Ukrainian Electricity Export: capabilities and potential

23/ 09/ 2022

Valentyn Gvozdiy. Managing Partner at GOLAW The export of Ukrainian electricity has become an urgent issue in recent months, after the start of the war. Having a surplus of electrical energy, which was and is accompanied by synchronization processes with the EU energy system, Ukraine is extremely interested in access to the EU energy market. The key point in the export of electricity is the so-called interstate crossing capabilities. In general, the situation around them can be characterized by two facts – a complicated procedure for obtaining access to them, and their physical and technical insufficiency considering the demand. For example, by the end of July, the weighted average daily price of access to interstate power crossing at intersections with Romania and Slovakia was UAH 7.7 thousand/MW (approx. USD 210.00 per MW). For this period, the number of participants was from 6 to 13. Therefore, we provide a short review of the existing procedure for access to the interstate crossing, which to some extent also reveals the issue of increasing the technical capacity of such. The legislation stipulates that market participants have the right to export and import electricity at free prices. The actual export of electricity is considered to be the interstate crossing of electricity. It takes place based on the so-called physical right of transmission. The transmission takes place within the free capacity of the interstate crossing. Market participants may obtain such a physical right of transmission: 1.1.) according to the auction; 1.2.) based on the exemption from auctions applicable to new and reconstructed existing interstate transmission lines. According to the auction. The distribution of the free capacity of the interstate crossing is provided by the auction office. Currently, it is the responsibility of the transmission system operator – NPC Ukrenergo. The auction is conducted according to the procedure of electronic auction with the use of electronic document management and electronic digital signature. At its core, to participate in the auction you shall conclude an agreement on access to the auction and provide collateral (in the form of cash collateral provided to the relevant escrow account or bank guarantee). Allocation of the free capacity of the interstate crossing provides for short-term (a day), medium-term (a month), and long-term periods (a year). According to the legal requirements, all available cross-border capacity must be offered in the capacity allocation process, taking into account compliance with operational safety standards and commitments made by the transmission system operator within the framework of joint operation agreements concluded by the transmission system operator. For monthly auctions, this is 35% of the available capacity of interstate electric networks of Ukraine at the relevant interstate intersection in the relevant direction. For daily auctions – 30%, as well as the unallocated and unused amount of capacity distributed at annual and monthly auctions. For annual auctions – 35%. A separate issue that should be mentioned here and that has a direct impact on the capacity of interstate crossing is technical synchronization and administrative management of the value. Currently, the interstate crossing capacity is set by the ENTSO-E normatively, and this is done by taking into account the technical possibilities of synchronizing the IPS of Ukraine and the European energy system. The last set out value is 300 MW, as revised on September 02, 2022. Based on the exemption from auctions – construction of new interstate crossing capacities.New interstate transmission lines and their capacity, as well as an additional capacity of reconstructed existing interstate lines, may be exempted from the need to allocate free capacity of the interstate crossing upon request from investors (usage of their capacities shall not be a subject for relevant auctions). For such exemption, several conditions must be met at the same time including special requirements regarding the investment (such investing is a high-risk operation, the investment will increase competition in the electricity market, etc.) It should be noted that the operation of new (reconstructed) interstate transmission lines and their dispatch (operational and technological) management, in any case, shall be carried out by Ukrenergo. It should be noted separately that the detailed procedure for such exemption shall be approved by the Cabinet of Ministers of Ukraine. Currently, such a procedure is not provided, respectively, exemption from participation in auctions is currently impossible. In general, the construction of new interstate crossing capacities may be an attractive public-private partnership project. Such new capacities can solve two existing problems at once: 1) increase the overall technical capacity of the interstate crossing; 2) provide the opportunity to use them without participating in the relevant distribution auctions, based on the fact that such exemption is provided by law. Such a perspective is even more interesting, considering the Public-private partnership reform that was announced and presented by the National Investment Council under the President of Ukraine. The reform was developed with the participation of Ukrainian and foreign experts, scientists, and business representatives. The corresponding draft law has already been registered in Parliament.

Valentyn Gvozdiy

Managing Partner at GOLAW

The export of Ukrainian electricity has become an urgent issue in recent months, after the start of the war. Having a surplus of electrical energy, which was and is accompanied by synchronization processes with the EU energy system, Ukraine is extremely interested in access to the EU energy market.

The key point in the export of electricity is the so-called interstate crossing capabilities. In general, the situation around them can be characterized by two facts – a complicated procedure for obtaining access to them, and their physical and technical insufficiency considering the demand. For example, by the end of July, the weighted average daily price of access to interstate power crossing at intersections with Romania and Slovakia was UAH 7.7 thousand/MW (approx. USD 210.00 per MW). For this period, the number of participants was from 6 to 13. Therefore, we provide a short review of the existing procedure for access to the interstate crossing, which to some extent also reveals the issue of increasing the technical capacity of such.

The legislation stipulates that market participants have the right to export and import electricity at free prices. The actual export of electricity is considered to be the interstate crossing of electricity. It takes place based on the so-called physical right of transmission. The transmission takes place within the free capacity of the interstate crossing. Market participants may obtain such a physical right of transmission:

1.1.) according to the auction;

1.2.) based on the exemption from auctions applicable to new and reconstructed existing interstate transmission lines.

According to the auction. The distribution of the free capacity of the interstate crossing is provided by the auction office. Currently, it is the responsibility of the transmission system operator – NPC Ukrenergo. The auction is conducted according to the procedure of electronic auction with the use of electronic document management and electronic digital signature.

At its core, to participate in the auction you shall conclude an agreement on access to the auction and provide collateral (in the form of cash collateral provided to the relevant escrow account or bank guarantee). Allocation of the free capacity of the interstate crossing provides for short-term (a day), medium-term (a month), and long-term periods (a year).

According to the legal requirements, all available cross-border capacity must be offered in the capacity allocation process, taking into account compliance with operational safety standards and commitments made by the transmission system operator within the framework of joint operation agreements concluded by the transmission system operator. For monthly auctions, this is 35% of the available capacity of interstate electric networks of Ukraine at the relevant interstate intersection in the relevant direction. For daily auctions – 30%, as well as the unallocated and unused amount of capacity distributed at annual and monthly auctions. For annual auctions – 35%.

A separate issue that should be mentioned here and that has a direct impact on the capacity of interstate crossing is technical synchronization and administrative management of the value. Currently, the interstate crossing capacity is set by the ENTSO-E normatively, and this is done by taking into account the technical possibilities of synchronizing the IPS of Ukraine and the European energy system. The last set out value is 300 MW, as revised on September 02, 2022.

Based on the exemption from auctions – construction of new interstate crossing capacities.New interstate transmission lines and their capacity, as well as an additional capacity of reconstructed existing interstate lines, may be exempted from the need to allocate free capacity of the interstate crossing upon request from investors (usage of their capacities shall not be a subject for relevant auctions).

For such exemption, several conditions must be met at the same time including special requirements regarding the investment (such investing is a high-risk operation, the investment will increase competition in the electricity market, etc.)

It should be noted that the operation of new (reconstructed) interstate transmission lines and their dispatch (operational and technological) management, in any case, shall be carried out by Ukrenergo.

It should be noted separately that the detailed procedure for such exemption shall be approved by the Cabinet of Ministers of Ukraine. Currently, such a procedure is not provided, respectively, exemption from participation in auctions is currently impossible.

In general, the construction of new interstate crossing capacities may be an attractive public-private partnership project. Such new capacities can solve two existing problems at once:

1) increase the overall technical capacity of the interstate crossing;

2) provide the opportunity to use them without participating in the relevant distribution auctions, based on the fact that such exemption is provided by law.

Such a perspective is even more interesting, considering the Public-private partnership reform that was announced and presented by the National Investment Council under the President of Ukraine. The reform was developed with the participation of Ukrainian and foreign experts, scientists, and business representatives. The corresponding draft law has already been registered in Parliament.