Executive Summary

The 4th issue of the Monitor of Electricity Market Opening covers the period from July 2019 to February 2020 and gives a comprehensive review of the electricity market development. The main messages of the Monitor are:

• Legislative framework is volatile, with 16 changes to key regulatory documents for 8 month and at least 4 expected in Q2 2020. All the changes focused on re-regulation and increase administrative control rather than liberalisation and boosting of competition.
• We identified 4 phases of market development in Integrated Power System of Ukraine, with different factors kicking-in and affecting price. Nuclear power, channelled exclusively through organised segments of the market, has a dominant share, and its oversupply had a decisive impact on price. The thermal generation, mostly private, faces no significant competition on bilateral agreements segment, as import from Russia and Belarus have a limited effect.
• The overall overcapacity in Ukraine creates conditions for oversupply and contributes to dramatic price drops. This situation will persist if market players like Energoatom do not follow economic reasoning but rather an administrative directive regarding the volume they produce, and if thermal and nuclear generation do not compete in all market segments.
• In the Burshtyn Energy Island, increased import has no significant impact on competition and price. A significant share of imports is traded on the DAM, just to be bought and re-exported to EU countries. Most likely, DTEK has established control over cross-border allocation via auctions, managing to keep DAM prices high.
• The loopholes in market rules created a dangerous positive feedback effect in Jan’-Feb’20, driving DAM prices below economically reasonable levels in some weeks, and syphoned millions of hryvnias from the system.
• Increased transparency is a big upside of the new market. A lot of previously hidden data became available, enabling better assessment of trends. Much is to be done to reach levels of transparency of established markets, to attract new players.
• Debts are now accumulating in the system, adding to an unaddressed legacy of UAH 30 bln from the old market. Non-payments on the balancing market threaten the stability of PSO schemes and Energoatom, as more and more nuclear is sold as imbalances due to surplus in the system.
• If fundamental flaws of the market structure will not be addressed, any minor change or tweak will not make the market function properly. Market concentration and lack of competition, both on wholesale and retail side, should be addressed as soon as possible. The administrative price control should be phased out.