Current Status and Prospects for the Development of the Power Sector of Ukraine Sergey Titenko

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1 Current Status and Prospects for the Development of the Power Sector of Ukraine Sergey Titenko Chairman of the National Electricity Regulatory Commission of Ukraine Carmel, Indiana, October 2010

2 I. Ukraine Has Joined the Energy Community for Southeast Europe Carmel, Indiana, October

3 Status of Ukraine in the Energy Community The main dates in the process of acquiring membership by Ukraine in the Energy Community: July 3, 2006 official statement of Ukraine about the intention to join the Energy Community Treaty (ECT) November 17, 2006 Ukraine joins the Treaty as an observer December 7, 2009 Council of Ministers i of the Energy Community takes a favorable decision on Ukraine joining the Energy Community, provided the Law on Natural Gas Market is adopted and complies with the requirements of the EU Directive 2003/55/EC (common rules for the internal market in natural gas) September 24, 2010 Protocol was signed on Ukraine joining The Energy Community Treaty Carmel, Indiana, October

4 Obligations of Ukraine under the Treaty Obligations of Ukraine as a party to the Energy Community: To implement e certain provisions o s of European legislation acquis communautaire on issues related to electricity, natural gas and environment according to an implementation timetable To follow the rules for competition and state assistance, envisaged by the Agreement on foundation of the European Community To approve the plans of development and implementation, stipulating energy infrastructure and policy in the field of renewable energy sources, which have to comply with accepted EU standards Carmel, Indiana, October

5 Potential advantages of Ukraine joining the Treaty Creation of the predictable and transparent energy market Establishing favorable conditions for investments in the energy sector of Ukraine to cover the expected demand d for energy (including peak) and to replace outdated infrastructure Increasing reliability of energy e supply at reasonable ab e prices and under most favorable terms Improving efficiency of utilizing available capacities, and optimizing future investments t Expanding possibilities of infrastructure improvement, network integration and providing investments to improve energy supply Carmel, Indiana, October

6 Advantages of Ukraine s full membership in the Energy Community More reliable energy network that is able to work without interruptions even in case of unforeseen problems Coordinated reaction to extraordinary and emergency situations and their liquidation More long-term, reliable and predictable basis for investments into development of clean energy and renewables; Enhancement of innovations and efficiency, more efficient use of resources Lower energy consumption due to more responsible, economic and reasonable use of resources; Reducing the need for reserve capacity and, with time, reducing costs related to improved interconnections; Improved relations and strengthened cooperation with EU and Parties of the Energy Treaty, as well as possibility of exchange of experience, modern trends in regulation, and interaction between neighboring countries Carmel, Indiana, October

7 Development of the Electricity Market in Ukraine Carmel, Indiana, October

8 Reforms of the Power Sector of Ukraine establishment of the National Electricity Regulatory Commission of Ukraine (NERC) Economic regulation; Promotion of competition; Licensing; Protection of consumer rights restructuring of the electric sector with unbundling of generation, transmission, distribution and supply of electricity 4 TPP companies, 2 HPP companies, 1 NPP company, 1 supergrid company 27 regional distribution companies establishment of the wholesale electricity market Carmel, Indiana, October

9 Current Wholesale Electricity Market of Ukraine Since 1996, there is a wholesale market of electricity in Ukraine, which operates according to a single buyer model The wholesale market participants are: Generating Supply companies Single buyer System operator companies -TPP and CHP with total capacity 27,225 MW(47.3%); - NPP with total capacity 13,835 MW (46.9%); -HPP 4,552 MW; - PSPP MW (5.9%) -WPP MW (0.1%) -27 district energy companies in each Oblast (District), АРК, the City of Kiev and the City of Sevastopol (regulated tariffs) - Private energy supply companies (non-regulated tariffs) - Functions of a single buyer and wholesale oesaeseller e of electricity are in monopoly of the SE Energorynok - Enterprise responsible for integrity of the UES, transmission of electricity, including through main of the NEC Ukrenergo Carmel, Indiana, October

10 Reforming the wholesale electricity market Decree of the Government of November 16, 2002, No. 1789, on approval of the Concept of functioning and development of the Wholesale Electricity Market of Ukraine: Gradual transition from the current single-buyer model to that of a comprehensive competitive market of bilateral agreements with balancing electricity market Carmel, Indiana, October

11 Assumed market model bilateral agreement model with the balancing market Cross section auction seller seller seller seller seller EE Bilateral agreements (internal market agreements) Balancing market (ancillary service market) buyer buyer buyer buyer buyer System operator Carmel, Indiana, October

12 Phases of transition Instruction of the Cabinet of Ministers of Ukraine, Nov. 28, 2007, No ( ) IV III I II Carmel, Indiana, October

13 Legal framework of the new market: Drafts developed: Law of Ukraine on the Fundamentals of the electricity it market of Ukraine Changes in the current legal basis Rules of functioning of bilateral agreements and balancing market Rules of ancillary services market and network codes Electricity Commercial Metering Code Carmel, Indiana, October

14 Draft Law of Ukraine on the Fundamentals of the electricity market in Ukraine Determines: Structure of the electricity market in Ukraine; Market participants, their functions and obligations; Specifics of functioning at each transitional stage; Terms for implementation Carmel, Indiana, October

15 Trade and Access in the Electricity Market of Ukraine Carmel, Indiana, October

16 Arrangement of Power Exchanges with Neighboring Countries Belarus Russia Poland Slovakia B urstyn island Kiev Hung ary Moldova Ukraine Romania The Sea of A zov Black Sea - Transm ission line 750 kv kv kv kv Carmel, Indiana, October

17 ГВт ч Electricity purchase volumes in the wholesale market for further export in январь февраль март апрель май июнь июль август сентябрь октябрь ноябрь декабрь Carmel, Indiana, October

18 Export pricing For export of electricity, necessary volumes are purchased in the Wholesale Electricity Market of Ukraine: - Until May 2009, at prices set by NERC (according to Provisional conditions of functioning of the Wholesale Electricity Market of Ukraine approved by Decree of the Cabinet of Ministers of Ukraine, November 5, 1999, No. 2043); - Since March 19, at the wholesale market price (according to the Law of Ukraine No VI on Introduction of Changes to the Law of Ukraine on Electricity concerning settling issues related to export of electricity Carmel, Indiana, October

19 Access to capacities of cross-border power networks for export of electricity it Access to capacities of cross-border power networks for export of electricity is granted on auction conditions for the period not to exceed one year Auctions on access to transfer capacity of interstate power networks of Ukraine are conducted by the system operator (SE NEC Ukrenergo ) Auctions are conducted at least once per month, provided free transfer capacity is available Carmel, Indiana, October

20 Elaboration of normative-legal acts NERC is responsible for elaboration and approval of normative-legal acts as follows: Procedure for conducting auctions on access to transfer capacity of cross-border power networks of Ukraine (approved by Decree of NERC of October 22, 2009 No. 1207); Procedure for allocation of cash received as a result of auctions on access to transfer capacity of cross-border power networks of Ukraine; Draft of an agreement on access to transfer capacity of crossborder power networks of Ukraine (approved by Decree of NERC of August 27, 2009, No. 986 ); Procedure for publication of information on transfer capacity of cross-border power networks of Ukraine. Carmel, Indiana, October

21 Determines: Procedure for conducting auctions on access to transfer capacity - Requirements to participants of the auction - Public nature of information about timeframes of auctions - Public nature of information about transfer capacity of cross-border power networks of Ukraine - Financial guarantees of payment for access to transfer capacity of cross-border power networks of Ukraine - Procedure for calculating the real price of a bid - Obligations of the auction winner - Conditions for refusal or termination of an agreement on access to transfer capacity - Procedure of allocation of cash obtained as a result of auctions Carmel, Indiana, October

22 Model agreement on access to transfer capacity Envisions: - Terms for provision of services on access to transfer capacity of cross-border power networks of Ukraine for export of electricity; - Determination of price of services and procedure of payment for services; - Terms for refusal to grant access to cross-border power network. Carmel, Indiana, October

23 Tariffs for transmission of electricity through the super-grid of Ukraine Carmel, Indiana, October

24 Review of the current tariff methodology Regulation of prices for services related to transmission of electricity through main and cross-border networks is done using cost plus method (the methodology was approved in 2006) The transmission tariff also includes a payment for centralized dispatch control over the unified grid of Ukraine Tariffs provide for full coverage of operating costs and partial coverage of necessary capital costs The tariff envisions an investment component, which is used both for implementation of investment programs and for return of borrowed capital Carmel, Indiana, October

25 The share of the transmission tariff in the structure of the wholesale market price in 2009 Carmel, Indiana, October

26 Prospects for reforming the transmission tariff Unbundled regulation of tariffs for operational-technical management of the system and for maintenance of the main network infrastructure Many years of regulation of infrastructure of main networks (revenue cap) Annual regulation of costs related to operational- technical management of the system (internal and external) Carmel, Indiana, October

27 R t Prospects of reforming the transmission tariff formula Transmission = TR t + System operation SOR t Inflation Increase of efficiency TRt = TRt 1(1 + CPIt )(1 Xt ) SOR = AS + CON + SOin t t Costs of ancillary services Cost of managing network restrictions t Revenue from transit t TRA Internal system operational costs t INTER t + CF corrective ratio Revenue from allocation of transfer capacity of Correctional factor interstate lines Carmel, Indiana, October t

28 Prospects for reforming the transmission tariff Transitional period Rate of return regulation using taxable cost of capital as a basis Transitional period (2 or 3 years) is necessary for the following reasons: To ensure gradual transition To give time to stakeholders to: apply technical measures, namely: Evaluation of assets Elaboration of recommendations on regulatory accounting Establishment of the regulatory asset base (RAB) Performance analysis Making necessary amendments in the legislation Accumulation of knowledge and experience To begin preparation for implementation of separate tariffs for bulk transmission and for operational-technicaltechnical management of the system Carmel, Indiana, October

29 Thank you for your kind attention! Carmel, Indiana, October