On 11 August 2021, the Cabinet of Ministers of Ukraine approved its Resolution No. 859 (PSO Resolution), which implements a new mechanism of public service obligations (PSOs) in relation to the supply of electricity to households and fully enters into force on 1 October 2021. Furthermore, on 29 August 2021 the Law of Ukraine No. 1639-IX dated 14 July 2021 entered into force, which, among others, implements temporary restrictions on the Ukrainian electricity market. We anticipate that both legal acts will have a significant impact on the Ukrainian electricity market by implementing the transitional PSO model, which could be a step towards a true financial PSO (as described in item 1 below) since the new PSO mechanism envisaged by the PSO Resolution does not fully comply with the requirements of the Energy Community for financial PSO mechanisms.
A summary of these legal acts is outlined below.
1. Implementation of a new PSO mechanism
There are two types of PSOs – commodity based and financial PSOs. In commodity-based PSOs, physical transfer of electricity between market participants is performed under the PSO (e.g. defined volume of electricity is sold by state-owned producers at fixed prices below market level). In financial PSOs, market participants freely buy and sell electricity on the market and are compensated financially under the PSO (e.g. state-owned producers sell electricity at market prices and compensate suppliers for the difference between the market price and the fixed one for households).
The PSO Resolution establishes that existing PSO scheme shall stay in force until October 2021 when the new PSO scheme (as described in item 1.1. below) which can be considered as transitional towards a true financial PSO (please see item 1.3 below) should start functioning.
1.1. New PSO mechanism
The PSO Resolution establishes the following mechanism for a financial PSO to be operational after 1 October 2021:
- The national nuclear power plant operator (Energoatom) must sell directly to the providers of universal services – companies chosen to supply electricity to households and small non-households consumers (SUSs) that operate within the Unified Energy System of Ukraine electricity in the amount of minimum consumption of electricity by households via special electronic auctions under the price amounting to the index of day ahead market base for the third month preceding the month in which electricity will be supplied (also see item 1.3.1).
- Energoatom is also required to sell to distribution system operators (“DSOs”) via electronic auctions electricity for their technical losses in the amount of technical losses during the same month of the previous year taking into account the coefficient of technical losses established by the Regulator under the price of UAH 1,700 per mWh (app. EUR 53.13 per 1 mWh).
- SUSs sell electricity to households under the fixed price established by the PSO Resolution (as described in item 1.2.).
- SUSs execute with the State Enterprise “Guaranteed Buyer” (Offtaker) agreements on provision of services of ensuring availability of the electricity for the household consumers under which the Offtaker pays to the SUSs the difference between the cost of provision of SUS services to households (including the cost of acquisition of electricity from Energoatom as described in item a above) and the amounts obtained by SUSs from households after selling them electricity under the fixed price (as described in item 1.2.).
- Energoatom and the National hydropower plants operator (Ukrhydroenergo) execute agreement for provision of service of ensuring availability of the electricity to households with the State Enterprise “Guaranteed Buyer” (Offtaker) under which Energoatom and Ukrhydroenergo pay to the Offtaker the sum calculated according to the following formula:
Where:
- amount of electricity dispatched either by Energoatom or Ukrhydroenergo into the grid;
- actual average price of all of the electricity sold either by Energoatom or Ukrhydroenergo under the bilateral agreements, day ahead and intraday markets ;
- minimum price of sale of the electricity either by Energoatom or Ukrhydroenergo which is average actual price of the sale of electricity by the State Enterprise “Energorynok” (which was Offtaker of electricity before 1 July 2019) in the first half of 2019 taking into account the index of prices of electricity generators;
A – excise duty on electricity;
K – applicable coefficient in the amount of 0.95 in case of the Energoatom or 0.6 in case of the Ukrhydroenergo.
- In case, if the sums paid by the Offtaker to the SUSs are higher (according to item d above) than the amount calculated according to the abovementioned formula, the amounts to be paid by Energoatom and Ukrhydroenergo are increased proportionally to the volumes of electricity sold respectively by Energoatom or Ukrhydroenergo under the bilateral agreements, on day head and intraday markets.
As a result, the financial PSO that will be implemented looks as described in Picture 1 below.
Picture 1, Schematics of the financial PSO
For the new PSO mechanism to begin operation in October 2021, the following is required by the PSO Resolution: (a) all of the entities that are subject to the PSO are required to execute the agreements envisaged by the PSO Resolution by 15 September 2021; (b) Energoatom is required to sell to the SUSs via special electronic auctions the amount of electricity necessary for supply to households in October 2021 by 30 September 2021; and (c) Ukrhydroenergo is required to provide the Offtaker with an advance on the payments for the services of the Offtaker in the amount of UAH 1 billion (app. EUR 31,250,000).
1.2. Household electricity prices
The PSO Resolution actually decreases regulated electricity tariff for households that consume less than 250 kWh during the month and establishes the following fixed tariffs for electricity to be paid by households between 1 October 2021 and 30 April 2022:
- UAH 1.44 per 1 kWh (app. 4.5 eurocents per 1 kWh) for households consuming less than 250 kWh during the month;
- UAH 1,68 per 1 kWh (app. 5.3 eurocents per 1 kWh) for households consuming more than 250 kWh per month, as well as for apartment block joint owners’ associations, dormitories and religious organisations irrespective of their levels of consumption;
- for two-zone metering, a coefficient of 0.5 will be applicable to the cost of the electricity consumer by households between the times of 23.00 and 7.00; and
- for three-zone metering, a coefficient of 0.4 will be applicable to cost of the electricity consumer by households between 23.00 and 7.00 and a coefficient of 1.5 will be applicable to the cost of the electricity consumer by households between 8.00 and 11.00, as well as between 20.00 and 22.00.
It should be noted that despite this decrease of the fixed tariff for households that consume less than 250 kWh, the decrease is temporary (until 30 April 2022) and other legal acts adopted recently envisage commencement in 2022 of the transfer from fixed tariffs to market prices for consumers, bringing prices to the economically justified level. In particular, the Order of the President of Ukraine No. 452/2021 dated 28 August 2021 implements the decision of the National Security and Defence Council of Ukraine dated 30 July 2021, which , among others, requires the Cabinet of Ministers of Ukraine until 30 September 2021 to develop and approve the plan for establishing a justified price of electricity for households and until 31 December 2021 to prepare a procedure for the gradual transfer to the economically justified price of electricity for households.
1.3. Assessment of the financial PSO model
Although the PSO model that is being implemented by the PSO Resolution is a step towards direct financial settlements on the market and free sale of electricity by Energoatom and Ukrhydroenergo on the electricity market, it does not fully comply with the requirements of the Energy Community for financial PSO mechanisms (as described in item 1 above) and may be considered more of a transitional PSO model towards the true financial PSO:
1.3.1. Auction mechanism for sale of Energoatom electricity to SUSs
As mentioned above, Energoatom sells electricity directly to SUSs in the amount of the minimum consumption of electricity by households via the special electronic auctions.
At the same time, under the financial PSO mechanism envisaged by the Energy Community, it was expected that Energoatom and Ukrhydroenergo would be selling electricity freely on the day ahead, intraday markets and market of bilateral agreements (via special auctions) at the prices set in these market segments, while SUSs would be procuring electricity necessary for supply to household consumer freely on these segments of the electricity market at the respective market prices. At the same time, losses of SUSs that would arise due to the difference between the prices of purchasing electricity on the market and selling to household consumers at the regulated prices would be reimbursed through the mechanism of “quasi swaps” administered by the Offtaker from the profits of Energoatom and Ukrhydroenergo.
The sale of electricity by Energoatom directly to SUSs in the amount of the minimum consumption of electricity by households via the special electronic auctions in fact does not comply with the above model of the financial PSO envisaged by the Energy Community and creates market distortion arising from the fact that volumes of electricity that are being sold by Energoatom, instead of being fully and freely sold on the electricity market are divided into: (a) the volumes necessary for household consumption are being sold by Energoatom only to SUSs, thus significantly diminishing competition for these electricity volumes and consequently decreasing prices for electricity volumes; and (b) remaining volumes that are allowed to be freely sold by Energoatom on the electricity market.
As a result, one of the aims of the implementation of the financial PSO mechanism – to ensure free sale of all electricity produced by Energoatom and Ukrhydroenergo – is not achieved and Energoatom electricity that is sold under the PSO mechanism is still not fully sold on the electricity market (since electricity volumes sold to the SUSs via special auctions are basically excluded from the market).
1.3.2. Payments to the Offtaker by Energoatom and Ukrhydroenergo
The formula of calculation of payments by Energoatom and Ukrhydroenergo to the Offtaker under the agreement for provision of service of ensuring availability of the electricity to the households (as described in item 1.1.(e) above) does not incentivise the former to effectively sell electricity that is not sold under the PSO and is not in line with the model envisaged by the Energy Community
The above formula results in the amounts to be paid by Energoatom and Ukrhydroenergo to the Offtaker under the agreement for provision of service of ensuring availability of electricity to households are not directly tied to the losses of SUSs that have arisen as a result of the sale of electricity to household consumers under the regulated tariff, but instead to the amount of income received by Energoatom and Ukrhydroenergo.
In theory, this formula envisaged by the PSO Resolution may create additional income for the Offtaker, which it can use for payments to renewable power producers under the feed-in-tariff (which is the main obligation of the Offtaker). However, despite the fact that only a part of the proceeds of Energoatom and Ukrhydroenergo is paid to the Offtaker, there is a possibility that neither Energoatom nor Ukrhydroenergo will be interested in selling their electricity at higher prices since the existing formula results in Energoatom transferring to the Offtaker of 95% of sums obtained from selling electricity over the price of UAH 0.94 per 1 kWh (app. EUR 0.029 per 1 kWh) and in Ukrhydroenergo transferring to the Offtaker of 60% of sums obtained from selling electricity over the price of UAH 0.75 per 1 kWh (app. EUR 0.023 per 1 kWh).
2. Electricity market restrictions
Law of Ukraine No. 1639-IX dated 14 July 2021, among others, imposed the following restrictions on the Ukrainian electricity market:
- Until 1 November 2021, the total amount of electricity sold by electricity suppliers and traders on the day ahead and intraday markets cannot exceed 10% of electricity acquired under bilateral agreements from electricity producers and/or the Offtaker (this does not apply to the electricity imported in Ukraine).
- Until 1 April 2022, sale of electricity by producers of electricity either of state, municipal or private ownership (except for the producers of electricity under the green tariff) under the bilateral agreements is only possible through the performance of an electronic auction.
Furthermore, it should be noted that the Law of Ukraine No. 1639-IX dated 14 July 2021 allows netting on the day ahead, intraday markets and market of bilateral agreements.
For more information on developments in the Ukrainian energy sector, contact your regular CMS advisor or local CMS experts: Vitaliy Radchenko, Maryna Ilchuk, Anatolii Doludenko.
PSO Resolution is available by the link (in Ukrainian) and the Law of Ukraine No. 1639-IX dated 14 July 2021 is available by the link (in Ukrainian).
Authors:
Vitaliy Radchenko, Partner, vitaliy.radchenko@cms-cmno.com
Maryna Ilchuk, Senior Associate, maryna.ilchuk@cms-cmno.com
Anatolii Doludenko, Associate, anatolii.doludenko@cms-cmno.com
