Electricity law and regulation in Ukraine

1.1.1 During the mid-1990s, Ukraine underwent substantial reforms and became the first amongst the Former Soviet Union (FSU) countries to liberalise the electricity sector.

1.1.2 In 1995, the National Commission for State Regulation of the Energy Sector (NERC)was established. NERC has the legal authority to handle all activities in the electricity industry, including overall responsibility for the wholesale energy market (WEM) that opened in 1997.

1.1.3 In February 2011, Ukraine became a full member of the European Energy Community (EEC). This initiative, which was established between the EU and a number of non-EU countries in South-Eastern Europe, aimed to foster market convergence through an extension of EU internal energy market legislation beyond the EU’s borders. Ukraine’s accession concluded a five year accession process, which began in 2006. Full EEC membership became possible once all accession requirements were met, including nuclear safety measures and legislation approximation.

1.1.4 It is anticipated that EEC membership will stimulate the competitiveness and transparency of Ukraine’s energy market, and encourage investments in modernisation of infrastructure and new technologies. By 2018 Ukraine will have to implement other elements of EU energy policy which regulate the electricity market and energy-related environmental issues. The first step was taken in October 2013 when the Parliament adopted the Law “On Fundamentals of Functioning of the Electricity Market of Ukraine”, which promises to be the major legal act on liberalisation of the energy market (the Law on Electricity Market). The necessary by-laws and market rules are expected to be adopted in 2014-2017 (the “transition period” where only certain provisions of the Law on Electricity Market are implemented). The full-scale electricity market will begin operating in Ukraine on 1 July 2017.

1.1.5 After the ex-President Viktor Yanukovych’s regime was overthrown in February 2014, and the Russian annexation of Crimea, the Ukrainian energy sector has been impacted by the ongoing conflicts in Donetsk and Luhansk regions.

1.1.6 The conflict in Donetsk and Luhansk regions, which began in April 2014, has resulted in significant damage to energy, coal production and supply infrastructure (generating stations, power lines, substations, railways, coal mines, coal stocks). Starting from August 2014 the Ukrainian electricity market was operated in a state of emergency due to difficulties in transportation of coal to thermal power plants. The Government restricted export of electricity and warned the consumers of power shortages and resulting rolling blackouts. Only in May 2015 the Government abolished the state of emergency in the electricity market.

1.2.1 Since 1997, Ukraine has had a single-buyer electricity market. The WEM is operated by Energorynok, a state-owned company, which acts as the buyer of all power generated by the regional generation companies and renewable energy producers at prices regulated by NERC.

1.2.2 In contrast to the nuclear, hydro and renewable generating stations (which sell electricity at the regulated prices), the large thermal generating stations (which account for approximately 32% of all power sold) must, at least in theory, compete to sell power to Energorynok. The price at which these generating stations sell power in the WEM is calculated on the basis of a system marginal price and a number of fees. There is little wholesale competition, as further detailed in paragraph 2.4.2 below.

1.2.3 Historically, Energorynok has not been able to fully recover from the distribution companies the contractual price for the power that it has pre-purchased from the generation companies. Consequently, it has accumulated substantial debts meaning that it, in turn, has not paid the generation companies in full for the power that they have sold into the market (see paragraph 2.1.3 for more information on generation companies). Therefore, the generation companies have not been able to pay for the fuel that they require. As a result, the Ministry of the Energy and Coal Industry (the Ministry) has had to allocate fuel under emergency rules; this has distorted the market and reduced the ability of the generators to compete freely in selling power. A law designed to address the level of debt within the industry was adopted in 2005 and, since then, debts between WEM participants have been dropping steadily. However, according to third party reports, Energorynok’s debt in 2011-2012 amounted to UAH 11b (approximately USD 1.38b - based on an exchange rate of UAH 800 to USD 100.).

1.2.4 Figure 1 illustrates the structure of the WEM in Ukraine.

Figure 1: Structure of the Wholesale Electricity Market

1.3.1 The Ukrainian electricity sector consists of:

1. generators of electricity, the largest of which are:
   1. Centrenergo, DTEK Dniproenergo, Donbasenergo, DTEK Zakhidenergo, DTEK Skhidenergo – thermal power;
   2. Ukrhydroenergo – hydro power; and
   3. Energoatom – nuclear power;
2. 2.a number of enterprises producing electricity from renewable sources;
3. 3.single buyer of the produced electricity, the wholesale electric power supplier and market administrator (Energorynok);
4. 4.the state-owned national transmission grid company (Ukrenergo);
5. 5.the distribution companies (Oblenergos) which also function as electricity suppliers for retail customers; and
6. 6.the independent suppliers that supply electricity to large industrial customers

1.4.1 The Cabinet of Ministers has initiated a programme of reforms aimed at moving away from the use of a single buyer and towards the exclusive use of bilateral purchase agreements by 2015. The reforms will include the introduction of a power exchange and a residual balancing market. The programme envisages, amongst other things, reducing the debts accumulated within the system, updating equipment, reforming tariffs to remove cross-subsidies and to encourage fair competition, transitioning to an automated transaction system and preparing the legislative basis for a new competitive market model.

1.4.2 However, the new round of electricity market reforms has not been completed by 2015. That is why in spite of the mentioned programme of reforms the Law on Electricity Market sets a later date for implementation of the liberalised market (please refer to section 3.5 below).

1.4.3 Ukraine’s electricity market is also in need of substantial investment. In 2011, 95% of thermal generating stations were reported to have outlived their design life. In addition, as far back as 2007, 34% of overhead 220–330kV transmission lines had been operated for 40 years or more and need replacing. Further, 76% of substations are being operated beyond their lifetime. Due to limited transmission capacities, the most problematic regions are Rivnenska, Khmelnytska and Zaporizhska oblasts. Power supply to the Crimean region is also quite unstable owing to the lack of transmission capacity and high-voltage power lines.

1.4.4 The Energy Strategy until 2030 envisages that a number of projects, detailed below, should be successfully implemented.

With respect to the transmission lines:

• between 2011 and 2020, the construction of 330–750kV lines (about 3,000km); and
• between 2021 and 2030, the construction of 330–750kV lines (about 700km).

With respect to the substations:

• between 2016 and 2020, the reconstruction of 30 substations; and
• between 2021 and 2030, reconstruction of 15 substations.

1.4.5 However, as the Energy Strategy does not define the source of finance for the above mentioned projects, there remain some question marks over their implementation.

1.4.6 In 2010 the European Bank for Reconstruction and Development (EBRD) lent EUR 175m to Ukrenergo for the South Ukraine Transmission Project. The proposed project consists of: construction of a new 750kV transmission line from Zaporizhzhia Nuclear Power Plant to Kakhovka substation; a new 750/330/220kV Kakhovka substation; two diversions of the existing 330kV line; renovation of 330kV/220kV Novokakhovska substation; automatic protection and communication equipment; and fibre optic connection to existing 330kV lines. The objective of this project is to increase overall reliability, efficiency and security of the country’s power system and, in particular, to improve electricity supply to southern regions. The loan agreement was signed in 2010 and Ukrenergo is supposed to pay back the loan within 15 years.

1.4.7 In 2011, EBRD provided a EUR 200m sovereign loan, which was co-financed in equivalent amount by the European Investment Bank (EIB), to Ukrhydroenergo for 15 years. The project aims to upgrade the hydro-mechanical and electro-mechanical equipment at seven hydro generating stations owned by Ukrhydroenergo, which make half of Ukrhydroenergo’s total installed capacity in Ukraine. This project is part of a larger rehabilitation program of all Ukrhydroenergo’s 4,600MW generation assets, split in ten hydro generating stations, most of which were put into operation in the 1960s. The rehabilitation program started in 1996 and is planned to be completed by 2022.

1.4.8 In 2013, the EBRD approved the provision of a EUR 300m long-term sovereign loan (which is expected to be coupled with a similar loan from the European Atomic Energy Community), for safety upgrades at all 15 operating nuclear power units in Ukraine (Safety Upgrade Programme), crucial to extend the lifetime of the nuclear reactors. The project includes measures to replace certain safety systems, for example the modernisation of monitoring and control equipment, necessary to bring the power units in line with operational measures and with both internationally accepted safety standards and Ukrainian requirements.

Structure of generation sector

2.1.1 Following a major recession in the early 1990s, the demand for power in Ukraine dropped dramatically and has still not recovered to 1992 levels. Partly as a result of this, the generation sector suffers from an excess of installed capacity (Ukraine had the twelfth largest installed capacity in the world in 2007), with generation facilities only operating at 38% of capacity. The reason for this is not only low demand, but also due to the age and inefficiency of the plants and the poor quality of the transmission lines.

2.1.2 Until recently, despite this overcapacity, power shortages occurred during periods of peak demand, owing to fuel shortages, mismanagement and poor maintenance of existing equipment. The World Bank estimates that about one-quarter of installed thermal capacity is not, in fact, available as equipment has either fallen into disrepair or been used to repair other stations.

2.1.3 Generating stations are owned by regional generation companies known as “GenCos”. Ukraine’s thermal plants are owned by five of these. One of them, DTEK Skhidenergo, is privately held. Three further GenCos (Donbasenergo, Zakhidenergo and Dniproenergo) were privatised in 2012 and 2014 (by a sale to DTEK); although the state retains a blocking interest of 25% + 1 share in them. The State of Ukraine also holds majority stake in Centrenergo. The minority stakes are privately held, traded on the PFTS Stock Exchange (the larger of Ukraine’s two main stock exchanges), or in the case of Centrenergo and Dniproenergo, traded on the Frankfurt Stock Exchange (using GDRs).

2.1.4 Half of Ukraine’s co-generation plants are owned by the State of Ukraine. The rest are owned by local communities or are privately owned. The nine largest hydro generating stations are owned by Ukrhydroenergo, which is wholly owned by the State of Ukraine. Ukraine’s four nuclear generating stations are owned by Energoatom (which is owned and controlled directly by the Ministry).

2.1.5 In July 2014, the Ukrainian government adopted a new list of state companies and other state-owned assets which are subject to privatisation in 2014. Some 160 lots representing various sectors of the Ukrainian economy (including energy) are on the government’s list. Among others, the following significant assets are to be privatised: “Centerenergo” (78.29% of the shares) and some combined heat and power generation companies: “Khersonska CHP” (99.833% of the shares), “Odesska CHP” (99.99% of the shares), “Nikolaivska CHP” (100% of the shares), and “Dniprodzerzhynska CHP” (99.928% of the shares).

2.1.6 This privatisation campaign is the largest wave of reforms seen in the last 20 years in Ukraine, however (taking into account the current political situation in Ukraine) tenders may be postponed until 2015 or when of the territorial conflicts are resolved.

2.1.7 Table 1 sets out the ownership structure of the different GenCos.

Table 1: GenCos ownership structure 1 Source: Ukrhydroenergo, Smida, Energoatom, DTEK websites.

Energy mix

2.1.8 Currently total installed capacity amounts to 53GW, of which around 63% is made up of thermal generating stations, 26% of nuclear generating stations and 10% of hydro generating stations. The role of renewables (in particular, wind and solar) is still minimal: total installed capacity in the renewable sector is about 530MW. In October 2012, Ukraine made a commitment to the European Energy Community to increase the renewable energy share in its energy balance up to 11% by 2020. Additionally, the Energy Strategy until 2030 stipulates that Ukraine should produce up to 19% of energy from renewable energy sources in 2030.

2.1.9 Coal and nuclear power are the principal energy sources in Ukraine, together they contribute the lion’s share of total electricity generation of around 180TWh (2012). Despite making up only around a quarter of installed capacity, nuclear plants contribute the largest share (47%) of the power actually generated in Ukraine. A further 40% is contributed by the major thermal generating stations and 7% by CHP plants, with the remaining 6% produced by hydro and renewable energy sources.

Structure of transmission sector

2.2.1 The state-owned company Ukrenergo owns and operates Ukraine’s high-voltage transmission grid (including the 220–750kV lines and almost all interstate transmission lines) and operates the central dispatch centre in Kyiv. It is a member of the WEM, and works closely with Energorynok, the market operator, though these two entities are separate and have independent budgets. Ukrenergo is also independent from the generation and distribution companies.

2.2.2 Ukrenergo currently operates the following lines:

Table 2: Ukrenergo operated lines 2 Source: Ukrenergo website.

2.2.3 All of the Ukrainian generating stations that supply electricity to the WEM are connected to the Unified Centralised Dispatching Managing System. Ukrenergo sets the tariffs for use of the high-voltage lines based on a NERC-defined cost-plus methodology. These tariffs are set annually and are subject to NERC approval.

2.2.4 Regional low-voltage power lines are operated and maintained by Oblenergos (which act both as transmission and distribution system operators). Each Oblenergo sets the tariff for use of the local networks, and as with the national system, this is done annually using a NERC-defined cost-plus methodology, and is approved by the NERC.

2.2.5 Oblenergos recover the cost of transmission, on both regional and high-voltage lines, from consumers by including those costs in the retail tariff for the electricity that they supply.

Cross border issues

2.2.6 Ukraine is a net exporter of electricity. It has interconnections with Russia, Belarus, Poland, Slovakia, Hungary and Romania. Currently, Hungary and Belarus are the main consumers of Ukrainian exported electricity. In 2014, Ukraine exported 8052,8 m kWh (18.4% less than in 2013), principally to Belarus and Hungary. The Ukrainian energy system is synchronously interconnected with the Russian and Moldavian power networks. However, only the so-called Burshtyn Island of generating stations is connected to the European grid (ENTSO-E); this limits the export capacity of Ukraine.

2.2.7 Until recently, the state-owned company Ukrinterenergo was the sole authorised power exporter from Ukraine, buying power from Energorynok for export. However, in 2009 the Ukrainian parliament passed a law introducing auctions for electricity exports from Ukraine, whereby participants bid for the right to transmit volumes of electricity over the interconnectors for one year.

2.2.8 The Law on Electricity Market changed some basic principles of the auction procedure for obtaining access to the transnational power lines. For instance, if the export capacity exceeds demand, access to the transnational power lines shall be granted free of charge. Private entities will also be able to construct new capacities for export purposes and such objects shall not be subject to auctions for a certain period of time, while the investing entities shall have a right of priority access to such new capacities. The changes were to become effective as of 1 December 2014, however the necessary secondary legislation was adopted by the regulatory bodies only in 2015.

2.2.9 The electronic auction procedure is now implemented for sale of the cross-border capacities. There are three types of auctions: (i) yearly; (ii) monthly; and (iii) daily auctions, held by the Auction Office (which functions are performed by Ukrenergo). The bidding process is performed on the basis of the auction platform (which is an information system with the appropriate software and hardware support). The general principle is that after the bids are submitted the auction platform ranges them and accepts only the bids with the highest prices.

2.2.10 Access to the interstate power lines may be transferred from one power supplier to another subject to notification of and registration of such transfer with Ukrenergo.

Structure of distribution sector

2.3.1 There are 27 distribution companies, or Oblenergos, in Ukraine: one for each region or oblast, an additional one in Crimea (Krymenergo) and one each for the cities of Kyiv and Sevastopol respectively.

2.3.2 These distribution companies have diverse ownership structures, with 12 now privatised or privately controlled. VS Energy (a Dutch/Slovak company) holds controlling stakes in five Oblenergos, having increased its stake in Chernivtsioblenergo to a controlling share following its purchase of 45% of the company in 2012. VS Energy owns a smaller stake, less than 50%, of three further Oblenergos. In 2013 VS Energy also purchased an 89.12% equity interest in Kyivoblenergo and an 84.56% equity interest in Rivneoblenergo from AES.

2.3.3 Five of the Oblenergos were privatised in 2012. The government sold its stakes in Dniprooblenergo (50%, purchased by DTEK), Krymenergo (45%, purchased by DTEK), Vinnitsaoblenergo (50%, purchased by Lugansk Energy Association LLC), Zakarpattyaoblenergo (50%, purchased by Energy Ukraine TV LLC), and Chernivtsioblenergo (45%, purchased by VS Energy).

2.3.4 The ownership structure of the other Oblenergos is not transparent. They are all partially privatised; some of their shares are traded on the Ukrainian stock market, whilst others are held by the government and a number of private shareholders.

2.3.5 The government also intends to privatise a number of the regional power distribution companies – “Zaporizhzhiaoblenergo” (60.248% of the shares), “Mykolaivoblenergo” (70% of the shares), “Kharkivoblenergo” (65.001% of the shares) and blocking minority stakes (25% to 50% of the shares) in other power distribution companies located in Dnipropetrivsk, Vinnytsia, Donnetsk, Kyiv, Sumy and other cities of Ukraine.

2.3.6 However, the privatisation process is likely to be delayed until 2015 or until resolution of the territorial conflicts in eastern and south eastern Ukraine.

2.3.7 The local low-voltage power networks are usually operated by Oblenergos. There are about 1m kilometres of the 0.4–150kV transmission lines and 200,000 6–110kV substations in Ukraine operated by Oblenergos. Generally, their technical condition is quite poor, with 17% of power lines and 19% of substations needing to be reconstructed or replaced.

Structure of supply sector

2.4.1 As a general rule, the retail supply of electricity in Ukraine is not a separate business from distribution. It is conducted by the Oblenergos, who buy power from Energorynok and sell it at regulated tariffs to all but the largest consumers in their territory. Thus they have a monopoly on supply to end users within their territory. Oblenergos have an obligation to serve all retail customers who wish to buy electricity at the regulated retail tariff. Oblenergos also own small-scale co-generation assets to produce heat for district heating.

Competition

2.4.2 Only a small amount of electricity (13.5% in 2013) is purchased from the WEM by non-regulated tariff distributors, which are mostly large industrial entities who use the electricity for their own consumption. There are, however, some intermediary entities who sell electricity on to other large consumers. As a result, there is limited competition in the market.

2.4.3 Currently there are 257 non-regulated tariff power suppliers. However, most of these are not engaged in power trading (instead, purchasing power from the WEM for their own needs) and do not have technical capabilities for power sale operations. This situation is expected to change once reform of the sector is complete.

Price control issues

2.4.4 The WEM can be divided into two submarkets: (i) the generators’ market and (ii) the distributors’ market. The purchase prices in the WEM are calculated by taking into account the power prices in the generators’ market.

2.4.5 The calculation of the average wholesale distributors’ price (AWDP) is based on the average wholesale generators’ price, additionally taking into account “special surcharges” and “donation certificates”. “Special surcharges” are fees to Energorynok (for administration services rendered in the WEM), Ukrenergo (for power transmission via high-voltage lines, operating and dispatching the Unified Power System of Ukraine) and other fees.

2.4.6 Oblenergos sell electricity at the regulated tariffs. They are also compensated for expenses incurred in connection with power deliveries to preferential groups of consumers (particularly households). These compensation fees are called “donation certificates”. The NERC approves the volume of these “donation certificates” for each separate Oblenergo in proportion to the structure of its consumers. The final price that Oblenergo should pay for electricity purchased in the WEM is decreased by the amount covered by “donation certificates”.

2.4.7 According to recent statistics, AWDP increased to UAH 585 per MWh (USD 73 3 Based on an exchange rate of UAH 800 to USD 100. ) in 2011 (compared to UAH 479 (USD 60) per MWh in 2010) due to growth in the volume of “donation certificates” and the rise in electricity prices in the generators’ market.

2.4.8 The electricity in the WEM is also purchased by the independent distributors. They are not entitled to receive donation certificates and therefore have to purchase electricity in the WEM at higher prices than Oblenergos do. The independent distributors purchase electricity in the WEM either for their own needs or for further resale to the large industrial consumers.

2.4.9 Prices for households and budget-funded organisations used to remain low, whilst due to cross-subsidisation, industrial consumers had to pay a relatively high price. For example, in 2011 the electricity price for end consumers covered only 24% of the expenses incurred in electricity generation, transmission, distribution and supply. However, starting from April 1, 2015 NERC increased the prices for households and budget-funded organisations significantly (up to 19%).

2.4.10 The general tariff setting mechanism is further illustrated by Figure 2 below.

Figure 2: Structure of the wholesale electricity price

As explained above, currently there is only one single-buyer power market in Ukraine – the WEM. Energorynok acts as an intermediary for the WEM (re-selling to suppliers the electricity purchased from the generators at the prices established by NERC). Both the price paid to generators by Energorynok (save for big thermal generating stations) and the prices paid to Energorynok by distributors are established by NERC. Energorynok is also responsible for forecasting the electricity consumption throughout the country and planning the appropriate operating mode of the electricity market.

The balancing functions are performed by Ukrenergo. As an operator of the Unified Power System of Ukraine, Ukrenergo is granted broad powers with respect to the management and administration of the available generation capacities. Ukrenergo is responsible for monitoring the system and for the reliable and stable parallel operation of thermal, hydro, nuclear and renewable generating stations.

Starting from 1 July 2017, the Law on Electricity Market establishes a new “day-ahead” market. For more information about this market please refer to section 3.5 below.

The Ministry of Energy and Coal Industry

3.1.1 The Ministry was founded on 6 April 2011 by presidential decree. It carries out the functions previously performed by the Ministry of the Coal Industry and the Ministry of Fuel and Energy respectively. The Ministry is the highest governmental authority governing the Ukrainian energy sector and is in charge of developing the energy sector’s strategy and its regulatory framework.

3.1.2 The Ministry is also responsible for maintaining the integrity and reliability of the energy system. It participates in the forecasting and scheduling of power generation and develops and implements investment policy in the industry. The Ministry manages the government’s participation in energy companies by appointing its representatives to the supervisory boards of Ukrenergo and Oblenergos.

The National Commission on State Regulation of the Energy Sector (NERC)

3.1.3 NERC is the energy industry regulator. The “first” NERC, the National Commission for Regulation of Power Industry, was founded on 8 December 1994 and had a remit that covered electricity and other energy sub-sectors. In 2011, as part of the presidential administrative reform, it was replaced by the “new” NERC which was to be independent from government.

3.1.4 In August 2014, NERC was reorganised and its powers were expanded to include the regulation of the municipal services sector: now NERC is officially called the National Commission on State Regulation of the Energy Sector and Municipal Services.

3.1.5 The chairman of the NERC and its commissioners are appointed by the president of Ukraine.
NERC has several roles, including:

• issuing and monitoring licences for generation, high-voltage transmission and low-voltage transmission (i.e. distribution), wholesale market operation, and regulated and unregulated tariff supply;
• setting the prices at which power is sold from hydro generating stations, nuclear generating stations and some CHP plants to Energorynok;
• setting the green tariff rates for generating stations generating power from alternative energy sources;
• approving investment programmes for Ukrenergo and Oblenergos; and
• setting retail tariffs, based on a cost-plus methodology, taking into account the average price of power purchased on the WEM, and the losses, operation and maintenance costs and the permitted rate of return of Oblenergos.

Ukrenergo

3.1.6 Ukrenergo is a state company that is managed by the Ministry of Energy and the Coal Industry. Ukrenergo is an operator of the Unified Energy System of Ukraine and is responsible for its stable functioning.

3.1.7 Its main functions are:

• power transmission via national and international power lines;
• maintenance and operation of high-voltage power lines;
• operation of the Unified Energy System of Ukraine to ensure its synchronous interconnection with the Russian and Moldavian energy systems and the UCTE European power grid; and
• to dispatch and manage power capacity at the WEM.

State Committee of Nuclear Regulation

3.1.8 The State Committee of Nuclear Regulation is a central government body charged with overseeing the nuclear power industry. It reports to the Cabinet of Ministers of Ukraine. Its main functions are:

• participating in forming and implementing state policy on nuclear energy;
• enforcing nuclear and radiation security;
• regulating the safe use of nuclear energy;
• supervising adherence to the legislation, regulations, rules and standards relating to the use of nuclear power and nuclear and radiation safety; and
• coordinating central and municipal bodies responsible for regulating nuclear and radiation security.

The National Agency of Ukraine for the Efficient Use of Energy Resources (NAER)

3.1.9 NAER was established in 2006 by presidential decree. NAER is a quasi-independent executive body, whose members are appointed (and dismissed) by the Cabinet of Ministers of Ukraine. It is government-funded and is responsible for:

• developing government policy on energy saving and the efficient use of energy resources;
• encouraging the use of alternative power sources; and
• monitoring the production, consumption, export and import of energy resources.

The Board of the Wholesale Electricity Market (WEM Board)

3.1.10 The WEM Board supervises the WEM’s activity. It consists of ten voting members (five from generating companies and five from the Oblenergos) and five non-voting members (representatives of NERC, the Ministry, Ukrenergo, Energorynok and the Antimonopoly Committee). The Head of the WEM Board is elected once a year (by majority vote) and meetings are held at least once a month. The WEM Board supervises Energorynok`s activities and members’ performance of the WEM admission terms. The WEM Board may also introduce amendments to the WEM Rules, subject to NERC’s approval.

Energorynok

3.1.11 Energorynok is the state company which off-takes electricity produced by the generating companies. Energorynok also pays feed-in tariffs to renewable energy generators. To prevent any misuse of the funds paid to Energorynok for supplied electricity, a system of accounts under a “special-use” regime have been introduced. These special-purpose accounts are used exclusively for the receipt of funds from power customers and for settlements with WEM members.

The Antimonopoly Committee of Ukraine (AMC)

3.1.12 AMC is responsible for enforcing competition law in Ukraine. AMC has a wide range of functions and powers, in particular:

• to monitor and control companies’ compliance with competition law;
• to review applications and to investigate suspected infringements;
• to decide whether or not the actions of an entity violate competition law;
• to apply to the competent authorities to withdraw the licences of companies that have violated competition law; and
• to impose fines of up to 10% of revenue.

3.2.1 The electricity sector is regulated by the following primary legislation:

• the Law of Ukraine “On Energy Lands and Legal Status of the Special Zones of the Power Engineering Facilities” No 2480-VI, dated 09.07.2010;
• the Law of Ukraine “On Energy Conservation” No 74/94 ВР, dated 01.07.1994;
• the Law of Ukraine “On Alternative Energy Sources” No 555-IV, dated 20.02.2003;
• the Law of Ukraine “On Alternative Types of Fuel” No 1391-XIV, dated 14.01.2000;
• the Energy Strategy until 2030, adopted by the Resolution of the Cabinet of Ministers of Ukraine No. 145-p, dated 15.03.2006;
• the Law of Ukraine “On Power Industry” No 575/97-ВР, dated 16.10.1997 (Power Industry Act);
• the Agreement between members of the Wholesale Electricity Market, dated 15.11.1996; and
• the Rules of the Wholesale Electricity Market of Ukraine approved by Resolution of NERC No 921, dated 12.09.2003.

3.3.1 According to the Power Industry Act participants in Ukraine’s electricity sector must obtain appropriate licences. Separate licences must be obtained for each of the following types of activities:

• power generation in excess of 5MW;
• generation of electricity from alternative power sources in excess of 10MW;
• generation of electricity from alternative power sources of any capacity for sale at the WEM;
• transmission of electricity through the high-voltage grid and interstate electricity networks;
• transmission of electricity through low-voltage local electricity networks (i.e. distribution);
• supply of electricity at regulated tariffs;
• supply of electricity at non-regulated tariffs;
• wholesale supply of electricity;
• co-generation of heat and electricity; and
• production of heat at thermal generating stations and facilities that use unconventional and renewable sources of energy.

3.3.2 All of the above-mentioned licences are issued by NERC. A licence is issued for a period of at least three years. Licence holders are required to pay a one-off licence fee, the amount of which depends on the generation or supply volumes at issue, and a quarterly licence fee thereafter.

Permits and consents

3.3.3 In addition to the above licences, to establish a new generating facility, a number of other permits and consents are required. Depending on the circumstances, these might include land use documents, construction design approvals, construction permits and fire and sanitary permits.

3.3.4 Preparation of an environmental impact assessment may also be necessary before construction or operational activities at a new generating station can begin.

3.4.1 Ukrainian law supports the government policy of encouraging the alternative energy sector’s development as an ecological, fossil-fuel independent energy sub-industry.

3.4.2 Under the Power Industry Act, producers of electricity from alternative energy sources (except for blast furnace and coke gas) are paid a special price for the volumes they generate. The green (feed-in) tariff varies for each type of alternative energy and is set by NERC individually for each generating company. It remains effective until 1 January 2030.

3.4.3 The green tariff is calculated as follows: it is equal to the established retail tariff for households (Class 2 consumers) multiplied by the green tariff index (GTI) established by law. The current retail tariff was made effective on 1 January 2009 and is 58.46 kopecks for 1 kWh (EUR cent 5.37 for 1kWh according to the exchange rate as on 1 January 2009).

3.4.4 The green tariff mechanism is designed to take into account currency risks and to protect investors from the risks of a devaluation of the UAH, by tracking the effective UAH-EUR exchange rate at any given time (Effective Rate). The Effective Rate is then compared with the official UAH-EUR exchange rate as on 1 January 2009 (UAH 10.89 for EUR 1) and if the UAH depreciates, the green tariff will be multiplied by the difference between these two exchange rates. If the UAH strengthens to less than UAH 10.89 for EUR 1, the generator will actually receive more than the established rate in EUR. NERC monitors the green tariff rates to ensure that they do not fall below a set minimum, and adjusts them accordingly.

In 2015, the green tariff system was significantly changed by virtue of Law “On Bringing Changes to Certain Law of Ukraine with respect to Ensuring the Competitive Environment for Power Generation from the Renewable Energy Sources” dated 4 June 2015 , which includes the following changes:

• the currency adjustment mechanism shall not be applicable to the power plants commissioned later than 31 December 2024;
• the green tariff index will be applicable to the power produced by households solar roof and/or facade installations with capacity lower than 0.3MW;
• the green tariff index is established for the power produced by households wind installations with capacity lower than 0.3MW;
• the green tariff index is established for the power plants producing electricity from geothermal energy sources;
• and
• the existing green tariff indices for solar power were reduced.

3.4.5 The green tariff rates are recalculated by the Regulator on a quarterly basis taking into account the average EUR/UAH exchange rate during the 30 days preceding the Regulator’s meeting.

3.4.6 The new green tariff indices and the approximate green tariff rates for each type of energy production are set out in Table 3 below:

Table 3: Green tariff indices and approximate rates

3.4.7 Use of local equipment and materials is promoted by the premium payment to be paid to the power plants commissioned prior to 31 December 2024. The premium payment shall be equal to 5 % of the eligible Green Tariff (if the share of the local equipment amounts to 30% of the total value of the project) or to 10% (if the share of the local equipment amounts to 50%). The Law contains lists of the equipment which could be qualified as the “locally produced equipment” for each of the energy sources.

3.4.8 The Law on Electricity Market does not change the above rules and provides that the obligation of the state (performed by a special state entity) to off-take electricity produced by renewable energy producers remains in effect until 1 January 2030.

3.5.1 On 1 January 2013 the procedures for connecting generating stations to the power grid changed. The new procedure is mandatory for all power transmission and distribution companies (presently, Ukrenergo and Oblenergos), that also act as transmission and distribution system operators (TSO) in their respective territories. The outlined changes have had the following effect:

• the TSO is now obliged to grant capacity and to expand power networks to accommodate demand;
• there are now two different types of connection and connection fees: (i) a standard connection (applicable only to electricity consumers); and (ii) a non-standard connection (applicable to power-generating companies and certain groups of electricity consumers);
• the connection fee covers connection costs and contributes to the cost of new infrastructure. The fee for a non-standard connection takes into account the design and cost of modifications or additions that the TSO may need to make to infrastructure; and
• where the cost of renovating or adding infrastructure is not covered by the connection fee, the TSO can use funds from fees paid by other customers connecting to the same securing point. It may also receive financial assistance from the customer, but this must be repaid within five years.

Changes introduced by the Law on Electricity Market

3.5.2 The Law on Electricity Market is a part of the so-called “European package”, being one of the legislative tools for Ukraine’s implementation of the Second Energy Package. The Law provides for the reorganisation of the WEM and once the new liberalised electricity market is implemented in Ukraine on 1 July 2017, the WEM will be divided into the following submarkets: (1) market of bilateral contracts; (2) day-ahead market; (3) balancing market; (4) market for ancillary services; and (5) retail market.

3.5.3 The bilateral electricity trading takes place outside the power exchange (the so called “day-ahead” market) based on contracts for the sale and purchase of electricity. Such contracts are executed between the power generators on the one hand and other market players (mostly – power suppliers) on the other hand for a period of at least three months. Players on this market can freely choose their counterparties and are not obliged to publicly disclose their contractual arrangements. Under bilateral contracts the power generators can sell all electricity they generate, save for volumes that must be traded on the “day-ahead” market.

3.5.4 The “day-ahead” market is a market where the prices and volumes of electricity traded are based on supply and demand dynamics. The market is based on competitive pricing mechanism and is essentially a bidding auction, which is held one day before the actual delivery of electricity. The “day-ahead” market is managed by the Operator, which accepts bids to sell or buy electricity in advance (but no later than a certain time for each hour of the next day) and holds an auction. NERC establishes the minimal amounts of electricity to be sold by the power generators at the “day-ahead” market (according to the Law on Electricity Market it may not be more than 15% of the monthly volumes for any power generator save for renewable generating stations and HPPs).

3.5.5 The balancing market is established for handling imbalances recorded during the previous periods of operation of the electricity market players. The market is operated by the system operator, which is responsible for balancing and which accepts the bids of market players for load increase (or decrease). Acceptance of a particular bid by the system operator results in the sale and purchase of the relevant amounts of electricity. The market players responsible for balancing may also join their efforts and form a group of balancing parties.

3.5.6 The market for ancillary services includes various types of energy and capacity products to meet the reliability requirements of the market players. The power generators bid for a right to deliver such ancillary services to the system operator.

3.5.7 At the retail market the electricity is traded between the power suppliers and the consumers. The power suppliers are divided into two groups: (i) guaranteed (i.e. Oblenergos); and (ii) independent (i.e. private companies licensed for electricity trading). From 1 January 2015, all of the consumers in Ukraine de jure are entitled to choose whom they will purchase their electricity from – whether the guaranteed or independent power suppliers. However, as a matter of practice, consumers still purchase electricity mostly from Oblenergos.

3.5.8 The renewable power producers sell the electricity to the so-called Guaranteed Buyer (a state enterprise designated by the government) under the bilateral contracts at the feed-in tariff. The Guaranteed Buyer then re-sells the electricity at the day-ahead market. The Law on Electricity Market ensures the priority purchase of electricity from the Guaranteed Buyer on the day-ahead market – the minimum price for electricity (permitted by the day-ahead market rules) will be established for the Guaranteed Buyer. Reimbursement of the difference between the price of the electricity at the market of bilateral contracts (i.e. feed-in tariff) and the price of the electricity sold at the day-ahead market will be reimbursed to the Guaranteed Buyer by the Cost Imbalance Allocation Fund.

3.5.9 The Cost Imbalance Allocation Fund is a non-profit organisation established by the Government for maintenance of the competitive environment at the electricity market of Ukraine. The Fund will deliver the services for adjustment of the competitive environment at the market. In particular, such services shall be delivered to: (1) NPPs and HPPs; (2) power suppliers engaged in import operations; and (iii) transmission companies. The Fund will also purchase services for adjustment of the competitive environment from: (1) the Guaranteed Buyer; (2) guaranteed power suppliers (i.e. Oblenergos) and (3) CHPs. By purchasing the services the Fund will be compensating its losses during sale of the electricity at prices lower than the free market prices.

3.5.10 The renewable power producers selling electricity at the “green” tariff should enter the special balancing group where the Guaranteed Buyer (as the party responsible for balancing on behalf of all such producers) will settle imbalances that emerge within such balancing group. The costs of the Guaranteed Buyer associated with the settlement will be reimbursed by the Cost Imbalance Allocation Fund. The law also provides that the renewable power producers (save for wind and solar generating stations) shall reimburse the cost of the imbalances in the following shares: (i) during the first year after the full-scaled market is implemented – 0%; (ii) during second year – 50%; and (iii) starting from third year – 100% of cost of imbalances.

3.5.11 According to the Law on Electricity Market, CHPs will also enjoy some privileges. For example, for a period of ten years after the full-scale market is implemented (i.e. after 1 July 2017) the prices for electricity produced by CHPs will be established by NERC.

3.5.12 The transition period will last for approximately 3.5 years (between 2014 and 2017). During this period only the following markets will be operate in Ukraine: the WEM; the retail market; and the market for ancillary services (operated by Ukrenergo). In the meantime CMU, NERC, Ukrenergo and Energorynok will adopt the necessary legislative changes.

Table 4:Generation, export, import and consumption in Ukraine 4 Source: Ministry of Energy.

• The Ministry of Fuel and Energy: mpe.kmu.gov.ua/fuel
• The National Electricity Regulatory Commission: www.nerc.gov.ua
• The Antimonopoly Commission of Ukraine: amc.gov.ua
• The State Committee of Nuclear Regulation: www.snrc.gov.ua/nuclear
• NJSC “The Energy Company of Ukraine”: www.ecu.gov.ua
• State enterprise “Energorynok”: www.er.gov.ua and
• NPC “Ukrenergo”: www.ukrenergo.energy.gov.ua