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The Government Has Enabled the Guaranteed Buyer and Energoatom to Sell Electricity Under Bilateral Contracts

10/ 06/ 2020
  Author: Tetiana Mylenka, Counsel at Hillmont Partners, Head of Energy Practice On 20 May 2020, the Cabinet of Ministers of Ukraine (the “CMU”) passed two important Resolutions in the energy sector: the Resolution on amendments to Regulations imposing Public Service Obligations (“PSO”) on electricity market entities (the “Resolution on PSO”), and the Resolution on amendments to the Procedure on holding electronic auctions for the sale of electricity under bilateral contracts (the “Resolution on the Procedure for Holding Auctions”). The objectives of the Resolutions are: To improve the financial position of the Guaranteed Buyer, Energoatom and other electricity market participants; To reduce administrative impact on market pricing; To enable Energoatom and the Guaranteed Buyer to conclude bilateral contracts. The Resolution on PSO came into force on 28 May 2020. The Resolution on the Procedure for Holding Auctions will come into force on the day of its official publication. I. Amendments to the PSO mechanism on the electricity market. The PSO mechanism ensures affordable electricity supply to households. An analysis reveals that amendments are significant and provide new opportunities for large industrial consumers. Industrial enterprises with a large volume of electricity consumption will gain access to long-term contracts at competitive prices, unless they would be reluctant to bear liability for imbalances. In the latter case they are unlikely to sign bilateral contracts. The main provisions stipulated by the Resolution on PSO concern mainly Energoatom and the Guaranteed Buyer and are detailed below. Reduction of the share of electricity sales within the PSO mechanism Previously, Energoatom was obliged to sell 85% of all electricity produced at nuclear power plants to the Guaranteed Buyer at a fixed low price within the PSO mechanism. Now this amount is reduced down to 80%. Besides, hydroelectric pumped storage power plants are excluded from the PSO mechanism, thus leaving only hydro PPs under the PSO mechanism. As before, Ukrhydroenergo is obliged to sell 35% of all electricity produced at hydroelectric power plants to the Guaranteed Buyer at a fixed low price within the PSO mechanism. Energoatom and the Guaranteed Buyer will be allowed to sell electricity under bilateral contracts Energoatom will be able to sell 5% of all electricity produced at nuclear power plants under bilateral contracts at special sessions of electronic auctions. For this reason, the respective Procedure for Holding Auctions has been amended (please see below). This amendment will make it possible for large commercial consumers (enterprises) to purchase electricity from Energoatom on a long-term basis at a price lower than the price on the day-ahead market. As before, 15% of all electricity produced at nuclear power plants Energoatom will sell on the day-ahead market. The Guaranteed Buyer will now be allowed to carry out the sale and purchase of electricity not only on organized segments of the electricity market (day-ahead market, intraday market and balancing market), but also under bilateral contracts concluded as a result of electronic auctions. Such amendments may be beneficial in terms of balancing supply and demand on the organized electricity market segments, as well as would likely lead to decrease of the volume of electricity imbalances. Elimination of price caps on the sale of electricity by the Guaranteed Buyer Prior to the amendments, the price for the sale of electricity by the Guaranteed Buyer on the organized market segments could not exceed 75% of the price during maximum load hours. The newly passed Resolution on PSO removes such price caps allowing the Guaranteed Buyer to offer electricity for sale at higher prices. Terms of bilateral contracts for the Guaranteed Buyer The amendments stipulate that bilateral contracts for the sale of electricity are concluded by the Guaranteed Buyer in accordance with the approximate form of the contract to be approved by the auction committee of the Ministry of Energy and Environmental Protection. However, the duration of the bilateral contract cannot exceed 1 month. The sale price for the results of electronic auctions cannot be less than the price at which the Guaranteed Buyer purchases electricity from Energoatom and Ukrhydroenergo at electronic auctions to ensure the fulfilment of PSO. Reaction of the Energy Community Secretariat On the same day of 20 May, the Energy Community Secretariat sent a letter to the Ministry of Energy and Environmental Protection stating that the process of adoption of the Resolution on PSO is not legitimate, pointing to Article 62 of the Electricity Market Law, according to which the Resolution on PSO shall be proposed by the National Energy and Utility Regulatory Commission (“NEURC”) following consultations with the Energy Community Secretariat. In addition, the Energy Community Secretariat emphasizes that: 1) the large volume of electricity being sold for PSO purposes does not allow Energoatom to sell produced electricity without any restrictions (on a free basis) on the market, and 2) the electricity prices of nuclear power plants and hydroelectric power plants offering electricity for sale to the Guaranteed Buyer remain regulated. Altogether, this may well amount to a disproportional PSO. Furthermore, the Secretariat reiterates the necessity of switching to a financial PSO. In the case of a financial PSO, Energoatom would direct the difference between the cost of its electricity and the income received from the sale of its electricity on competitive market segments to cover the difference between the price for households and the market price. Response from the Ministry of Energy and Environmental Protection In its response to the Energy Community Secretariat, the Ministry of Energy and Environmental Protection stated that the PSO mechanism approved on 20 May 2020 is a temporary decision and will be in effect until the introduction of a financial PSO, but the Ministry did not provide any time indication of when this is likely to happen. As explained by the Ministry, the reason for implementing such an interim PSO mechanism is the current complex situation on the electricity market. Another reason for the impossibility of a financial PSO is the necessity for the Ukrainian Parliament to pass amendments to the Tax Code at first. Legislation: CMU’s Resolution “On Amendments to Regulations on Imposition of Specific Duties on Electricity Market Entities to Ensure the General Public Interests in the Course of Electricity Market Operation” No. 400 of 20 May 2020. II. Resolution on the Procedure for Holding Auctions. Terms of auctions on the sale of electricity under bilateral contracts for consumers Auctions shall be conducted in the form of special auction sessions organized by the Commodity Exchange “Ukrainian Energy Exchange” in accordance with the schedule of electronic auctions for the relevant year to be approved by the auction committee. Energoatom shall offer sets of indivisible lots for sale under bilateral contracts at electronic auctions. Each lot is worth 1 MW of capacity. Only those buyers who purchase electricity for their own consumption will be eligible to participate in such special auction sessions. Moreover, only those buyers will be eligible to conclude long-term bilateral contracts for whom the share of electricity in the prime cost of their products is at least 30%. Minimum price for electricity under bilateral contracts The minimum price for the electricity to be sold at special sessions under bilateral contracts cannot be less than the actual average weighted price for electricity generated by the producer in the period of April-May 2019 (including excise levy); or the purchase price of electricity (including excise levy), provided that prices in such special session are not regulated by the state (i.e., not defined as marginal). Volume of Energoatom’s electricity to be sold at special sessions for consumers The volume of electricity produced by nuclear power plants (Energoatom) to be sold to consumers at special sessions is up to 5% of their output in the relevant month according to the forecast balance of the integrated power system of Ukraine for the respective year. Procedure for holding separate special sessions for the sale of Energoatom’s electricity The Commodity Exchange “Ukrainian Energy Exchange” (organizer of the auction) holds separate special sessions: For the sale of sets of 100 lots under long-term bilateral contracts with a duration up to 12 months, but within a calendar year; For the sale of sets of 50 lots under medium-term bilateral contracts with a duration up to 6 months, but within a calendar year; For the sale of sets of 25 lots under short-term bilateral contracts with a duration up to 3 months, but within a calendar year. All bilateral contracts concluded during 2020 shall expire on 31 December 2020. Procedure for holding special sessions initiated by Energoatom In case of the availability of a free volumes of electricity for sale, Energoatom initiates the holding of special sessions on the sale of electricity produced by nuclear power plants in the following order: At first, a special session for the sale of sets of lots under long-term bilateral contracts (up to 12 months within a calendar year); Then a special session for the sale of sets of lots under medium-term bilateral agreements (up to 6 months within a calendar year); And finally a special session for the sale of sets of lots under bilateral agreements for up to 3 months. However, the auction committee has the right to decide on holding special sessions in a different order. Requirements and limitations for buyers As was mentioned previously, buyers will be able to purchase electricity only for their own consumption and only those buyers will be eligible to conclude long-term bilateral contracts for whom the share of electricity in the prime cost of their products is at least 30%. Therefore, such auctions will be of interest for large consumers of electricity, but not for traders. Auction participants, among other things specified at the auction rules, will be obliged to provide a certificate of actual electricity consumption for the corresponding period of the previous year. The certificate shall be confirmed by the TSO or the relevant DSO. The TSO and the relevant DSO shall provide such a certificate within 3 days of the buyer’s application. In addition, potential buyers who intend to participate in special sessions for sale of sets of lots under long-term bilateral contracts shall provide the organizer of the auction with a certificate on the share of electricity in the structure of a prime cost of final products of an enterprise for the last reporting period, issued by an independent audit company. The buyer shall provide the abovementioned certificates to the organizer of the auction no later than 24 hours before the start of the auction. The total amount of electricity purchased by the buyer cannot exceed 90% of the volume of its consumption for the corresponding period of the previous year. Obligations of auction winners The main obligations of auction winners are the following: To conclude bilateral contracts with the sellers at the price determined at the electronic auction; To accept and adhere to a “take or pay” condition: auction winners will be obliged to pay for the electricity, regardless if they have actually consumed it, with advance payments specified in contracts; To transfer to the seller the guarantee fee (terms, amount and time frames shall be specified in auction rules); To use the purchased electricity only for own needs; no right to resell and/or alienate and/or transfer any rights to it to any third party. Legislation: CMU’s Resolution “On Amendments to the Procedure for Holding Electronic Auctions on Sale of Electricity Under Bilateral Contracts” of 20 May 2020.

Author: Tetiana Mylenka, Counsel at Hillmont Partners, Head of Energy Practice

On 20 May 2020, the Cabinet of Ministers of Ukraine (the “CMU”) passed two important Resolutions in the energy sector: the Resolution on amendments to Regulations imposing Public Service Obligations (“PSO”) on electricity market entities (the “Resolution on PSO”), and the Resolution on amendments to the Procedure on holding electronic auctions for the sale of electricity under bilateral contracts (the “Resolution on the Procedure for Holding Auctions”).

The objectives of the Resolutions are:

  • To improve the financial position of the Guaranteed Buyer, Energoatom and other electricity market participants;
  • To reduce administrative impact on market pricing;
  • To enable Energoatom and the Guaranteed Buyer to conclude bilateral contracts.

The Resolution on PSO came into force on 28 May 2020. The Resolution on the Procedure for Holding Auctions will come into force on the day of its official publication.

I. Amendments to the PSO mechanism on the electricity market

The PSO mechanism ensures affordable electricity supply to households. An analysis reveals that amendments are significant and provide new opportunities for large industrial consumers. Industrial enterprises with a large volume of electricity consumption will gain access to long-term contracts at competitive prices, unless they would be reluctant to bear liability for imbalances. In the latter case they are unlikely to sign bilateral contracts.

The main provisions stipulated by the Resolution on PSO concern mainly Energoatom and the Guaranteed Buyer and are detailed below.

Reduction of the share of electricity sales within the PSO mechanism

Previously, Energoatom was obliged to sell 85% of all electricity produced at nuclear power plants to the Guaranteed Buyer at a fixed low price within the PSO mechanism.

Now this amount is reduced down to 80%. Besides, hydroelectric pumped storage power plants are excluded from the PSO mechanism, thus leaving only hydro PPs under the PSO mechanism. As before, Ukrhydroenergo is obliged to sell 35% of all electricity produced at hydroelectric power plants to the Guaranteed Buyer at a fixed low price within the PSO mechanism.

Energoatom and the Guaranteed Buyer will be allowed to sell electricity under bilateral contracts

Energoatom will be able to sell 5% of all electricity produced at nuclear power plants under bilateral contracts at special sessions of electronic auctions. For this reason, the respective Procedure for Holding Auctions has been amended (please see below). This amendment will make it possible for large commercial consumers (enterprises) to purchase electricity from Energoatom on a long-term basis at a price lower than the price on the day-ahead market. As before, 15% of all electricity produced at nuclear power plants Energoatom will sell on the day-ahead market.

The Guaranteed Buyer will now be allowed to carry out the sale and purchase of electricity not only on organized segments of the electricity market (day-ahead market, intraday market and balancing market), but also under bilateral contracts concluded as a result of electronic auctions.

Such amendments may be beneficial in terms of balancing supply and demand on the organized electricity market segments, as well as would likely lead to decrease of the volume of electricity imbalances.

Elimination of price caps on the sale of electricity by the Guaranteed Buyer

Prior to the amendments, the price for the sale of electricity by the Guaranteed Buyer on the organized market segments could not exceed 75% of the price during maximum load hours. The newly passed Resolution on PSO removes such price caps allowing the Guaranteed Buyer to offer electricity for sale at higher prices.

Terms of bilateral contracts for the Guaranteed Buyer

The amendments stipulate that bilateral contracts for the sale of electricity are concluded by the Guaranteed Buyer in accordance with the approximate form of the contract to be approved by the auction committee of the Ministry of Energy and Environmental Protection. However, the duration of the bilateral contract cannot exceed 1 month. The sale price for the results of electronic auctions cannot be less than the price at which the Guaranteed Buyer purchases electricity from Energoatom and Ukrhydroenergo at electronic auctions to ensure the fulfilment of PSO.

Reaction of the Energy Community Secretariat

On the same day of 20 May, the Energy Community Secretariat sent a letter to the Ministry of Energy and Environmental Protection stating that the process of adoption of the Resolution on PSO is not legitimate, pointing to Article 62 of the Electricity Market Law, according to which the Resolution on PSO shall be proposed by the National Energy and Utility Regulatory Commission (“NEURC”) following consultations with the Energy Community Secretariat.

In addition, the Energy Community Secretariat emphasizes that: 1) the large volume of electricity being sold for PSO purposes does not allow Energoatom to sell produced electricity without any restrictions (on a free basis) on the market, and 2) the electricity prices of nuclear power plants and hydroelectric power plants offering electricity for sale to the Guaranteed Buyer remain regulated. Altogether, this may well amount to a disproportional PSO. Furthermore, the Secretariat reiterates the necessity of switching to a financial PSO. In the case of a financial PSO, Energoatom would direct the difference between the cost of its electricity and the income received from the sale of its electricity on competitive market segments to cover the difference between the price for households and the market price.

Response from the Ministry of Energy and Environmental Protection

In its response to the Energy Community Secretariat, the Ministry of Energy and Environmental Protection stated that the PSO mechanism approved on 20 May 2020 is a temporary decision and will be in effect until the introduction of a financial PSO, but the Ministry did not provide any time indication of when this is likely to happen. As explained by the Ministry, the reason for implementing such an interim PSO mechanism is the current complex situation on the electricity market. Another reason for the impossibility of a financial PSO is the necessity for the Ukrainian Parliament to pass amendments to the Tax Code at first.

Legislation: CMU’s Resolution “On Amendments to Regulations on Imposition of Specific Duties on Electricity Market Entities to Ensure the General Public Interests in the Course of Electricity Market Operation” No. 400 of 20 May 2020.

II. Resolution on the Procedure for Holding Auctions

Terms of auctions on the sale of electricity under bilateral contracts for consumers

Auctions shall be conducted in the form of special auction sessions organized by the Commodity Exchange “Ukrainian Energy Exchange” in accordance with the schedule of electronic auctions for the relevant year to be approved by the auction committee. Energoatom shall offer sets of indivisible lots for sale under bilateral contracts at electronic auctions. Each lot is worth 1 MW of capacity. Only those buyers who purchase electricity for their own consumption will be eligible to participate in such special auction sessions. Moreover, only those buyers will be eligible to conclude long-term bilateral contracts for whom the share of electricity in the prime cost of their products is at least 30%.

Minimum price for electricity under bilateral contracts

The minimum price for the electricity to be sold at special sessions under bilateral contracts cannot be less than the actual average weighted price for electricity generated by the producer in the period of April-May 2019 (including excise levy); or the purchase price of electricity (including excise levy), provided that prices in such special session are not regulated by the state (i.e., not defined as marginal).

Volume of Energoatom’s electricity to be sold at special sessions for consumers

The volume of electricity produced by nuclear power plants (Energoatom) to be sold to consumers at special sessions is up to 5% of their output in the relevant month according to the forecast balance of the integrated power system of Ukraine for the respective year.

Procedure for holding separate special sessions for the sale of Energoatom’s electricity

The Commodity Exchange “Ukrainian Energy Exchange” (organizer of the auction) holds separate special sessions:

  • For the sale of sets of 100 lots under long-term bilateral contracts with a duration up to 12 months, but within a calendar year;
  • For the sale of sets of 50 lots under medium-term bilateral contracts with a duration up to 6 months, but within a calendar year;
  • For the sale of sets of 25 lots under short-term bilateral contracts with a duration up to 3 months, but within a calendar year.

All bilateral contracts concluded during 2020 shall expire on 31 December 2020.

Procedure for holding special sessions initiated by Energoatom

In case of the availability of a free volumes of electricity for sale, Energoatom initiates the holding of special sessions on the sale of electricity produced by nuclear power plants in the following order:

  • At first, a special session for the sale of sets of lots under long-term bilateral contracts (up to 12 months within a calendar year);
  • Then a special session for the sale of sets of lots under medium-term bilateral agreements (up to 6 months within a calendar year);
  • And finally a special session for the sale of sets of lots under bilateral agreements for up to 3 months.

However, the auction committee has the right to decide on holding special sessions in a different order.

Requirements and limitations for buyers

As was mentioned previously, buyers will be able to purchase electricity only for their own consumption and only those buyers will be eligible to conclude long-term bilateral contracts for whom the share of electricity in the prime cost of their products is at least 30%. Therefore, such auctions will be of interest for large consumers of electricity, but not for traders.

Auction participants, among other things specified at the auction rules, will be obliged to provide a certificate of actual electricity consumption for the corresponding period of the previous year. The certificate shall be confirmed by the TSO or the relevant DSO. The TSO and the relevant DSO shall provide such a certificate within 3 days of the buyer’s application.

In addition, potential buyers who intend to participate in special sessions for sale of sets of lots under long-term bilateral contracts shall provide the organizer of the auction with a certificate on the share of electricity in the structure of a prime cost of final products of an enterprise for the last reporting period, issued by an independent audit company.

The buyer shall provide the abovementioned certificates to the organizer of the auction no later than 24 hours before the start of the auction.

The total amount of electricity purchased by the buyer cannot exceed 90% of the volume of its consumption for the corresponding period of the previous year.

Obligations of auction winners

The main obligations of auction winners are the following:

  • To conclude bilateral contracts with the sellers at the price determined at the electronic auction;
  • To accept and adhere to a “take or pay” condition: auction winners will be obliged to pay for the electricity, regardless if they have actually consumed it, with advance payments specified in contracts;
  • To transfer to the seller the guarantee fee (terms, amount and time frames shall be specified in auction rules);
  • To use the purchased electricity only for own needs; no right to resell and/or alienate and/or transfer any rights to it to any third party.

Legislation: CMU’s Resolution “On Amendments to the Procedure for Holding Electronic Auctions on Sale of Electricity Under Bilateral Contracts” of 20 May 2020.

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