This is still a market, not a regulated monopoly: how does Europe see Ukrainian electricity industry

A new electricity market was launched four months ago in Ukraine. Head of the Ukrainian office of the Czech IT company Unicorn Systems Volodymyr Pohoida and leading specialist Yana Lyakh shared their impressions with Kosatka.Media – how the energy system has survived the launch of the new market, whether Ukraine will be able to implement ambitious plans for its digitalization, and what security issues are worth market participants’ and the state’s attention.

- In July, immediately after the launch of the open electricity market, we talked about how this process will help “identify and correct all the bottlenecks in the legislation and in software products, which are maintaining the market”. From your point of view, what have been discovered and corrected?

V: There were no pleasant surprises. Fortunately, there were no super unpleasant ones too. But everything is as bad as we expected.

Y: Well, we can’t say that everything is so bad, there are encouraging moments.

Firstly, electricity imports on market conditions have appeared in the country. Someone can buy an inflow carrying capacity, for example, at a daily auction, an outflow carrying capacity at an annual auction, and this will not prevent from making a transit. The Antimonopoly Committee in its recent recommendations also noted this as a truly positive feature of the market’s launch.

In addition, we see that more and more players are entering this market, including completely new companies.

About the negative aspects – there are many technical issues that, in the opinion of the market participants themselves, are poorly designed. The most striking example is electricity bills. They are issued every ten days based on preliminary commercial accounting data; the final bill arrives in the beginning of the next month. But, as of November 6, July 2019 has not been closed yet, final bills have not been issued.

It is unclear who is to blame. Participants blame Ukrenergo, Ukrenergo blames participants for the fact that the data do not match, and it is also unclear where these mismatches are. This is a dangerous situation. With the launch of the market, many independent electricity providers have appeared, and they periodically turn into a pre-default status, a default status, some will begin to declare bankruptcy soon. And what should be done if the supplier has already gone bankrupt and the payments have not been closed yet? Like, he went bankrupt, went through all the procedures, closed, and in January we will recount the entire market and it turns out that he owes something to the market, and who will give this money is unclear. This is the biggest technical issue.

 

Other issues, as Volodymyr said, are predictable shortcomings: there are certain nuances in the software (for example, Ukrenergo was even fined – ed.), and the law tears around: we have one price caps, then others. Ukrenergo had one tariff, then another.

But, in general, the market has been opened. The mechanisms of work began to be developed, we see an increase in competition, which means that this is really a market, not a regulated monopoly.

- Ukrainian energy market and European standards. Has our country managed to reduce the distance between these worlds in four months somehow? How can this process be affected by the changes that the market is arguing about today: retroactive change in a feed-in tariff, expansion of regulatory rights and imports from Russia and Belarus?

V: From a technical point of view, imports from the Russian Federation and Belarus are not a really big deal, but from the political point of view it raises many questions. Basically, import of electricity is more a political issue than an economic one.

- According to Head of Ukrenergo Vsevolod Kovalchuk, both supporters of import and those who believe that it harms the Ukrainian power generation try to put pressure on them...

V: Let's remember that electricity is not water, it cannot be stored, and the energy system has its bottlenecks. Accordingly, there are situations when here and now, in this place, it is more profitable to import electricity from a neighboring state, rather than transmit it there from Ukraine.

Regarding domestic power generation. We have nuclear energy, but it needs to be modernized to work efficiently. This means that electricity from nuclear power plants must have a reasonable market value, which currently does not exist.

It is necessary to understand why exactly this has been done in each case. And mostly there is a logical reason, which we just do not see.

In addition, the less regulation, the less restrictions, the better chance that the market will adjust itself.

Regarding a feed-in tariff, we, as a European company, are closer to the EU experience. They focus not so much on reducing the tariff, but on its marketability. In Europe, “green” producers are becoming more and more responsible for the balance of electricity, but in our country they are not responsible for it.

One more thing: Europe is working more using “green” certificates, which are also intended to sponsor this type of power generation, not at the expense of direct government support, but real consumer demand.

There, the electricity supplier offers the consumer several tariffs. Here is the cheapest one, but we understand that all this electricity, for example, was produced at coal stations. A little more expensive, and I understand that 30% of this electricity was produced from renewable energy sources, or the most expensive – and I understand that there 90% of electricity was produced from renewable energy sources. And each person chooses – he wants to save, or pay more and support eco-movement.

- Let's get back to Ukraine. On October 23, SE Market Operator invited the Cabinet of Ministers to consider the issue of tenders for the sale and purchase of electricity under bilateral agreements by the enterprise on its platform. In your opinion, does the state-owned enterprise have sufficient software for this?

V: As far as it goes, there is nothing complicated. Another thing is that the desire to concentrate precisely bilateral agreements on the basis of one organization is a bit exotic. In Europe, there is not only one platform, which supports the day-ahead market operation and supports the conclusion of bilateral agreements at the same time. And I see no reason for us to change this scheme.

Another thing is that there are few experts in the Parliament who can assess the adequacy of a particular action, and commercial companies or state-owned companies can lobby for their own interests. They, although, do it within the legal framework. And I believe that before they get out of it, they have the right.

It is clear that the state should not allow them to go too far. But we often simply do not have this second side.

  • Continuing the theme of state-owned enterprises, I want to ask about Ukrenergo. The company representative told about plans for using cloud technologies in their work at an energy forum held in Kyiv in early November. How real is it in the current environment?

V: Good question. It all depends on what they mean. For European system operators, working in the cloud is really the norm. They already have a built-in security system that has passed more than one audit, which allows all work to be carried out in the clouds.

For example, one of our latest projects, LIBRA platform, which has combined balancing markets of 6 countries. This is very sensitive information, which potentially costs a lot of money to market participants. And they absolutely did not consider it shameful to entrust UnicornSystems with hosting their system somewhere in the cloud. So, they conducted all the necessary security audits and decided that “we trust”.

Ukrenergo’s cloud, which is planned for the “dispatcher to see all the information”... Hypothetically, they should see the status of their power lines using SCADA system. If they do not see, then something is wrong with the system itself, a cloud is not needed for this. Now they are conducting a project to organize DATAhub in Ukraine. Believe me, this is a very ambitious goal. They could not calculate the final data for July in the central system by large market players. And the construction of DATAhub, which will calculate useful supply or energy consumption in general for each point of connection, including potentially us, is an even more ambitious task. Hypothetically, yes, probably it would be possible to make it in the cloud, but this does not help the representatives of Ukrenergo to collect more information.

There is another reason why the implementation of such projects is often unsuccessful in Ukraine – the legislation is outdated. There are a lot of restrictions that are not needed today at all. For example, the fact that customer data should be stored only in the walls of Ukrenergo. On the other hand, the law “On Public Procurement” is optimized for the purchase of very simple things, tarpaulin boots or shovels, and it’s very difficult to buy information systems there. As a result, tenders are won by villains who promise the impossible and, unfortunately, customers do not have an effective mechanism to verify this.

-  During the Forum, the topic of cybersecurity was actively discussed. The participants agreed that our state needs to pay more attention to this issue. And from your point of view, how much is our energy industry protected from cyberattacks?

V: Everything is really not very good. Let’s say that even Ukrenergo, when there was “Petya” virus, something survived, something didn’t, but something had to be turned off, because they were afraid that it couldn’t survive. Our auction platform survived the shake without any problems, we absolutely did not worry about it.

Y: On my own behalf, I want to add that the software to support trading operations, the balancing market and a solution for the market operator, was implemented in a hurry.

We are used to the fact that when systems of this kind are introduced in Europe, they undergo a series of independent examinations. And often the examination itself is paid not by a company purchasing software, but, for example, by a regulator, hiring an external company for independent and competent analysis.

And, in fairness, we have not heard that the systems that are currently operating in Ukraine underwent such an examination. However, it should have, because our cybersecurity has local nuances on many things that are needed to be verified.

If, for example, European decision was taken that worked there and the same was delivered to Ukraine, then, theoretically, we could defend ourselves, as the software is the same, and in Europe it has already passed a certain accreditation. We had to seriously modify it. For example, there was information in the public domain that digital signatures did not start working immediately on the platforms of a market operator and a system operator. Just because these are Ukrainian digital signatures, they differ from European ones. And after that, no safety audit was conducted, but it started working and ok. In Europe, market participants would probably be very indignant. Here, it seems to me, they are not yet sophisticated in these matters, while there have not been serious precedents yet. But as soon as they appear, there will be a big hype.

V: I can tell you how we do these things – UnicornSystems. This is absolutely not advertising, we do not offer this in Ukraine. We have such a service, called “Red team”. The owner or head of the client company gives us permission to carry out certain activities to crack their infrastructure.

- Something like exercising?

No, this is a real hack, we just guarantee that the information will not go any further. The cracker team has the right to do almost everything, including physical penetration. The only thing they have with them is a piece of paper in case they are nevertheless caught where it is written that these are the exercises and the signature of their general director. But if you have to show it, then the operation failed – they were caught trying to penetrate, well, it didn’t work.

Nevertheless, at the annual meeting, where our colleagues from all branches show successful projects, they told: a large international bank gave permission and only two knew about it – the general director and the head of the security service.

We found the employees of this bank on social networks, sorted all the ports, all the websites of this bank, found unprotected places, created a copy of the site, received a database of phone numbers of employees, sent them messages that there is a problem with the working site, so today use the second one, where a copy of the same site was created, log in with a normal password. Well, all the employees cheerfully began to enter their passwords into our system, we got dozens of real passwords of real bank employees. There was much more, but in the end we got full access to their internal systems, lists, transactions, database access.

Of course, all this data did not go anywhere, we only pointed out the shortcomings of the protection system. So, I guarantee you that no one in Ukraine carries out such checks, and most likely it doesn’t interest anyone, because people are used to fight a fire after it has erupted and to insure things after they was broken or had an accident.

Can we generally compare the level of digitalization in the energy sector of Ukraine and in Europe? To what extend is synchronization possible, for example, with Germany?

V: Full synchronization with Europe is very expensive, and does not really depend on the level of digitalization. It is more essential to gradually bring our market closer to European rules of work, and here we can help Ukraine. But we don’t see that, at the moment, someone needed this. Ukraine is trying to fulfill its obligations because the European Union and the energy community actually force it to do so. And we do not see Ukraine’s efforts in trying to profitably use the doors that has opened in front of it.  

Again, synchronizing energy systems is, roughly speaking, to make sure that the wave of electricity we have and the wave of electricity in Europe coincide. But the European Union strictly adheres to the requirements for the quality of electricity. And they are often and densely ignored in Ukraine. There, an emergency shutdown is really an emergency, and in our windy days dozens of villages sit without light. There the differences in frequency and power are something out of the ordinary, and sometimes no one can even explain why this happened. Therefore, before talking about synchronization with Europe, it seems to me that on a technical level we still have a lot to fix.

Y: Perhaps all these issues will be resolved with the development of the market. In order to enable our power plants, which are not in Burshtyn, to export electricity to Europe, synchronization in the full sense is not needed. It is enough to install several back-to-back stations between us and Burshtyn and several transformers. Yes, it will not be cheap, but on the other hand it will open up the possibility of export.

But again, judging by European experience, such projects become interesting when they are implemented on a market basis. Recently, we have been working a lot with direct current interconnectors that run under the English Channel. Many of them are built by private companies, which will then charge a certain fee for the transmission of electricity. The same can be done with us. In theory. But practically, I am sure that such a project will encounter numerous legislative nuances that will negate the possibility of implementation.

V: By the way, speaking of the Western example, the Czech electricity market is more successful than German, although the Germans started much earlier. The Czech Republic is the only country in Europe where it has been possible to successfully reform the electricity market, from zero to a very steep level. They have been changing for 20 years, probably, but in separate phases. They travel, watch, compare, plan, consult, pay for the analysis, pay for the consultations, and when they already implement something, this is never an experiment, they already know exactly what to do.

-  The success of the transformations depends, first of all, on the qualifications of those who carry them out. There are less and less high-level specialists in Ukraine every day. Does your company feel a lack of qualified personnel in Ukraine and how do you deal with it?

V: There is a good joke about the fact that the president of Belarus may be someone who already has experience as president of Belarus. When we came to Ukraine in 2010, we realized that effective reforms require people who have experience in carrying out these reforms. The only way to get such specialists is to educate them. We involve people who have the makings, a certain mentality, a good education, and are included in similar projects in other countries. And we did it purposefully, our guys worked in different countries, across Europe. They saw from the inside those processes that are taking place and will continue to take place in Ukraine.

And, unfortunately, there is a little benefit from guest short-term visits, with which our state-owned companies are trying to gain more experience.

 
 

Tags: contracts, tariffs, legislation, electricity, EU, Ukrenergo, ETL, electricity market, foreign affairs, Market operator, Unicorn Systems UA

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