Business opinion on the report of Energy Community Secretariat on energy reforms in Ukraine

27/ 11/ 2020

On November 23, 2020, the Annual Implementation Report of the Member States of the EU Energy Community was released. This report has been prepared by the Energy Community Secretariat and highlights key reforms in Ukraines energy sector. The EBA Energy Committee has carefully analyzed this document and draws attention to the following key points. Gas sector Thus, Janez Kopač, Director of the Energy Community Secretariat, said that over the past year Ukraine has made a leap forward in the gas sector. Such a leap was the result of unbundling (separation of activities), the implementation status of which is estimated at 90% (out of 100% possible). The Annual Implementation Report 2020 of the Energy Community Secretariat states that the success of unbundling in Ukraine was ensured by the following factors: The transmission system operator is unbundled and certified in line with the Third Energy Package; The storage system operator and the distribution system operators are completely unbundled in legal, information, and accounting terms. Thus, the gas distribution system (GDS) operators were unbundled in terms of accounting procedures to ensure full independence and public control of accounting for each activity; the information distribution was fully applied to the activity of suppliers and GDS operators; the functional separation of gas supply and distribution activities were completed, which was ensured both by separating management and by delimiting the identity of companies. All activities related to the unbundling of GDS operators are under the control of the National Energy and Utilities Regulatory Commission (NEURC). Thus, GDS operators report annually on the actions taken to implement the unbundling procedure in accordance with the approved Compliance Programs. Comprehensive information on such actions is also provided to the Energy Community Secretariat for professional independent evaluation. In fact, the EBA Energy Committee has always stressed the need for Ukraine’s integration into the European energy market under the EU-Ukraine Association Agreement as part of its commitments to market reform. Energy Sector The Annual Report also assessed the introduction of a new retail electricity market. It is noted that according to the adopted law, the Regulator must stop cross-subsidization between different categories of consumers before the opening of the wholesale market on July 1, 2019. However, prices for households have remained unchanged since 2017 and do not cover energy costs. The difference is covered by the Guaranteed Buyer through the assignment of public service obligations (PSO) and state-owned generating companies Energoatom and Ukrhydroenergo, which are obliged to sell electricity at a low price, as determined by an inconsistent act on PSO adopted by the Government. At the same time, as the EBA has previously pointed out, despite the lack of regulation of cross-subsidization, recent amendments to the Law on the Electricity Market have further expanded the list of consumers who will be able to pay for electricity at household prices. At the same time, the Energy Community Secretariat notes that the NEURC acts as a “central executive body” that should have been a temporary decision to enforce the Constitutional Courts ruling that the independent status of the Regulator is unconstitutional which is a clear violation of the acquis. That is why it is necessary to make constitutional amendments as soon as possible and restore the independence of the Regulator. Regarding renewable energy, the dispute between investors and the state almost caused a wave of arbitration lawsuits against the country in the reporting period. The dispute was resolved by a Memorandum between the Government and investors and the relevant Law implementing its provisions. Their implementation remains a problem, further complicated by the distortions in the electricity market. The law also introduced a compensation mechanism for limiting green generation, government funding for RES, and exempting some large industries from paying for renewable energy. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

Gas sector

Thus, Janez Kopač, Director of the Energy Community Secretariat, said that over the past year Ukraine has made a “leap forward” in the gas sector. Such a leap was the result of unbundling (separation of activities), the implementation status of which is estimated at 90% (out of 100% possible).

The Annual Implementation Report 2020 of the Energy Community Secretariat states that the success of unbundling in Ukraine was ensured by the following factors:

The transmission system operator is unbundled and certified in line with the Third Energy Package;
The storage system operator and the distribution system operators are completely unbundled in legal, information, and accounting terms.

Thus, the gas distribution system (GDS) operators were unbundled in terms of accounting procedures to ensure full independence and public control of accounting for each activity; the information distribution was fully applied to the activity of suppliers and GDS operators; the functional separation of gas supply and distribution activities were completed, which was ensured both by separating management and by delimiting the identity of companies.

All activities related to the unbundling of GDS operators are under the control of the National Energy and Utilities Regulatory Commission (NEURC). Thus, GDS operators report annually on the actions taken to implement the unbundling procedure in accordance with the approved Compliance Programs. Comprehensive information on such actions is also provided to the Energy Community Secretariat for professional independent evaluation.

In fact, the EBA Energy Committee has always stressed the need for Ukraine’s integration into the European energy market under the EU-Ukraine Association Agreement as part of its commitments to market reform.

Energy Sector

The Annual Report also assessed the introduction of a new retail electricity market. It is noted that according to the adopted law, the Regulator must stop cross-subsidization between different categories of consumers before the opening of the wholesale market on July 1, 2019. However, prices for households have remained unchanged since 2017 and do not cover energy costs. The difference is covered by the Guaranteed Buyer through the assignment of public service obligations (PSO) and state-owned generating companies Energoatom and Ukrhydroenergo, which are obliged to sell electricity at a low price, as determined by an inconsistent act on PSO adopted by the Government. At the same time, as the EBA has previously pointed out, despite the lack of regulation of cross-subsidization, recent amendments to the Law on the Electricity Market have further expanded the list of consumers who will be able to pay for electricity at household prices.

At the same time, the Energy Community Secretariat notes that the NEURC acts as a “central executive body” that should have been a temporary decision to enforce the Constitutional Court’s ruling that the independent status of the Regulator is unconstitutional which is a clear violation of the acquis. That is why it is necessary to make constitutional amendments as soon as possible and restore the independence of the Regulator.

Regarding renewable energy, the dispute between investors and the state almost caused a wave of arbitration lawsuits against the country in the reporting period. The dispute was resolved by a Memorandum between the Government and investors and the relevant Law implementing its provisions. Their implementation remains a problem, further complicated by the distortions in the electricity market. The law also introduced a compensation mechanism for limiting green generation, government funding for RES, and exempting some large industries from paying for renewable energy.

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.