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Opening imports: Who is hindering electricity price reduction

Ukraine has not yet removed the administrative barriers to electricity imports from the European Union, although Kyiv promised to do this several years ago. European officials set a deadline for fulfilling previous commitments for July 1, 2019. Otherwise, they vow sanctions.

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Late November, a decision was published on the Energy Community website saying that Ukraine was failing to comply with its commitments to create opportunities for free electricity imports.

The same document states that, if Ukraine fails to fix the situation before July 1, 2019, the procedure could be initiated for imposing sanctions.

The deadline on July 1, 2019, was not set by chance. It was at this time that a new electricity market should be launched in Ukraine, as required by law. However, the authorities are seeing this market in a peculiar way.

Non-free market to raise prices

In the spring of 2017, the Verkhovna Rada passed the bill on the electricity market, which was revolutionary for Ukraine and designed to fundamentally change the rules of the game.

It was expected that businesses and household consumers would be able to choose their electricity supplier, focusing on quality and price, which will be regulated by the market, not the state. Accordingly, there should be competition between energy companies, which has never been the case in Ukraine.

The introduction of a new market model is divided into two phases: for businesses it will start operating in the middle of summer 2019, and for household consumers – no earlier than 2020.

At the same time, without the possibility of importing electricity, there can be no talk of any competition promised by law.

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As an expert in the field of energy Andriy Herus told UNIAN, today in Ukraine, 90% of electricity production remains in just two pair hands - the government and Rinat Akhmetov's DTEK.

“It’s possible to introduce some kind of market, but it’s almost impossible to introduce a competitive market without imports. That's for a simple reason that the Ukrainian power industry is monopolized and 90% of electricity generation remains in two pair of hands,” Herus notes.

According to the expert, the opening of the new market for electricity imports will precisely restrain domestic producers from unjustified price increases. But if there is no import, electricity prices will soar under the new market model.

"Opening the market to imports is crucial for the purposes of de-monopolization and competition. It is beneficial to all consumers: households, businesses, and the state. This does not mean that imported electricity will flow in here right away. This means that the domestic private monopoly will be forced to lower prices, reduce tariffs for consumers, and reduce the super-profits of a rich oligarch," Herus is convinced. Moreover, according to the norms of the law, at least until mid-2020, producers of more than half of the country's electricity, the state-owned Energoatom and Ukrhydroenergo will be obliged to sell a significant portion of their electricity to household consumers at a regulated tariff in order to compensate to the population the high cost of electricity produced under the "green" tariff and by thermal generation at the initial stage of market formation.

Thus, in the absence of possible import supplies, thermal generation, which is almost completely concentrated in a single pair of hands (about 80% of thermal generation is controlled by DTEK) will become a monopoly in the "competitive" electricity market. At the same time, the price of electricity produced at TPPs, is already almost 4 times higher than that of electricity produced at nuclear power stations.

“The imports are closed today because it is beneficial for local monopolies, primarily Akhmetov's DTEK. They lobbied for this decision. In order for imports to become possible, the decision of the Ministry of Energy and NEURC [National Energy and Utilities Regulation Commission] is necessary, but these bodies took DTEK's side and just don't take such decision," says the expert.

Indeed, the reaction of the bodies responsible for the reform is rather surprising. Neither the Ministry of Energy and Coal Industry nor the NEURC responded to the decision of the Ministerial Council of the Energy Community.

Although it is the decisions and actions of the Ministry of Energy and the NEURC on which it depends whether Ukraine gets a competitive electricity market that will give an impetus to the development of the entire economy or a revolutionary reform is delayed again for an indefinite period.

UNIAN appealed to the NEURC and the energy ministry with a request to comment on the decision of the Energy Community and to speak about the actions taken and an action plan for market liberalization, but has not yet received a response.

At the same time, it is possible to ensure imports using the capacity of the Burshtyn "Energy Island", which is already integrated into the European energy system and is working exclusively for exports.

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By the way, the issue of the Burshtyn "Energy Island" was raised at a recent meeting of Acting Head of the National Energy Company Ukrenergo Vsevolod Kovalchuk and EU Ambassador to Ukraine Hugues Mingarelli.

Ukrenergo chief stressed the importance of opening the Ukrainian market and technological readiness of the state to launch electricity trading, and also drew attention to the need for appropriate decisions to be made by government authorities.

Chairman of Ukrenergo's supervisory board Sevki Acuner, who also attended the meeting, noted that the company's key task in the coming years is to prepare the Ukrainian power grid for synchronization with the that of the EU.

In turn, Mingarelli noted that the European Commission actively supported the integration of the electricity and gas markets of Ukraine into European markets, adding that these issues are a priority for the European Commission.

Price increase and quality reduction

According to Herus, the price of electricity from Ukrainian coal-fired power plants is already 40% higher than in Europe, and 75% higher than in Russia.

The report by an independent financial analytical center Carbon Tracker echoes this claim, saying that heat generation in Ukraine is the most inefficient and expensive in the world.

According to the report, the average tariff for Ukrainian TPPs per megawatt-hour (MWh) is $70, while the closest competitors in the ranking of the most expensive thermal generation (the European Union, South Korea and Japan) have their rate ranging from $50 to $60 per MWh.

The gap will only increase if thermal generation sees no competition from importers.

Back in December last year, the Antimonopoly Committee of Ukraine (AMCU) recommended that the Ministry of Energy and Coal Industry, as well as the Council of the Wholesale Electricity Market, consider possibilities of importing electricity, based on economic feasibility.

According to the AMCU, electricity imports are included in the country's energy balance based on the closing principle – to balance the energy system. However, they are sure: in countries with which Ukraine is connected by interstate sections, sometimes prices are lower than those set by Ukrainian thermal power plants (TPPs).

Therefore, the AMCU recommended that the Ministry of Energy and Energy should change the order of formation of the annual and monthly forecast balances of electricity of Ukraine's united energy system in terms of the possibility of attracting imports on a competitive basis with respect to other types of generation, based on economic feasibility.

The Council of the Wholesale Electricity Market of the AMCU recommended changing its rules so that there is competition between importers and manufacturers on price bids.

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At the same time, even after removing all restrictions, imports will be technically limited, therefore the full integration of the Ukrainian energy system into the European energy system (ENTSO-E) should play a decisive role in the liberalization of the national energy market, which will allow Ukrainian producers to sell electricity to European customers, while allowing Ukrainian businesses to buy electricity in the West.

Moreover, Ukrenergo's Vsevolod Kovalchuk said that after the unification of the energy markets, all countries show a clear downward trend in the wholesale price of electricity by 25-30%

At the same time, today, Ukrainian consumers are isolated from European electricity, which creates very comfortable conditions for outdated and environmentally unsafe thermal power stations, while carrying enormous risks for the development of the industry and Ukraine in general.

Ihor Orel

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