Reforming the Ukrainian Energy Market to Continue

21 11 2016


The liberalizing of natural gas trading and free access to transportation facilities are and still remain the key requirements to reform the gas market. The Law of Ukraine on the Natural Gas Market (the "Law"), by which Ukraine introduced basic principles for liberal functioning of the gas market, was to lay down the fundamentals of the reform. A number of regulations have been enacted in pursuance of the Law in order to put into practice the opportunities afforded by the Law, such as market mechanisms introduced to supply natural gas, diversification of supply and foreign traders engaged to operate on the market. The National Commission for State Energy and Public Utilities Regulation approved the Code of the Gas Transmission System and the Code of the Gas Distribution System, which allowed implementing partially the rules applicable in EU member states.

However, we have not seen any European traders overflowing the Ukrainian market during 2016. More so as domestic market players continue operating in the environment making their operations more complicated and forcing them to incur additional financial commitments. First of all, it refers to the gas stock reserve, financial security and licensing.

A collision between the regulations is one of the problems when it goes to the licensing of gas suppliers. The Law sets out principles of free competition on the natural gas market and excludes such notions as "regulated tariff" and "non-regulated tariff," so that both business entities that obtained, under the established procedure, licenses to supply gas at the regulated tariff and other business entities that obtained relevant licenses to supply gas at the non-regulated tariff until 1 October 2015 are allowed to participate in tenders. Moreover, article 9(2) of the Law states that the Regulator shall approve the licensing terms and conditions for business activities on the natural gas market related to transmission, distribution and storage of natural gas, provision of LNG installation services and natural gas supply, in consultation with the Energy Community Secretariat. However, since no new licensing terms and conditions have been approved so far, business entities have been prevented from 1 October 2015 to obtain licenses to supply natural gas. Accordingly, this conflict, which exists as long as one year now, prevents independent suppliers from participating in tenders held by state-owned enterprises and institutions, as such state-owned entities require the suppliers to hold a license in accordance with the Law when preparing for public tenders. But as of today no one can obtain such a license and accordingly traders may not offer their resource and their prices to this category of consumers.

Meanwhile, the situation with the reforming of the Ukrainian energy market in general is changing for the better. This is primarily the case in view of reserve stocks of natural gas established.

Briefly, the history of the question is the following. In September 2015, the Cabinet of Ministers of Ukraine (the “CMU”) adopted resolution by which all gas suppliers were obliged to create natural gas stock reserve in the amount equal to 100% of the volume of monthly supply. In December 2015 the CMU reduced the minimum level of the gas stock reserve up to 50% of volume of monthly supply. However, this reduction did not meet the European criteria of the gas market reform, as still imposed extremely high financial obligations on the gas supply companies. As it was mentioned in the latest Energy Community Implementation Report, such requirement in relation to keeping of the gas stock reserve at such a high level is "considered not proportionate or in line with ensuring equal access".

As of 1 November 2016 the Law of Ukraine "On Amendments to the Law "On the Natural Gas Market (regarding gas stock reserve)" No. 1541-VIII (the "Amendments to the Law") became effective. Those amendments brought the long expected changes to the regulations in respect to the burdensome obligation of the suppliers to keep a natural gas stock reserve. The Amendments to the Law provide that any supplier shall secure natural gas stock reserve of up to 10% of the planned monthly supply volume. The exact amount of the natural gas stock reserve is established on annual basis by the Cabinet of Ministers of Ukraine for all suppliers.

It was reported that on 16 November 2016 the Cabinet of Ministers took a decision to establish obligation for the gas suppliers to create a gas stock reserve at the amount of 0% and only in cases of emergency the gas suppliers will be obliged to create natural gas stock reserve in the amount of 10 per cent of monthly supply volume.

The reform of the Ukrainian energy market is still in progress. There have been a number of important regulations recently enacted. So far, a major step forward is the Law of Ukraine on the National Commission for State Energy and Public Utilities Regulation adopted in line with the Third Energy Package. In addition, the draft Law on Electric Energy Market and draft Law on Amending the Budget Code of Ukraine (regarding the normalization of the system for receiving and applying proceeds from rents payable for using subsoil to extract oil, natural gas and gas condensate), which law states that local communities shall retain 5% of the rent, have been adopted in the first reading. They are vital steps forward to reform the Ukrainian energy market and to boost the growth of the entire economy by creating better mechanisms to protect consumer rights and reducing corruption risks due to strengthening transparency and market-oriented pricing.

Published: Kyiv Post, issue 47, November 18, 2016

Author: Oleg Alyoshin