring mechanism. Therefore, there is a problem with the transparency and fairness of the markets. We, as a regulator, cannot react quickly to the different behaviour of market participants, we cannot collect data, etc.,” she explained.

The second problem, according to her, is that when the market was launched, everyone thought that the spot market, the DAM and the IDM would be indicative.

“But according to the results of the analysis, the bulk of transactions for the purchase and sale of electricity occur in the market of bilateral agreements (MBA). It is indicative, prices are formed there. And only about 20-25% is sold on the spot market,” said the representative of NEURC.

The third problem, according to Babii, is the peculiarities of our energy system. In certain periods of the year, especially in summer, there is a surplus due to the rapid growth of renewable energy sources. Prices fall and become uncompetitive for thermal generation.

Representatives of energy companies described in more detail how the aforementioned market shortcomings affect their work.

Iryna Beresneva, director of AUGUSTA LLC (a group of energy suppliers Tolk), in a comment to Kosatka.Media noted that in the first year of the market's operation transparent market mechanisms for setting electricity prices should have started working. However, the unstable and unbalanced legal framework and uncertain work of the regulator allowed “unscrupulous traders” to vary the level of electricity prices to obtain super-profits with a gradual “download” of profits from individual generations.

“Therefore, the prices that the consumer is guided by today have nothing to do with market prices. I will also note that the high cost of electricity today is still legally transferred from the population to the industry. That is, it still finds a way out in the increased price of goods produced in Ukraine, which, in turn, has to be compensated for by the same end consumer,” Beresneva clarified.

She also emphasized that a significant market problem is the so-called "cross-subsidization" when the income of generating companies is still aimed at reducing the high cost of electricity for the population.

“This leads to significant losses for companies that have been assigned special responsibilities. According to the results of 2020, only NNEGC Energoatom received losses of UAH 4.8 billion. Also, a partially unsolved problem is shifting the overstated tariffs of "green generation" to industrial consumers by raising the transmission tariff," Beresneva explained.

The head of the Electricity project of Je Energia Vasyl Honcharuk told Kosatka.Media that the electricity market, although formally considered open and reformed, is in reality segmented.

“Each supplier is limited to its own segment, and a significant part of the actual resource of electricity (first of all, the cheapest - nuclear) is not available to independent traders and suppliers. The reason for this is the artificial regulation of prices for certain categories of consumers - the population and legal entities with a permitted power of 50 kW,” the expert noted.

Vyacheslav Kokhanov, director of the electricity supplier Megatrading, added three more market problems that have not been resolved since the start of its launch. The very first is the accumulated debts for previous periods to market participants from State Enterprise Energorynok.

“The market actually started from a solid debt hole, settlements were not settled, there were no mutual settlements between state-owned gas supply companies, generation (producers) and State Enterprise Energorynok, which arose due to the difference in the cost of energy and heat produced and the prices at which these energy carriers were sold to the population, so the lack of working capital does not allow generating companies to work effectively,” Kokhanov said.

Secondly, an effective mechanism for working with legal entities-consumers, which are insolvent, and which, due to technical reasons, cannot be disconnected from power consumption, was not approved.

“The so-called supplier of the last resort (SE Interenergo) was created, but the sources of its financing and mechanisms for settling such debt have not been created. One of the biggest reasons why Ukrenergo has not fulfilled its function for 9 months and does not pay for imbalances with all market participants is that SE Interenergo does not pay bills in favour of NPC Ukrenergo. Each market participant is now forced to subsidize the debtors of Interenergo at their own expense,” said Kokhanov.

The expert also noted that there is a problem of preventing operators of the distribution system from transferring consumers from "their" supplier at free prices to new suppliers.

“Some distribution system operators forcefully discourage consumers from switching to alternative suppliers. Different tools are used, some consumers have counted debts and threatened with blackouts, others are warned about difficulties with energy supply, or with the implementation of certain technical conditions that the consumer will have to fulfil in case of switching to an alternative supplier, some immediately issue invoices for electricity in advance by the end of the year, as a type of penalty,” explained Kokhanov.

Another nuisance for business is negotiated to bid between state-owned producers and large traders.

“You don't have to be in the top offices to know what kind of backroom agreements exist on the market, everything becomes clear anyway if you analyze the tenders of Energoatom and Centrenergo in the period from 2019 to 2020. Huge, for most participants not available, lot sizes, a short time from the announcement of the auction to their actual holding (announced on Friday at 6.00 p.m., with the start of trading on Monday at 11.00 a.m.) so that those who are "not in the subject" did not have time to accumulate funds or time their holding (from 7 p.m. to 11 p.m.).

So, thanks to a cheap resource, which is redistributed to suppliers at free prices (structures are separated from the DSO), monopolies can keep the consumer price. Of course, this mechanism distorts the market and creates a non-competitive environment for ordinary suppliers,” said Kokhanov.

Energy expert Valerii Nozdrin agreed that after the launch of the new model, several questions arose both from the point of view of regulation and the point of view of administrative interference. But I noticed that the main effect of the introduction of the new model of the energy market is a significant reduction in the price of electricity for the end consumer. And this is her indisputable plus, despite all the difficulties.

What difficulties on the market have been solved

Ukrenergo noted that at the moment the total volume of positive imbalances of Energoatom and Guaranteed Buyer has significantly decreased (but still has not disappeared). This was primarily due to the cancellation of the lower price cap in the balancing market. As a result, the balancing market becomes a penalty area for those market participants who did not manage to sell their volumes in the main segments (the DAM, the IDM, and the MBA), because the volumes sold as positive unbalances cost less than other segments. Reducing the volume of positive unbalances facilitates the balancing of the power system, reduces the need to provide balancing services. Both factors help to reduce the financial burden on NPC Ukrenergo.

Also, during 2020, it was possible to completely unblock the work of the ancillary services market (the DAM), the launch of which was delayed due to the lack of certified participants. At the initiative of NPC Ukrenergo, back in 2019, a temporary simplified certification procedure was introduced, and in 2020 a full-fledged one was introduced. As a result, today 17 generating units have been certified to participate in the DAM, among which, in addition to the power units of hydroelectric power plants, thermal power plants and combined heat and power plants, power unit No.2 of Zaporizhzhia NPP.

“In 2020, procedural and financial issues of compensation for dispatching restrictions on electricity production from renewable energy sources were resolved. The necessary changes have been made to the legislation and by-laws, mechanisms have been created to determine the scope of restrictions, determine their cost, etc., NPC Ukrenergo introduced a software package for renewables Restriction Management System for the transmission of dispatch commands. Also, the tariff for dispatching NPC Ukrenergo provides for funds to finance the cost of compensating for restrictions on renewable energy sources,” the operator explained.

Also, amendments have been made to the Market Rules to allow financing uplift from the Ukrenergo dispatching tariff. Now the issue of allocating funds for this in the structure of the specified tariff is being resolved.

Repayment of about 40% of Ukrenergo's debt in 2020 under PSO to Guaranteed Buyer was ensured by attracting loans in the amount of UAH 10.25 billion from three state-owned banks (Oschadbank, Ukrgasbank, Ukreximbank).

According to Iryna Beresneva, most of the problems could not be solved. But during the second year, we got more additional tools for determining the market price.

“Today, the Ukrainian Energy Exchange is effectively operating in the market of bilateral agreements. I believe that it is on the prices that are formed during trading sessions that we will further orient the consumer. In the future, it is imperative to pay more attention to the mechanisms of formation of futures prices, which will be offered by powerful suppliers in the near future,” she said.

Vasyl Honcharuk noted that now the government and the sectoral regulator NEURC are introducing several changes aimed at correcting the situation with the distortion of pricing. In particular, the Ministry of Energy plans to make auctions for the sale of electricity mandatory - it will be possible to conclude bilateral agreements only through the exchange. Now part of the contracts is concluded between the participants in the direction. But the market participants do not know the price situation of the entire volume of concluded bilateral agreements; only the exchange has a complete picture. Obviously, the market needs such a step as changing the price indicator.

“Today, the indicator of prices for concluding deals is still the day-ahead market and the intraday market, where no more than 20% of all electricity is traded, and the volatility is about 300%. Suppliers have repeatedly stated that it would be more logical to make the market of bilateral contracts an indicator, the volatility of which is usually no higher than 13%. Here the opinion of the suppliers has already been heard - the Ukrainian Energy Exchange, where bilateral agreements are concluded, plans to make an indicator based on the weighted average information on these agreements,” Honcharuk said.

The second problem that the government and the regulator drew attention to, according to Honcharuk, is manipulation in all market segments (bilateral agreements, the day-ahead market and intraday).

NEURC representatives warned about the introduction of administrative and criminal liability for manipulations from July 1, 2021.

“We also hope that in the near future NEURC will begin work on solving the problem of predicting the level of imbalances in the system. This creates an unmanageable additional financial burden on suppliers. And, as a result, it falls into the cost of the resource and the final price for the consumer. The Commission is preparing to discuss with market participants a draft resolution on the introduction of hourly consumption profiles (standard schedules). If the initiative is implemented, it will streamline the planning of both market participants and end users of their consumption volumes, and imbalances will be reduced,” the expert believes.

In the NEURC itself, according to Olha Babii, they believe that they have learned to analyze the market faster and quickly take action on seasonal price caps.

“We have become more flexible and gained experience in regulating the market with such peculiarities,” she said.

Regarding the forecasting of imbalances, Babii noted that during the second year of work it became clear how the features of the balancing market work, despite the Covid limitations, rapid growth and decline in consumption.

“But the issues on the balancing market have been partially resolved. Although now we are partially held back by PSO. But the main achievement of this year was that Energoatom learned to trade normally on the market and became more stable in its trading activities,” Babii said.

Vyacheslav Kokhanov pointed out that in terms of debts for previous periods to market participants from Energorynok, the situation is gradually gaining momentum in the search for solution tools. The debt restructuring of electricity producers is being carried out, which makes it possible to balance the work of generating companies, but the problem of settlements has not yet been fully resolved.

 And regarding the obstruction of the operators of the distribution system in the transfer of consumers, thanks to monitoring and intervention from the NEURC, the situation has changed for the better, Kokhanov noted.

“Some special cases of “obstruction” by DSOs exist, but this has no mass signs. The transfer of consumers began to take place quickly, transparently, therefore, it should be considered that the regulator has invented an effective mechanism for influencing DSO. Of course, those DSOs that are still “getting absorbed in playing” have remained, but have become more careful in their actions,” the specialist clarified.

Challenges and problems of the second year of operation

Ukrenergo noted that in January-February 2021, the main problem was the shortage of electricity production at nuclear power plants and coal-fired TPPs in the UES of Ukraine, which was compensated by imports from Belarus and Russia.

“NPPs operated at a reduced load (a total of 9-9.5 MW per 10 MW in January-February 2020) due to the postponement of part of the repair work of power units for the winter. TPPs, on the one hand, due to the reduced load of NPPs, had to increase their power generation and worked out their coal reserves much faster than planned, on the other hand, TPPs experienced an increased level of accidents,” the company explained.

At the same time, experts pointed out a significant increase in debt on the market as the biggest, although not so new, problem.

“In the second year, we have an increase in debts to investors of renewable generation – due to previously introduced economically unjustified tariffs and only a partial solution to the problem of debts of previous periods. Also, at the moment, suppliers have significant outstanding debts from the transmission system operator for balancing services and surplus electricity sold,” said Iryna Beresneva.

Vasyl Honcharuk added that as a result of PSO, debts have accumulated to Energoatom and Ukrhydroenergo. In particular, in 2020 Energoatom received a net loss of several billion. One of the main reasons is the company's losses due to the discrepancy between the cost of electricity produced by the NPP and the price at which Energoatom supplies it to the population under PSO. To recover the debts of Guaranteed Buyer the company is forced to resort to lawsuits.

“The accumulation of debts of state-owned companies is already having consequences. Energy Community Director Janez Kopač recently stated that the community cannot certify the transmission system operator NPC Ukrenergo until the company's financial health problem is resolved. And Ukrenergo's certification is a prerequisite for the integration of the Ukrainian energy system into ENTSO-E. That is, the current distortions in the market are becoming an obstacle to integration into the European energy system,” Honcharuk recalled.

The Covid-19 pandemic has also become a global problem, said Iryna Beresneva. It led to a decrease in production and, above all, in demand.

“As a result, we received a legislative ban on shutting down and calculating penalties for the population due to debts, which led to an increase in debts to PUP (universal service providers), which, in turn, led to an increase in debts to generation and distribution companies of regional companies throughout Ukraine," explained the expert.

Vyacheslav Kokhanov pointed to “a lot of manual control on the part of the regulator,” sometimes in spite of market mechanisms for regulating the market, which slows down the development of the energy market and makes it impossible to predict the company's financial activities.

“These are constant changes in the formula for calculating the volumes of financial guarantees, which ensure the activities of suppliers in the balancing market and increase the contribution to regulation, as well as restrictions on participation in buying/selling in all market segments for traders, which makes it impossible to balance the volumes of purchase/sale with the actual consumption or sale of electricity,” he explained.

Kokhanov also added that manipulations in large volumes by individual market participants still significantly distort the market, namely the supply/demand and price of electricity, which leads to risks for each market participant and significant losses due to imbalance.

How to solve accumulated problems

Vasyl Honcharuk believes that the longer PSO operates, the larger the consequences will be and the harder it is to overcome them. Accordingly, the problems of the energy market cannot be solved without a phased departure from PSO.

Iryna Beresneva agreed that it is necessary to take an economically balanced approach to the issue of pricing for the population. She also noted that legislative permission is needed to disconnect debtors among the population. And last but not least, it is necessary to reconsider political interests and for the further development of "green generation", nevertheless, to model and introduce existing mechanisms for closing debts to investors who had the courage to invest in the development of the so-called "green" in Ukraine to preserve ecology.

Vyacheslav Kokhanov noted that NEURC and the Ministry of Energy influence the solution of most of the problems of the energy market, but it will not be possible to solve all problems at the same time using one instrument. According to the specialist, the market is going through a period of its formation, the situation is constantly changing and the only way is to constantly improve both legislation and market regulation mechanisms.

In terms of debts and calculations, this problem has been forming for years, and should be resolved at the state level with the involvement of state financial institutions, possibly international banks, which provide financial support in the implementation of reforms in Ukraine, he said.

Other problems are solved through the introduction of transparent platforms for the purchase and sale of electricity, the introduction of electronic contracts, where the price is no longer determined by the general method (averaged), Kokhanov said.

“Probably, it is necessary to determine the limit prices, which generation and traders will not violate, so as not to lead to loss-making generating enterprises. For generations, it is possible to enter the KPI for the fuel component in the cost of electricity. It is also necessary to improve the mechanisms for managing supply and demand, as well as forecasting the balance of electricity. After these issues are resolved, it will be possible to launch long-term contracts and other financial instruments that will make the market more predictable for all players,” the specialist explained.

Olha Babii confirmed the thesis of the need for effective forecasting of electricity consumption.

“We saw that our market is very seasonal. To make it stable and economically predictable, it is necessary to better predict the actual production model. This is the task of the Ministry of Energy,” Babii said.

Valerii Nozdrin supported the cancellation of price caps. First, this can be done for the summer period to see the real situation on the market and even then – to plan further steps.

More complex solutions require a solution to the issue of "greens", in his opinion.

“It is imperative, finally, to introduce for them real responsibility for imbalances and switch to an auction model. This is not the first year that they have been talking about it, but, unfortunately, no further talk has gone yet,” he recalled.

The expert also pointed out the need to improve the market for bilateral agreements so that everyone can trade on certain organized platforms.

“The monitoring system also requires improvement. All transactions must be transparent for the regulator, and this requires certain legislative changes. By the way, the relevant proposals have already been registered in the Verkhovna Rada,” Nozdrin said.

Ukrenergo added that the solution to the problems of a stable passage of the heating season on the part of electricity producers at nuclear power plants and thermal power plants is to fulfil the repair schedule, which provides for their main part in the warm season against the backdrop of a seasonal decrease in energy consumption. As well as other measures for the advance provision of the necessary volumes of fuel in warehouses.

Will the market work effectively in the third year?

Olha Babii noted that the efficiency of the further work of the market will depend on effective forecasting of electricity production and consumption and on the model and accuracy of balancing the system.

But the biggest challenge in NEURC sees something else.

“We, as a regulator, now face a big challenge - we have restricted imports. And we need to get ready to work in the isolated synchronization mode of Ukrenergo in ENTSO-E. We must pass the test for compliance with further synchronization. This will be the biggest challenge for us in the third year of operation,” Babii said.

Iryna Beresneva believes that the third year of operation of the electricity market should aim at balanced and balanced management of generation, economically calculated models for solving the issues of reducing debts and leveling their further accumulation. And also a thorough approach to the pricing of electricity for the population and the maximum reduction of the load on Ukrainian producers due to the inflated tariffs, which are components of the cost of electricity. And the participants in the electricity market must conscientiously fulfil their duties, relying on the legislative framework, which urgently needs to be finalized.

Vasyl Honcharuk believes that the efficient operation of the market in the future depends on what steps and how quickly the government will take to eliminate the main imbalance of the market – artificial regulation of electricity prices for categories of the population and legal entities with a permitted capacity of 50 kW.

“There is only one way to this - the gradual curtailment of PSO, and in parallel – bringing the price for the population to the market level. An unpopular move that is delaying the government. The government postponed the first stage of the increase twice this year, not daring to raise prices on April 1 and May 1, at the peak of the next surge in Covid. So far there is no final decision – as of 11.06, representatives of the government and the ministry have not announced the specifics either about the timing of the increase or about its level. Since the government is considering several scenarios prepared by NEURC, it can be assumed that this year there will be either two price increases of 15% each, or one more sharp one,” the expert predicts.

Ukrenergo agrees that the key issue is to finally solve the problem of debt in the electricity market and improve PSO in such a way as to eliminate the ineffective work of the companies that carry it out, as well as to establish secure permanent sources of funding for the difference in costs within PSO.

“In terms of PSO for the population, one of the options for solving may be the introduction of a financial model of PSO. In it, all volumes of electricity are bought/sold at market prices in all market segments, and the difference in the cost of selling electricity to the population is compensated by additional profit of state-owned generation with low cost (NPP and HPP),” the operator admits.

Vyacheslav Kokhanov believes that the evolutionary path of the electricity market development can be accelerated and efforts need to be made to do this, but it is not possible to jump from the first stage of market opening to the stage of a mature market without all those mistakes and decisions made on them, which then shape the practice. ...

“The market is working, we can say that it happened. Further, it should be improved, therefore, we should expect from the Ministry, the Cabinet of Ministers of Ukraine and NEURC exactly logical improvements in the regulatory environment," said Kokhanov.

As a result, the electricity market is waiting for three things: financial recovery, well-established rules and a clear forecast of the energy balance of Ukraine simultaneously with the development of generating, shunting and storage capacities in accordance with consumption needs.