Ukrainian energy sector: electricity trade
Introduction
1. Export and import opportunities
2. Renewable energy
3. Current situation of export and import
• Export
• Import
Starting from mid-March 2022, the Ukrainian power system has been operating synchronously with the European continental network ENTSO-E and has become a part of the European energy space. At the end of June 2022, export-import operations between Ukraine and ENTSO-E were launched. Ukraine’s power system worked in the trial mode, Ukraine had to prepare and sign a lot of technical documentation to complete synchronization.
For a gradual increase in the Net Transfer Capacity of the export direction to begin, the six technical prerequisites had to be fulfilled before the Regional Group Continental Europe (RGCE) approval. This was necessary to ensure stability of the interconnected grid and increase capacity of damping low-frequency oscillations.
Due to the missile strikes on Ukraine’s energy infrastructure that began on 10 October 2022, it was decided to suspend electricity exports from 11 October 2022.
Fortunately, Ukraine has a highly developed and extensive energy system, so it is not that easy to damage it to the point of inoperability. Due to russia’s attacks on energy facilities, temporary power outage schedules were introduced in Ukraine in order to balance the power system.
As of now, Ukraine needs to sign relevant contracts with neighbouring Transmission System Operators. Furthermore, certain legislative acts must be amended to harmonise Ukrainian and European legislation on electricity trade.
1. Export and import opportunities
Firstly, Ukraine views the possibility of starting electricity exports to European countries as an opportunity to add liquidity to the electricity market and generate additional income. Under the conditions of martial law and active hostilities, the Ukrainian energy sector is struggling to maintain its pre-war financial indicators. Therefore, starting electricity export could become an economically substantiated alternative to new borrowings and loans.
Secondly, low-carbon electricity supplies from Ukraine will significantly strengthen energy security in the Central and Eastern Europe. At the same time, electricity supplies from Ukraine could cover a share of electricity consumption in these countries and reduce their dependence on the russian federation.
Also, the Ukrainian government relies on electricity imports to compensate for the possible shortage of its domestic production for the next annual winter load shedding. Thus, we can expect the relevant laws to be adopted (to ensure normal imports) by the end of summer and early autumn 2023.
2. Renewable energy
Export of electricity also benefits producers of “green” energy.
Ukraine has great potential for the production of green energy. Many power plants (mainly solar and wind) have already been built. Also, European organisations, engaged in planning the restoration of Ukraine’s energy system after the war, stress the need to give preference to green or energy-efficient projects. That is, when restoring the destroyed power plant, which used to produce energy from traditional sources (gas, coal), it makes sense to build a new power facility in its place that will produce energy from renewable sources. If this is impossible or ineffective, such plant should be restored with the use of modern and energy-efficient technologies.
Related article: Renewable energy in Ukraine: current state of affairs
According to IRENA’s pre-war estimates, Ukraine has the capacity to install more than 320 GW of wind and 70 GW of solar power. This does not include the potential for wind and floating stations in Crimean waters, which, according to the World Bank, could add more than 250 GW. That brings the prospective total capacity of renewable sources in Ukraine to 415 GW installed capacity within 10 years, and over 700 GW with the potential project in Crimean waters.
Since the start of the full-scale invasion, however, renewable energy producers have found themselves in difficult circumstances. First of all, due to the change in budgetary funding priorities, debts for the payment of the feed-in tariff began to accumulate. The temporary rule on transferring 80% of electricity exporters’ revenues to Guaranteed Buyer was introduced to pay these debts.
Secondly, many generation facilities have been destroyed or damaged, especially in the south-east regions, such as Kherson, which had previously been a leader in renewable energy production.
For reference, the “green” tariff payment rate for 2021 is 99%, for 2022 it is 53.3%, for January-April 2023 (as of 19 April 2023) – 64.8%.
Ukrenergo’s debt to Guaranteed Buyer for renewable energy services is UAH 16 billion (approx. USD 433,874,720).
This is due to obvious reasons:
- lack of budget funds
- temporary absence of cross-border auctions for electricity export:
a) part of the funds from auctions was used to pay off debts to green energy;
b) exporters were required to transfer 80% of their export profits to Guaranteed Buyer.
In this regard, on 25 April 2023, the Ukrainian Regulator adopted the necessary amendments to the legislation on the functioning of the balancing group “Guaranteed Buyer”, which will regulate the procedure for entry / exit of producers at the “green” tariff.
Thus, “green” generation will have the right to temporarily exit from the balancing group “Guaranteed Buyer” to the free market.
3. Current situation of export and import
Export
Electricity export was suspended until 11 April 2023, that is when Ukraine resumed electricity exports, initially only to Poland and Moldova. At the same time, both the Ukrainian side and the EU announced further expansion of export opportunities.
On 17 April 2023, export to Slovakia started. However, it was stopped after a few days at the request of the Slovak side. These few days of export have shown the following:
- No critical problems with the system connection or stability have been encountered.
- It is necessary to adopt the norms of the EU legislation, which, among other things, will allow for synchronous bilateral auctions.
At the end of April, a joint meeting was held with the participation of representatives of the European Commission, the Energy Community, the Slovak Regulator and TSOs of Ukraine and Slovakia. The event participants reached an agreement that the TSOs of Ukraine and Slovakia would agree on an export agreement developed by NPC Ukrenergo and submit it to the Ukrainian Regulator for approval.
On 28 April, the Parliament Energy Committee supported the draft law on Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). The new law is based on EU recommendations with regard to changes in the electricity market. The draft provides, inter alia, for the procedure for conducting joint auctions, extension of technical specifications and signing of pre-PPA contracts for a year, etc. Verkhovna Rada is expected to vote on it shortly.
At the beginning of May, the Agreement on the Procedure for the distribution of cross-border transmission revenues between the TSOs of Ukraine and Slovakia was signed. This Agreement must still go through certain procedural steps before it becomes effective, after which exports to Slovakia can be resumed. Afterwards, resuming exports to Romania is likely to be a purely technical matter.
Thus, a gradual recovery in exports can be expected within a short-term perspective. Of course, exports will be affected by both political decisions and agreements and the availability of an electricity surplus in the Ukrainian power system (which may vary depending on the intensity of the enemy’s attacks on infrastructure).
It should also be noted that on 27 April, the first physical flow of electricity took place along the Khmelnitsky NPP – Rzeszów (Poland) line. The KhNPP-Rzeszów energy connection has not operated since the 90s. The final commissioning of the connection is scheduled for the end of June 2023.
Import
Electricity market participants are waiting for the NEURC to adopt new tariffs in the electricity market, which is one of the EU requirements. Higher tariffs will reduce budget expenditures to support certain electricity market participants, as well as make market participation more attractive. According to the main participants of the electricity market, without raising tariffs, producers will not be able to properly prepare for the next heating season.
Changes to the existing tariffs are currently under consideration by the NEURC, which is expected to approve the new tariffs. The need to change the current electricity market tariffs and rules is caused by several factors:
1. The current tariffs are economically inadequate and do not correspond to the market value of the commodity. The difference between market value and tariffs should be compensated by the state budget. However, there are currently no funds for this in the budget.
The NEURC’s approval of a number of new tariffs will allow participants to operate at least without losses. This is especially important considering the damage to the infrastructure.
2. The maximum price caps set in the market are lower than the regular market price in the neighbouring countries. For example, while in Ukraine the maximum load price cap is approximately EUR 100, the average price of the base load on the Slovak market is EUR 102 (and this does not include the cost of cross-border transmission and distribution).
In other words, in the current situation, commercial imports of electricity do not make sense (except for the few days when imports are commercially attractive, but this is rather an exception).
Electricity imports to compensate for the shortage of domestic production will again require additional financing, which will be covered either by the consumer or by the Ukrainian budget.
However, as mentioned above, changes to tariffs and market rules are necessary for Ukraine both to prepare for the heating season and to possibly compensate for the shortage of domestic production with imports.