A recent draft promoted by members of the Verkhovna Rada, the Parliament of Ukraine, envisages that in the future the government may prohibit or restrict electricity exports and imports, and imposes strict price caps on the wholesale market. It also excludes large renewable power installations above a capacity of 150 MW from priority dispatch, and allows for curtailment without compensation for these installations. The proposed changes are likely to breach Energy Community rules. The draft passed already the Rada’s committee on energy on Friday last week.
The draft amendments were proposed as a reaction to price increases following the electricity market opening on 1 July 2019, which are attributed to a “low level of competition caused by high concentration in the electricity production market”. The explanatory notes accompanying the draft assume that “the key reasons for such an increase include an insignificant share of electricity import that could create competition for the national producers, a notable share of electricity export, imperfect structure of established generating capacity in the power system of Ukraine, imperfect regulation mechanisms in certain segments of the electricity market, unreasonable preferences for electricity producers using alternative energy sources”. Whether this analysis is correct or not, the Secretariat is concerned that the instruments proposed are highly disproportionate and in breach of core principles of European law:
- The possibility for imposing temporary and flexible price caps on the wholesale markets (the day-ahead, intraday, ancillary services and balancing markets) is already given to the regulatory authority NEURC under the existing rules. Based on continuous monitoring, NEURC under the Electricity Market Law has the right to intervene into the market and to “take measures to prevent inefficient operation of the electricity market, in particular, as the result of actions and any behaviour of market participants aimed at overpricing and causing economic damage to consumers.” Implementation of the Regulation on Market Integrity and Transparency (REMIT) by Ukraine will reinforce NEURC’s powers to fight abusive market behaviour. Besides, the national competition authority AMCU can fine and impose other remedies against individual generators in cases of abuse.
To make price caps permanent and to link it to historical data (90% of the price cap currently in place in Burshtyn island, and 95% of that cap for the rest of Ukraine) exceeds what is allowed under the Third Energy Package and the case law of the European courts for wholesale price regulation. To adopt fixed price levels by a Law will also put the Ukrainian power market in a regulatory straight-jacket, and perpetuate the deviation from the European target model. Permanent price caps distort the market and investment signals, and lead to significant economic welfare losses for Ukraine.
- The restriction of exports and imports contravenes the key principle of an integrated electricity market, the free movement of energy, and cannot be justified by the alleged imperfect structure of the Ukrainian power market. Imposing export bans as a means to increase liquidity in the national markets is a measure which runs contrary to the very idea of Ukraine’s integration in the European power system, and breaches Article 41 of the Energy Community Treaty.
- Under European energy law currently applicable in Ukraine, priority dispatch constitutes a right of every producer of electricity from renewable energy sources, as a means to promote these technologies. There may be good reasons to remove that right in more mature markets, but to base the proposed exclusion on “an unreasonable preference for electricity producers using alternative energy sources” in Ukraine is not in line with decarbonisation goals. In any event, the exclusion of individual producers is justifiable only for reasons of grid reliability and safety, and not in a general, arbitrary and discriminatory manner such as introducing a general capacity threshold of 150 MW. The same goes for generally excluding these producers from compensation in case of curtailment. To the extent the proposed law changes intervene in the (standard) power-purchase agreements between renewable energy producers concerned and the guaranteed buyer, it raises the concern of retroactive change of law.
The Secretariat understands the fears over dominant power companies making windfall profits and abusing their market power. Yet it believes that to address these risks, the tools already available but underused - such as the enforcement of the regulatory powers, the prohibition of abuse under competition law, introduction of compliant liquidity measures and the design of targeted public service obligations - should be applied. What has been proposed to the Rada for adoption last week is excessive and will incur economical damage for Ukraine, even if the goals may seem legitimate. The Energy Community Secretariat calls upon the promoters to withdraw the draft amendments, to jointly with the Secretariat and other international partners engage in analysing the perceived negative consequences of the recent liberalization, and to find appropriate and compliant solutions to such issues where needed.