Ukraine: Kinstellar Energy & Natural Resources Digest: Ukraine. July 2019 In Review

Last Updated: 15 August 2019
Article by Olena Kuchynska and Oleksandr Plachynta

ELECTRICITY: First reflections on the new electricity market in Ukraine

Ukraine’s new electricity market began operation on 1 July 2019 and has introduced competition at several levels of the local electricity market. Under Ukraine’s previous electricity pool model of electricity market, all power producers were required to sell output at regulated prices to Energorynok SE, which would then sell electricity to regional distributors and ultimately to consumers. After 1 July, the compulsory sale to a pool has been abolished, and producers sell electricity directly on a wholesale market at a competitive price. Consumers, primarily commercial and industrial, can purchase electricity in any of the four wholesale market segments.

As the new electricity market launched, the National Energy and Utilities Regulatory Commission (the "Regulator") reported that the energy system was operating as planned and that no power outages occurred. However, the level of administrative interference in the market remains high. In June 2019, the government imposed public service obligations on the state-owned power producers Energoatom NNEGC ("Energoatom") and Ukrhydroenergo PJSC to keep electricity prices low for residential customers.

The said producers must sell a substantial portion of output – 75% and 20%, respectively – at a regulated price for the needs of residential customers until the end of 2020. Given that Energoatom's share in electricity production is approximately 50%, a number of stakeholders believe that limiting the capacity of the power producers to sell electricity on the wholesale market has substantially contributed to an increase in electricity prices of up to 30% in July for commercial and industrial customers.

RENEWABLES: FIT is paid to RES-E producers despite challenges

On 27 June 2019, the Kyiv District Administrative Court suspended two resolutions of the Regulator, No. 954 and No. 955 dated 7 June 2019. The resolutions set out new prices for the power transmission and energy system management services of the transmission system operator, Ukrenergo NEC ("Ukrenergo") for July-December 2019 (the "First Resolutions"). The suspension occurred from litigation initiated by Nikopol Ferroalloy Plant, a company of a large Ukrainian business group, to cancel the First Resolutions.

Suspension of the new prices for Ukrenergo's services hindered capacity of the state-owned electricity off-taker, Guaranteed Buyer SE (the "Guaranteed Buyer"), to pay the feed-in tariff ("FIT") to producers of electricity from renewable sources ("RES-E producers"). In the new electricity market, Ukrenergo must compensate the Guaranteed Buyer with the difference between the FIT payments and the market-price for electricity out of the income Ukrenergo receives for provided services. Hence, the suspension resulted in Ukrenergo being underpaid, reportedly by UAH 2.4 billion (approximately EUR 85 million) in July, and therefore unable to duly compensate the Guaranteed Buyer.

In the meantime, to enable FIT payments, the Regulator has adopted a new resolution (No. 1411, dated 12 July 2019) setting out the price for Ukrenergo's power transmission service for August-December 2019 (the "Second Resolution"). Nikopol Ferroalloy Plant initiated litigation to cancel the Second Resolution and asked for its suspension, albeit unsuccessfully. Moreover, following an application by Ukrenergo, the Kyiv District Administrative Court on 1 August 2019 changed its order limiting the effect of the suspension of the First Resolutions to Nikopol Ferroalloy Plant and several other applicant companies.

As a result, Ukrenergo's capacity to finance the Guaranteed Buyer's FIT payments has been restored. Market players must pay Ukrenergo for services provided in July 2019 at the rate set out in the First Resolutions, and for the services provided in August-December 2019 at the rate set out in the Second Resolution. The Guaranteed Buyer reported UAH 1.5 billion (approximately EUR 53 million) in FIT payments to RES-E producers in July. The sum included UAH 454 million (approximately EUR 1.9 million) that the Guaranteed Buyer received from Ukrenergo.

RENEWABLES: President signs bill returning FIT to private households with ground-mounted solar installations

On 6 August, Ukraine’s president signed a bill granting FIT to private households owning ground-mounted solar installations with capacity of less than 30kW. The move is meant to clarify the legal framework after parliament raised the permitted capacity of solar installations entitled to FIT from 30 kW to 50 kW. At the same time, parliament had granted FIT only to private households with rooftop installations. The bill will come into force the following day after its official publication.

OIL AND GAS: Government raises uncertainty about Dolphin PSA tender winner

As we recently reported, in April 2019 Ukraine’s government launched a tender for development of the offshore hydrocarbon field Dolphin under a 50-year production sharing agreement ("PSA"). With a total area of 9,536 square kilometres, Dolphin is the largest block to be tendered to date in Ukraine. Four companies initially participated. On 26 July 2019, the PSA Interagency Commission – the agency arranging the conclusion and operation of PSAs – announced that Trident Black Sea had submitted the winning bid.

The government has until 12 September to approve the winner, which will trigger a 12-month period for the conclusion of the PSA. It is unclear now, however, whether the government will confirm the results. Ukraine’s prime minister criticised the tender, as more major industry players were expected to bid, and suggested a new tender. Trident Black Sea followed by proposing a compromise: the government approves the tender, while the company engages a major industry player to participate in the development of Dolphin. Discussions are pending.

On a related note, the other bidder, Frontera Resources Ukraine LLC, filed a claim with the Kyiv District Administrative Court on 7 August asking for the tender results to be cancelled. The court has not yet opened the case and stakeholders have not yet commented on the claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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