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Electricity market reforms in Ukraine. Challenges and opportunities

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The electricity market reforms provide for the establishment
of separate market sectors (formal and informal) with the
competition-based pricing, the separation of distribution
companies from suppliers and the introduction of
incentive-based tariff for the transmission and distribution
system operators. The commencement of the new electricity
market works is scheduled on 01.07.2019.

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Electricity market reforms in Ukraine. Challenges and opportunities

  1. 1. Challenges and opportunities MARKET REFORMS IN UKRAINE Electricity Kyiv 2018
  2. 2. Mission of the Ukrainian Institute for the Future is about designing successful Ukrainian Institute for the Future is an independent analytical center, а think tank, aimed to provide an expert analysis of what happens in Ukraine, to create a discussion space, which goal is to give recommendations for the Ukrainian government and politicians, on the one hand and to deepen the understanding of it by the Ukrainian society on the other. future for Ukraine through experts’ research and discussions, which are supposed to stimulate acceptation of qualified decisions for domestic and foreign policy. Institute’s fields of research: Foreign and domestic policy National security Economics Law enforcement and the judicial system Institute implicates well-known international and national experts, who share values of the Institute to realization of projects: Supporting of modernization of Ukraine Independence – Institute has to be an independent from political and business influences Deliberate of materials – materials and events, produced by the Institute are supposed to be deliberate and objective, in accordance to independent experts’ opinions Quality – Institute endeavors to offer to Ukrainian society and to international community new quality of researches Tolerance – tolerate opinions and views, which are contradictory to its and/or not support and criticize its activity, and endeavors to constructive dialogue Openness – Institute welcomes new people, who can make their productive contributions, to join to its team Free access – all researches and events has to be in free access for both Ukrainian society and international community Institute will produce analytical exploring, reports, questionnaires, forecasts, and more in even different ways (discussions, debates, presentations, conferences so on) with further publication of conclusions and decisions. Founders of the Institute: Yuriy Romanenko forotide,ycilopngierofnotrepxe, web-site «Hvulya»; Taras Berezovets, political consultant, an expert on national security; Igor Liski, businessman; Anton Gerashchenko, deputy of the Verkhovna Rada, Adviser to the Minister of the Interior; Anatoly Amelyn, businessman; Oleksiy Skrypnyk, Member of Parliament. The Institute is open to new proposals.
  3. 3. CONTENT SUMMARY 1. RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 1.1. The essence of electricity reforms in Ukraine 1.1.1. The current electricity market model 1.1.2. The transition to a new model of the electricity market 1.2. The state of implementation of the plan-schedule of reforms 1.3. Ukraine's losses during the delay of the reform introduction 2. FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE WITHOUT REFORM AND AS A RESULT OF ITS IMPLEMENTATION 2.1. Forecast of macroeconomic indicators and net electricity consumption 2.1.1. Forecast of macroeconomic indicators 2.1.2. Forecast of net electricity consumption 2.2. Plans for generation development 2.2.1. Without reform 2.2.2. As a result of the reform 2.2.3. Investment needs 2.3. Plans for development of power grids 2.3.1. Plans 2.3.2. Investment needs 2.4. Gross consumption and generation balance 2.4.1. Without reform 2.4.2. As a result of the reform 2.5. Sufficiency assessment of generating capacities 2.5.1. Without reform 2.5.2. As a result of the reform 2.6. Forecast of the wholesale prices 2.6.1. Without reform 2.6.2. As a result of the reform 2.7. Assessment of competitiveness of electricity export. Forecast of export and import volumes 2.7.1. Without reform 2.7.2. As a result of the reform 2.8. Forecast of investments in the electricity generation sector 2.8.1. Without reform 2.8.2. As a result of the reform 2.9. Forecast of investments in the electricity transmission and distribution sector 2.9.1. Without reform 2.9.2. As a result of the reform 2.10. Forecast of retail tariffs 2.10.1. Without reform 2.10.2. As a result of the reform 2.11. Assessment of the effects of the reform 3. ASSESSMENT OF RISK AND OPPORTUNITIES ARISING DUE TO REFORM INTRODUCTION 3.1. Without reform 3.2. As a result of the reform 4. RECOMMENDATIONS FOR THE AUTHORITIES LIMITATION OF LIABILITY ACRONYMS 03 05 05 05 07 10 15 18 19 19 19 25 26 28 29 32 32 41 42 43 45 53 53 54 55 55 58 62 66 67 70 70 72 73 73 75 82 82 85 88 97 97 100 104 105 106
  4. 4. The electricity market reforms provide for the establishment of separate market sectors (formal and informal) with the competition-based pricing, the separation of distribution companies from suppliers and the introduction of incentive-based tariff for the transmission and distribution system operators. The commencement of the new electricity market works is scheduled on 01.07.2019. The electricity market reforms will have a positive effect on the macroeconomic situation in Ukraine. Due to the reforms introduced in 2019-2030, an additional GDP of USD 72.1 bln will be created. There will be additional state budget revenues from taxes in the amount of USD 12.1 bln, the population will additionally receive USD 17.7 bln of income. For each year of delay of reforms Ukraine will lose on average USD 3.66 bln . of capital investments, USD 7.4 bln of GDP, USD 1.16 bln of the state budget revenues. As a result of market reforms, the generating companies will be able to invest USD 29.8 bln in 2019-2030, which is 11.5 times more funds than without the reform being introduced. This will allow to finance the full introduction of new power units and prevent a deficit of baseload capacity, which without reform being introduced will occur after 2029. If the reform is not introduced, the state regulator's influence on pricing remains and the risks of untimely payments for electricity to producers remain. As a result of the transition to incentive-based tariff, the distribution and transmission system operators will be able to accumulate EUR 7.5 bln of investment resource, which is almost twice more than without reform being introduced. Due to an increase in investment volumes, losses in distribution grids are expected to decrease – from 8.6% in 2017 to 7.2% in 2030, in transmission grids – from 2.6% to 2.1%. In case the reforms are not introduced, the distribution companies hold the risks of deterioration of the grids and increase in consumer average interruption frequency index. 03 SUMMARY SUMMARY ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES
  5. 5. uifuture.org SUMMARY 04 The introduction of reforms in synchronisation with ENTSO-E will increase the export of electricity by almost 5 times – from 5.6 billion kWh in 2017 to 25.0 billion kWh in 2030. Consequently, the surplus export earnings in 2019-2030 will make USD 6.7 bln. In case of failure to carry out synchronisation, the dependence on imports of electricity from the Russian Federation and Belarus remains at the time of crisis. The absence of market reforms will lead to a greater load on TPPs – their capacity utilization index will increase from 20.9% in 2017 to 37.6% in 2030 (36.5% in case of reforms). As a result, the impact on the environment will be increased, which will not be minimized in the underfunding conditions for the environmental modernization programs. The implementation of market pricing and incentive-based tariff will lead to a faster growth of tariffs for ultimate consumers during the first two years than without reform being introduced. We assume that the residential tariffs in 2019 will increase by 28% (from 1.40 UAH/kWh in 2018 to 1.78 UAH/kWh in 2019), and in 2020 – by another 84%. For industrial consumers, tariffs will increase in 2019 by 45% (from 1.80 UAH/kWh to 2.60 UAH/kWh) with a decrease of 5% in 2020. The industrial tariffs will be decreased due to cancellation of subsidized certificates. In the future, the tariff growth rates under the conditions of reform introduction will not exceed this figure without reform being introduced.
  6. 6. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES Since 1995, the electricity market in Ukraine has been functioning under the model of “mandatory pool” or “single buyer”. Generation companies produce electricity and sell it to State Enterprise “Energorynok”, which is then sell it to its suppliers at a regulated tariff (oblenergos and independent suppliers (suppliers at unregulat- ed tariff)). Further oblenergos and suppliers at unregulated tariff supply electricity to retail consumers, including residential and large industrial consumers. RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 05 Scheme of the existing model of the electricity market in Ukraine (until 01.07.2019) THE ESSENCE OF ELECTRICITY REFORMS IN UKRAINE 1.1.1. The current electricity market model 011.1. Wholesale electricity market (State Enterprise “Energorynok”) Main electric grids (SE “NPC Ukrenergo”) Supply + distribution of electricity Consumers (residential and industrial) TPP CHPP HPP and HPSPPWEP SPPNPP GENERATION OF ELECTRICITY Source: State Enterprise “Energorynok”
  7. 7. uifuture.org RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 06 The price at which TPP sells electricity to SE “Energorynok” is calculated for each billing period (time) according to the rules of the wholesale market and it is mainly formed at the level of the price bid for the operating generating unit with the highest production expenses. The unit-wise price bids of the producers are submitted daily to SE “Energorynok”, which defines the list of units that will operate in the power system. The lower the cost of electricity generation at a specific unit of TPP, the more often it is involved in the operation and the higher is its profit (margin) when selling electricity in the wholesale market. In turn, economically inefficient units are of low demand and have fewer loads during the year. The TPP tariffs are monthly approved by the NEURC and are formed by residual principle. Producers and operators of NPP, HPP and CHPP sell electricity in the wholesale market at the tariffs regu- lated and established by NEURC. The producers of renewable energy sources (mainly solar and wind power plants) sell all electricity generated by SE “Energorynok” under the feed-in tariffs set by the state regulator of NEURC in accordance with the Law of Ukraine “On Alternative Energy Sources”. Problems of the existing electricity market model: 1. The absence of direct long-term contracts concluded between consumers and electricity producers does not allow market members to hedge the risks and this fact limits the development of competition in the electricity market. 2. The influence of the Regulator on the establishment of a forecast wholesale market price and tariffs for all electricity producers limits the development of competition between different types of electricity producers and does not stimulate the reduction of costs in the economics. 3. Electricity tariffs are determined by the Regulator, which does not contribute to effective pricing and leads to general welfare gap. 4. The imperfect mechanism of pricing leads to insufficient payments to generating companies for the electricity produced and, as a result, does not allow them to invest in modernization or construction of new capacities. Particularly with regard to NPP and HPP the profitability of which is limited to the greatest extent, causing a deficit of investment resources. 5. The non-market mechanism for determination of amounts and directions of investments: until 2017. The regulator set investment premiums in tariffs in accordance with the approved investment programs. 6. Volatility of cash flows of market members, which restricts access to financial resources of market members and prevents attracting foreign investors, including international financial institutions. 7. Industry subsidizes the population, which slows down the development of the economy. 8. The current model “single buyer” does not allow the synchronization of the UES of Ukraine with the Euro- pean network of transmission system operators for electricity (ENTSO-E). 9. Non-payments between market members. Thus, as of 01.01.2018, the total debt of SE “Energorynok” to electricity producers and SE “NPC Ukrenergo” amounted to UAH 29.2 bln. Insufficient receipt of funds leads to the suspension of investments in the modernization and reconstruction of both power plants and grids.
  8. 8. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES The Law of Ukraine “On the Electricity Market” (No. 2019 dated 13.04.2017) provides for the introduction of a liberalized electricity market in accordance with the norms of European electricity legislation, namely Directive 2009/72/EU on common rules for the internal market of electricity, Directive 2005/89/EU on measures to ensure security of electricity supply and infrastructure investment and Regulation (EU) 714/2009 on conditions for access to the grids of cross-border exchanges of electricity. As in European countries, the new model of the Ukrainian electricity market provides for the creation of various market sectors for formal and informal electricity trade. The informal market sector is represented by bilateral agreements, which are concluded directly between the market members for different terms of electricity supply (from one hour to several years). The regulator has no right to interfere pricing and the relationship between the parties hereof. Electricity producers, the share of the state in the authorized capital of which is 50% or more, will be able to sell electricity under bilateral agreements only on electronic auctions. The formal market sector includes the day-ahead market, the intraday market and the balancing market. Relationship between the members of the formal market sectors are determined by the relevant market rules, which are approved by the Regulator. Day-ahead market is an electricity market sector in which the electricity is purchased and sold on the day next to the bidding day (day of delivery). Intraday market is an electricity market sector in which the electricity is continuously purchased and sold after the completion of bidding on day-ahead market and during the day of actual supply of electricity for the billing periods of day of delivery. The electricity price on the day-ahead market is determined as per the principle of marginal (limit) pricing on the basis of the balance between aggregate demand and aggregate supply, and on the intraday market the pricing principle will be introduced at the posted price. These pricing principles in the formal market sectors are also characteristic of EEX. The formal electricity trading provides some benefits to market members. The system of payments on the day-ahead market and the intraday market will require the prior deposition by the bidders of a certain amount of funds on the account of the market operator to secure payments on the market. Accordingly, market members will duly receive payment for the electricity supplied in the formal market sectors and reduce the counterparty risk. Balancing market is an electricity market sector in which the electricity is purchased and sold by the transmission system operator to balance demand and supply in real time, to settle possible system constraints in the energy system of Ukraine, and to settle market members' unbalances (deviation of the actual production schedule / consumption of the market member from his schedule that was sold/purchased on the market). The ideology of the new electricity market suggests that market members will be able to provide most of their electricity sales or purchases through bilateral agreements with different delivery terms (year, month, week, etc.), and then adjust their positions on the eve of the day of delivery (day-ahead market) and during 07 1.1.2. The transition to a new model of the electricity market
  9. 9. uifuture.org RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 08 the day of delivery (intraday market). After the day of delivery, the accounts are already in the process of settling for the unbalances with the transmission system operator (balancing market). Under the reforms, the electricity distribution companies (oblenergos) will be divided into distribution system operators (responsible for the transmission of electricity by local electric power grids) and electricity suppliers that will perform the function of universal service providers (responsible for guaranteed electricity supply to residential and small non-residential consumers at regulated prices, which are calculated in accordance with the method approved by the Regulator). By separating the electricity distribution function from market functions, all suppliers will have equal access rights to distribution grids. Accordingly, the market will create conditions for the extensive development of independent power suppliers, which will stimulate competition in the retail market sector. The synchronization of the United Energy System of Ukraine with the ENTSO-E will allow the free flow of electricity between Ukraine and other members of the European Community. On the one hand, under the new market model, this provides new opportunities for electricity exports. On the other hand, it provides opportunities for imported electricity supplies and increased competition between electricity suppliers and producers. Within the framework of the energy market reforms, the incentive-based tariff is set for transmission and distribution system operators – the so-called RAB-regulation (Regulatory Asset Base – regulated investment capital base). According to it, tariffs should incentivize transmission and distribution system operators to increase their efficiency, reduce costs and invest in their grids. The distribution and transmission system operators will be able to receive compensation for the investments made inclusive of the rate of return established by the Regulator. The market reforms also involve the following organizational measures: Transformation of SE “Energorynok”, creation the market operator on its basis and the selection of a guaranteed buyer from it, which will be responsible for purchasing electricity from producers from renewable sources at a feed-in tariff; Transformation and corporatization of SE “NPC Ukrenergo” with significant extension of authorities, namely, functions of balancing market management, settlement administrator and commercial accounting administrator. A guaranteed buyer purchases electricity from producers who have a feed-in tariff, and subsequently sells it at market prices in the day-ahead market or the intraday market. The difference between market prices and established feed-in tariffs is compensated at the expense of the transmission system operator. In order to ensure stable and reliable operation of the United Energy System of Ukraine and to ensure the appropriate quality of electricity, the transmission system operator will introduce a new sector – the market of ancillary services. The transmission system operator shall purchase ancillary services under market conditions with the purpose of: 1) regulation of frequency and active capacity, maintenance of capacity balance and power in the United
  10. 10. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES Energy System of Ukraine, namely: a) render of services of primary, secondary, tertiary regulation with provision of reserve of the corresponding regulating capacity; b) render of services in provision of reserves of new and/or reconstructed generating capacity; 2) maintenance of parameters of reliability and quality of electricity in the United Energy System of Ukraine, namely: a) voltage and reactive capacity regulation services; b) services to restore the functioning of the United Energy System of Ukraine after systemic accidents. 09 The new electricity market model in Ukraine Source: Law of Ukraine on the Electricity Market Guaranteed buyer Transmission system operator Main electric grids Ancillary services market Electricity distribution Consumers (residential and industrial) Electricity Suppliers Balancing market Market operator Day-ahead market Intraday market 100% DIRECTAGREEMENTS TPP NPP HPP and HPSPP WEP WEPCHPP GENERATION OF ELECTRICITY 100%
  11. 11. uifuture.org RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 10 The launch of the new market model was planned on July 1, 2019. At present, this deadline will be unlikely met. In accordance with the Law of Ukraine on the Electricity Market, the coordination of actions on the new market introduction is assigned to the Coordination Centre responsible for the introduction of a new electricity market. According to the plan-schedule made by this coordination centre, the electricity market reforms involve the implementation of 205 measures and the adoption of 119 statutory acts. As of June 2018, only 14 statutory documents were approved. The directions of the electricity market reforms Source: Coordination Centre responsible for the introduction of a new electricity market THE STATE OF IMPLEMENTATION OF THE PLAN-SCHEDULE OF REFORMS Direction Number of events including the approved Separation of the transmission system operator and its work Separation of the distribution system operator and its functions Retail market and supply Introduction of market sectors Production Market operator RES and Guaranteed buyer Traders CHPP Other measures Total 24 16 23 16 4 2 12 2 4 16 119 35 41 25 35 8 7 21 2 9 22 205 4 2 2 – 1 1 1 1 – 2 14 Number of statutory acts 1.2.
  12. 12. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES11 Source: NEURC Statutory documents approved by the regulations of NEURC (as of 06.06.2018) Direction Statutory act Separation of the transmission system operator and its work Separation of the distribution system operator and its functions Retail market and supply Production Market operator RES and Guaranteed buyer Traders Other measures 10.08.2017 09.11.2017 14.03.2018 14.03.2018 27.12.2017 27.12.2017 14.03.2018 27.12.2017 27.12.2017 27.12.2017 27.12.2017 27.12.2017 14.03.2018 14.03.2018 Procedure for certification of the transmission system operator for electricity License provisions for conducting business activity on electricity transmission Transmission system code Electricity commercial accounting code License provisions for conducting business activity on electricity distribution The procedure for the preparation, submission, approval, disclosure of the compliance program of the distribution system operator, the report on its implementation and the approval of the authorized person on compliance issues Rules of retail electricity market License provisions for conducting business activity on electricity supply to a consumer License provisions for conducting business activity on electricity generation License provisions for conducting business activity on fulfilment of market operator functions License provisions for conducting business activity on fulfilment of guarantee buyer functions License provisions for conducting business activity on electricity resale (trading activity) Market rules The rules of day-ahead market and the intraday market. Date of approval The most important measures that are to be implemented during the reforms are presented below. The implementation of most of the listed measures is the responsibility of the regulator – NEURC.
  13. 13. uifuture.org RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 12 Measures by implementation directions Directions Measures 11.06.18 11.12.18 20.06.19 No date Separation of the transmission system operator (TSO) and its work Separation of the distribution system operator (DSO) and its functioning The electricity transmission charging methodology The dispatching (operational-technological) management services charging methodology The methodology for determining the value of available capacity and assurance factor Forms of reporting for the transmission system operator The separation of the transmission system operator (delineation of powers for the management of TSO and assets in production, supply of electricity and gas) between the various central government authorities TSO Certification Approval of the tariff for electricity transmission services Approval of tariff for services of dispatching (operational-technological) management Confirmation of transfer capacity distribution structure Issue of a license for the transfer Quality indicators of DSO services and the procedure of compensation Procedure for the development and submission for approval of plans for the development of distribution systems and investment programs of DSO Creation of new suppliers (to perform the functions of universal service providers) Implementation Deadline Directions Measures 11.12.18 20.06.19 01.07.20 No date Separation of the distribution system operator (DSO) and its functioning Calculation methodology for DSO charges commercial accounting services Calculation methodology for DSO charges commercial accounting services Separation of DSO Approval of tariffs for the distribution Revocation of licenses for the supply as per regulated/unregulated tariffs Implementation Deadline
  14. 14. Directions Measures 11.12.18 20.06.19 01.07.20 No date Separation of the distribution system operator (DSO) and its functioning Abolition of regulated retail tariffs by companies Abolition of statutory acts on the regulated retail tariffs Holding of a competitive tender for selection of universal service providers Issue of new distribution licenses Approval of connection fee rates and fee rates for the linear connection Issue of new licenses for supply Approval of tariffs for universal service provider services Holding of a competitive tender for last resort suppliers Implementation Deadline Directions Measures 11.12.1811.06.18 20.06.19 01.07.19 No date Retail market and supply Procedure for the selection of universal service providers Procedure for the selection of last resort suppliers Procedure for providing consumers with information on sources used for electricity generation Supply reporting forms Quality indicators of service providers and compensation procedure Procedure for supporting vulnerable consumers Methods (procedure) of pricing policy for universal services Methods (procedure) of pricing policy the last resort supplier Ensuring that no cross-subsidization between different categories of consumers Development of typical graphs (profiles) of load Implementation Deadline ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES13
  15. 15. Directions Measures 11.12.1811.06.18 20.06.19 01.07.19 No date Production Generation reporting forms The procedure for publication by producers of the information on the share of each power source used for the production of electricity and the impact on environment caused by electricity generation The procedure for conducting tenders for the construction of generating capacity and for the implementation of demand management program Cancellation of generation licenses Issue of new generation licenses Implementation Deadline Directions Measures 11.12.1811.06.18 01.04.19 20.06.19 No date Market operator (MO) RES and Guaranteed Buyer (GB) Traders Other measures MO forms of reporting Establishment of Market operator’s company. Preparation of the documents required for registration. Getting a license Rules for purchasing electricity at the feed-in tariff, including the work rules of the balancing group and the GB GB reporting forms The decision of the imposition of public service obligations on the GB and the TSO related to feed-in tariffs and the conditions (procedure) of their provision Issue of GB licenses The decision of termination the fulfilment of public special obligations related to electricity purchases at the feed-in tariff by guaranteed buyer from 2030 Traders reporting forms Procedure for electricity market monitoring Implementation Deadline uifuture.org RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 14
  16. 16. Directions Measures 11.12.1811.06.18 20.06.19 01.07.19 No date Other measures Requirements for the security, reporting, disclosure and publishing of information by market member Standards of information exchange on the Ukrainian electricity market in accordance with ENTSO-E requirements Procedure for the construction of interstate lines by investors (other than TSO) Procedure for the imposition of public special obligations to ensure the public interest and the conditions for the performance of such public special obligations Supply safety monitoring report (every 2 years) Implementation Deadline ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES15 Source: Coordination Centre responsible for the introduction of a new electricity market UKRAINE'S LOSSES DURING THE DELAY OF THE REFORM INTRODUCTION On 01.02.2011, Ukraine became a Contracting Party to the Energy Community after signing the relevant minutes of meeting and ratifying it by the Verkhovna Rada. Joining the energy community means introducing and enforcing common rules for the energy sector in all member countries. The decision of the Council of Ministers of the Energy Community D/2011/02/MC-EnC stipulated that as of 01.01.2015, the member countries should implement most of the provisions of the Third Energy Package aimed at liberalizing energy markets and stimulating the development of competition among energy suppliers. In particular, 16 independent suppliers entered Estonian market after the liberalization. Estonians have the opportunity to change the supplier once a month, and there are three specialized websites for comparing price offers and contracting. According to the Plan of actions as to the implementation by Ukraine of its obligations under the Treaty Establishing the Energy Community, all regulatory acts concerning the new (free) electricity market should have been elaborated well before 2015. In 2013, there was enacted the Law of Ukraine On the basics of the electricity market performance which did not take into account all the norms of the Third Energy Package, and in addition, in fact, was not imple- mented. Therefore, the development of a new law on the electricity market, which takes into account all Euro- pean practices, has begun. 1.3.
  17. 17. uifuture.org RISK ASSESSMENT OF NON-INTRODUCTION OF REFORM 16 * - for the period from the planned commencing date to the estimated date of implementation Thus, by the beginning of 2015, the domestic electricity sector had already to be reformed. So, the reference point for assessing the losses due to the delayed implementation of the reform is set as follows: 01.01.2014 – for introduction of incentive-based tariff; 01.01.2015 – for the introduction of the electricity market. Thus, the legislative framework for the transition to incentive-based tariff was adopted in 2013. At the moment, there is 5 years delay, during which Ukraine has lost USD 2.3 bln of investments, USD 4.5 bln of additional GDP, USD 0.76 bln of budget income. The potential loss rate is calculated as the economic effect of the implementation of the reform for the delay period. The calculation is made using an economic model that allows us to assess the effects of the reform (see clause 2.11). Similarly, the transition to a competitive electricity market, initially was envisaged from 01.01.2015. For 5 years of delay, Ukraine has lost USD 16.2 bln of capital investment, USD 32.4 bln of GDP, USD 5.4 bln of budget income. Potential losses of Ukraine due to the delay in the transition to incentive-based tariff setting, USD bln At average annually For the period of 2014-2018* Capital investments GDP Budget income 0,46 0,90 0,16 2,3 4,5 0,8 * - for the period from the planned commencing date to the estimated date of implementation Potential losses of Ukraine due to the delays in the transition to a competitive electricity market, USD bln At average annually For the period of 2015-2019* Capital investments GDP Budget income 3,2 6,5 1,0 16,2 32,5 5,4
  18. 18. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES17 Consequences of the delayed implementation of the reform for key stakeholders Consequences for electricity producers: Deficiency of investment resource to the amount of more than USD 2.5 bln every year, especially for Energoatom and Ukrhydroenergo, the state operators of nuclear and hydro power plants; lack of transparent pricing mechanism, artificial limitation of profitability; an increase in the amount of debt of SE “Energorynok” to producers, which as of 01.01.2018 is more than USD 1 bln; increase in voltage due to lack of energy resources in the heating period. Implications for distribution companies: deficiency of investment resources to the amount of USD 0.46 bln every year; lack of a transparent tariff formation mechanism that does not allow to attract investments in the development of grids, including the use of debt instruments, and integrate modern solutions of Smart Grid; an increase in the amount of consumer debt to suppliers to the amount of USD 440 mln compared to 2015. Implications for industrial companies: deficiency of investment resources to the amount of USD 0.4 bln every year; lack of fair pricing and hedging mechanisms when purchasing electricity, while maintaining cross-subsidization between consumers. Implications for households: increase in the duration of power failures: SAIDI has increased from 354 minutes in 2014 up to 728 minutes in 2017; maintaining a low level of customer service quality; constant risks of power failures during periods of peak load; maintaining of air pollution level due to insufficient investments in environmental protection. Implications for the budget of Ukraine: the budget of Ukraine has not received USD 1.16 bln of income annually; the absence of new jobs and new businesses due to the development of related industries.
  19. 19. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 18 FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE WITHOUT REFORM AND AS A RESULT OF ITS IMPLEMENTATION 02 Scheme for an economic model development Investment appraisal (RAB-tariff) Forecast for EXPORTS/IMPORTS Marginal (wholesale) price Coal price, USD exchange rate Plans for input / output of capacities Forecast for grid losses E-vehicles consumption Specific consumption by population Retail tariffs (reform) Calculation of effects Retail tariffs (without reform) Forecast for LOAD WMP Generation BALANCE Generation BALANCE Producer price index Calculation of effects Calculation of effects Distribution tariff (without reform) Transmission tariff (without reform) Transmission tariff (reform) Distribution tariff (reform) Forecast for GROSS consumption BALANCE of capacities (sufficiency assessment) Forecast for NET consumption MACRO forecasts Population change Investment appraisal (RAB-tariff) Investment appraisal for generation sector
  20. 20. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES19 In order to assess the effects of the reform, a comprehensive economic model of calculations was developed. This model examines the results of Ukraine's energy development by two scenarios: 1) without reform being introduced; 2) as a result of the reform introduced. Comparing the results by two scenarios gives an opportunity to determine the consequences and economic effects of the reform. Forecasts of macroeconomic indicators used in the model are based on the consensus estimates: Real GDP growth rates, manufacturer price index, USD/UAH exchange rate – consensus forecast of the following organizations: BMI, EIU, IHS, Focus Economics, Oxford Economics, IMF, Ministry of Economic Development and Trade of Ukraine, National Bank of Ukraine; Average annual EUR/USD rate, USA manufacturer price index – Bloomberg consensus forecast; Coal Price – forecast of eex.com on futures API2 (up to 2025) with the subsequent adjustments for the US manufacturer price index; is used only as a price index to take into account the dynamics of coal prices in the calculations. According to the forecast, the average growth rate of real GDP in Ukraine is 3.5%, which is a realistic result. The UAH/USD rate after 2022 is calculated on the basis of the parity principle of the price indices in USD in Ukraine and the United States. Demand for electricity is formed by two main groups of consumers – households and non-residential consumers. The main part of net consumption (over 70%) falls on the non-residential consumers, which are industry, agriculture, transport, construction, and other economic sectors. FORECAST OF MACROECONOMIC INDICATORS AND NET ELECTRICITY CONSUMPTION 2.1.1. Forecast of macroeconomic indicators 2.1.2. Forecast of net electricity consumption 2.1.
  21. 21. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 20 Net electricity consumption by the economic sectors, million kWh Regression model for forecasting net electricity consumption by non-residential consumers 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 160 000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Industry Agricultural consumers Transport sector Construction Public utility consumers Other non-industrial consumers Households Source:MinistryofEnergyandCoalIndustryofUkraine Source: State Statistics Service of Ukraine, Ministry of Energy and Coal Industry of Ukraine, UIF calculations The electricity consumption structure depends on the dynamics of development of a specific industry and the economy as a whole. Thus, in recent years a trend has been observed in reduction of electricity consumption by the industry due to decline in production. At the same time, the share of electricity consumption by the agriculture is increasing, which confirms the existing structural changes in the Ukrainian economy. In this regard, forecast of demand of non-residential consumers is made based on the regression model, which shows the direct dependence of electricity consumption by various economy sectors on the real GDP growth rate. y = 0,8253x + 15,004 R² = 0,7988 80,0 85,0 90,0 95,0 100,0 105,0 110,0 80 85 90 95 100 105 110 115 Thepaceofgrowthof electricityconsumptionby non-residentialconsumers,% The pace of real GDP growth, %
  22. 22. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES21 Determination of the population needs for electricity is made based on the forecast of average electricity consumption per person and the projected population size of Ukraine. Also, spreading of e-vehicles shall be taken into account in the forecast of net electricity consumption by the public. On the basis of the study of the Ukrainian Institute for the Future “Future of the Oil Market”, the assumption is made that the trend of the e-vehicle market in Ukraine will be in line with the global trend, namely: the car fleet will grow by an average of 2.2% annually; the share of battery electric vehicles (BEV) in the car fleet will gradually increase from 0.1% in 2017 to 12.6% in 2030; the average annual mileage of 1 car will be 20 thousand km, electricity consumption per 100 km of run will be 18.1 kWh. As a result, the forecast of a gradual increase in electricity consumption by BEV from 17.6 million kWh in 2017 to 5.6 billion kWh in 2030 was obtained. Study of electricity consumption by non-residential consumers was divided into industries, taking into account projected structural changes in the Ukrainian economy. The net consumption forecast is used for both scenarios of the electricity market development (with and without reform). Dynamics of e-vehicle fleet (BEV) and electricity consumption Source: AUTO-Consulting, UIF calculations Electricity consumption by BEV, million kWh BEV fleet in Ukraine, thousand pcs.
  23. 23. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 22 Forecast of net electricity consumption in Ukraine, million kWh UIF forecast of net electricity consumption in Ukraine compared to the target forecast of NEC Ukrenergo, million kWh Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations Source: Ukrenergo, UIF calculations 2022Е UIF Ukrenergo 2020Е UIF Ukrenergo 2025Е UIF Ukrenergo 2027Е UIF Ukrenergo Consumers Manufacturing industry and construction Agricultural consumers Transport sector Public utility consumers Other non-industrial consumers Households Total demand 52 566 3 779 7 034 15 110 5 553 39 353 123 395 53 101 4 069 6 866 15 258 5 213 42 644 127 152 53 152 4 020 7 497 16 528 6 255 38 163 125 615 53 872 4 107 7 088 15 648 4 681 48 348 133 744 54 839 4 270 7 229 15 616 4 449 52 993 139 395 55 798 4 503 7 956 17 540 6 522 40 439 132 758 58 434 4 894 8 277 18 338 6 755 42 445 139 143 52 000 3 790 7 300 15 964 6 180 37 080 122 314 Industry Agricultural consumers Transport sector Construction Public utility consumers Other non-industrial consumers Population incl. BEV
  24. 24. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES23 In general, UIF forecast of net electricity consumption is very similar to the target forecast of NEC Ukren- ergo, which is presented in the report on generation sufficiency assessment. Difference is in the consumption structure: according to the UIF forecast, electricity consumption by the population will grow faster than specified in the forecast by NEC Ukrenergo. However, this growth is compen- sated by the lower electricity consumption by transport and public utility consumers. This difference in the forecasts is explained by the fact that in the UIF calculations of the electric vehicle consumption is taken into account in section “Population”. Forecast of macroeconomic indicators Real GDP growth rate in Ukraine, % Producer price index, % Average annual USD/UAH rate Average annual EUR/USD rate USA producer price index, % Coal price, USD/t (API2) Real GDP growth rate in Ukraine, % Producer price index, % Average annual USD/UAH rate Average annual EUR/USD rate USA producer price index, % Coal price, USD/t (API2) 2018E 3,0% 10,3% 27,8 1,18 2,0% 95,8 2019E 3,1% 8,4% 29,4 1,23 2,2% 87,6 2020E 3,1% 8,0% 30,5 1,25 2,2% 83,1 2021E 3,2% 7,5% 30,7 1,25 2,2% 80,2 2022E 3,5% 7,0% 32,2 1,27 2,2% 79,2 2023E 3,4% 6,3% 33,5 1,27 2,2% 78,0 2024E 3,4% 5,0% 34,5 1,27 2,2% 76,7 2025E 2026E 2027E 2028E 2029E 2030E 3,4% 3,4% 3,5% 3,5% 3,5% 3,4% 5,0% 5,0% 5,0% 5,0% 5,0% 5,0% 35,5 36,6 37,6 38,7 39,9 41,1 1,27 1,27 1,27 1,27 1,27 1,27 2,2% 2,2% 2,2% 2,2% 2,2% 2,2% 76,7 78,4 80,1 81,9 83,7 85,5
  25. 25. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 24 Detailed UIF forecast of net electricity consumption in Ukraine Detailed UIF forecast of net electricity consumption in Ukraine 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Industry Consumption, million kWh Consumption, million kWh 50 198 49 994 50 952 51 142 51 284 51 703 52 059 52 211 52 497 Agricultural consumers 3 202 3 259 3 642 3 685 3 731 3 779 4 005 4 069 4 006 Transport sector 8 708 8 878 7 044 6 859 6 943 7 034 6 758 6 866 6 979 Construction 895 912 892 902 853 864 876 890 905 Public utility consumers 15 194 15 192 15 016 15 042 15 184 15 110 15 142 15 258 15 379 Other non-industrial consumers 4 048 4 105 6 361 6 285 5 969 5 553 5 349 5 213 5 040 Households 36 481 35 916 35 020 36 419 37 850 39 353 40 954 42 644 44 428 Total Industry Agricultural consumers Transport sector Construction Public utility consumers Other non-industrial consumers Households Total Industry Agricultural consumers Transport sector Construction Public utility consumers Other non-industrial consumers Households Total 118 725 118 257 118 927 120 334 121 814 123 395 125 143 127 152 129 233 2024E 2025E 2026E 2027E 2028E 2029E 2030E 52 691 52 963 53 282 53 526 53 698 53 849 53 955 4 035 4 107 4 185 4 270 4 364 4 469 4 454 7 096 7088 7 222 7 229 7 247 7 350 7 473 894 909 927 945 966 990 1 016 15 505 15 648 15 535 15 616 15 631 15 573 15 661 4 862 4 681 4 546 4 449 4 476 4 507 4 484 46 317 48 348 50 575 52 993 55 718 58 802 62 416 131 400 133 744 136 273 139 027 142 101 145 539 149 459 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 42,3% 42,3% 42,8% 42,5% 42,1% 41,9% 41,6% 41,1% 40,6% 2,7% 2,8% 3,1% 3,1% 3,1% 3,1% 3,2% 3,2% 3,1% 7,3% 7,5% 5,9% 5,7% 5,7% 5,7% 5,4% 5,4% 5,4% 0,8% 0,8% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 12,8% 12,8% 12,6% 12,5% 12,5% 12,2% 12,1% 12,0% 11,9% 3,4% 3,5% 5,3% 5,2% 4,9% 4,5% 4,3% 4,1% 3,9% 30,7% 30,4% 29,4% 30,3% 31,1% 31,9% 32,7% 33,5% 34,4% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% % Consumption structure
  26. 26. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES25 Industry Agricultural consumers Transport sector Construction Public utility consumers Other non-industrial consumers Households Total Structure of installed capacities in the UES of Ukraine (at the end of 2017) 2024E 2025E 2026E 2027E 2028E 2029E 2030E 40,1% 39,6% 39,1% 38,5% 37,8% 37,0% 36,1% 3,1% 3,1% 3,1% 3,1% 3,1% 3,1% 3,0% 5,4% 5,3% 5,3% 5,2% 5,1% 5,1% 5,0% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 11,8% 11,7% 11,4% 11,2% 11,0% 10,7% 10,5% 3,7% 3,5% 3,3% 3,2% 3,2% 3,1% 3,0% 35,2% 36,1% 37,1% 38,1% 39,2% 40,4% 41,8% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations % PLANS FOR GENERATION DEVELOPMENT As of the beginning of 2017, 51.8 GW of generating capacities were installed in the UES of Ukraine, which mainly focus on: four nuclear power plants (15 power units, of which 13 – with a capacity of 1000 MW and 2 – with a capacity of 415 and 420 MW); cascades of 8 HPPs on rivers Dnipro and Dniester with a total number of hydroelectric units (HU) 103 units and three HPSPP (11 HU with a capacity from 33 MW to 324 MW); 14 TPPs (97 power units including 6 units with a capacity of 150 MW, 42 – 200 MW, 42 – 300 MW, 7 units – 800 MW and 4 turbine generators)* ; three large CHPPs with power units of 100 (120) MW and 250 (300) MW. Source: NEURC * At the end of 2017 – 12 TPPs (87 power units including 6 units with a capacity of 150 MW, 32 – 200 MW, 38 – 300 MW, 7 units – 800 MW and 4 turbine generators) due to disconnection of TPPs in the temporarily uncontrolled territories of Donbas from the United Energy System of Ukraine. 2.2. Detailed UIF forecast of net electricity consumption in Ukraine Consumption structure NPP GC TPP CHPP HPP HPSPP RES
  27. 27. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 26 Installed capacity utilization factor Forecast of existing capacity decommissioning, MW Source: NEURC, UIF calculations Source:Ukrenergo The installed capacities of NPP are mostly utilized, which cover the base load. To regulate peak imbalances, the capacities of TPPs are used, which are flexible and more cost efficient than CHPP. According to NEURC, the design service life of the equipment in the majority thermal power plants has already been exhausted. For example, of 83 power units of the thermal power plants (total installed capacity is 24,185 MW), 72 power units (18,046 MW or 74.6%) are operated over the economic lifetime, 5 units (1,339 MW or 5.5%) are operated over the threshold lifetime and 6 power units (4,800 MW or 19.8%) are operated over the design lifetime. Due to the high degree of equipment wear in 2018-2029, it is planned to decommission the outdated TPPs and CHPPs with a total installed capacity of 4,810 MW. And in 2029, operation of power unit No. 1 of the Rivne NPP with a capacity of 440 MW is expected to terminate, which will result in an extended design lifetime. Generation type 2015 2016 2017 NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP 72,3% 66,8% 70,6% 23,0% 23,2% 20,9% 32,0% 25,2% 23,7% 12,7% 18,6% 21,7% 15,2% 12,4% 12,0% 14,8% 9,9% 9,8% 38,6% 24,1% 33,2% 32,2% 33,7% 33,8% 2.2.1. Without reform 0 500 1000 1500 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP
  28. 28. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES27 Forecast of commissioning of new capacities is calculated based on the plans of development of generat- ing companies and the target scenario of NEC Ukrenergo. This forecast is relevant in both cases, since the need for new power units does not depend on the reform. However, the degree of actual implementation of the plans will be different. The forecast “without reform” specifies commissioning of new capacities by private generating companies, while state power plants (NPP, HPP, and HPSPP) will not expectedly be able to finance the construction of new blocks due to lack of investment resources. Forecast of the installed capacities is made on the basis of the balance equation: Installed capacities at the end of the year = Installed capacities at the beginning of the year + Commissioned capacities – Decommissioned capacities. GC TPP CHPP SPP WEP Biofuel TPP NPP CHPP HPP SPP WEP Biofuel TPPHPSPPGC TPP Forecast of construction of new capacities, MW Forecast of installed capacities, MW Source:Ukrenergo,Energoatom, Ukrhydroenergo,UIFcalculations Source:Ukrenergo,Energoatom, Ukrhydroenergo,UIFcalculations
  29. 29. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 28 Forecast of construction of new capacities, MW In case of the reform, the forecast for decommissioning of existing capacities remains unchanged: 4,810 MW – TPP and CHPP, 440 MW – NPP. Forecast of the volumes of commissioning of new capacities is made based on the plans of development of generating companies of the private and public sector and the target scenario of NEC Ukrenergo. Should the reform be implemented, these plans can be expectedly implemented in full. Increase of the capacities of HPP is taken into account due to modernization of existing power plants (Kaniv, Kremenchuk, Dnipro, Dniprodzerzhynsk HPP) by a total of 132 MW, as well as new construction on Kakhovka HPP-2 (250 MW) Verhnodnistrovska HPP (390 MW) and small HPPs (160 MW). 2.2.2. As a result of the reform Forecast of existing capacity decommissioning, MW 0 500 1000 1500 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP 0 500 1000 1500 2000 2500 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Source:Ukrenergo,Energoatom, Ukrhydroenergo,UIFcalculations Source:Ukrenergo,Energoatom, Ukrhydroenergo,UIFcalculations
  30. 30. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES29 Increase of the capacities of HPSPP is taken due to completion of the Dniester HPSPP (1,296 MW) and Tashlyk HPSPP (604 MW), as well as construction of Kaniv HPSPP (1,000 MW). Herewith, partial delay in commissioning of new capacities on HPSPP is admitted. Commissioning of the completed 3rd and 4th units of Khmelnytskyi NPP is planned for 2025 and 2028 respectively. For TPP, a 330 MW capacity increase is planned for 2020 and 2022. The capacities of SPP and WEP are installed in accordance with the target scenario of the NEC Ukrenergo strategy. Growth of the installed capacities is expected mainly due to HPP, HPSPP and RES. Forecast of installed capacities, MW 0 10 000 20 000 30 000 40 000 50 000 60 000 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Source:MetropoliyaGroupofCompanies Commissioning of new capacities in full in 2019-2030 requires USD 22.2 billion of investment in construction. 2.2.3. Investment needs Estimate of investments required for construction of new capacities Generation type million USD/ 1 MW MW million USD NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Total – 2 000 2 690* 1,5 660 990 1,6 1 251 2 002 1,8 970 1 746 1,4 2 900 4 060 1,0 1 560 1 482 1,6 1 860 2 883 2,3 2 803 6 307 – 14 004 22 160 * - cost of completion of construction, 2017, considering expenses already incurred Source:Ukrenergo,Energoatom, Ukrhydroenergo,UIFcalculations NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP
  31. 31. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 30 Evaluation of implementation of investment programs of generating companies Source:NEURCSource:NEURCSource:NEURC – NAEK Energoatom – Ukrhydroenergo – CHPP Plan Actual Investment needs (plan), million EUR Level of financing of investment needs
  32. 32. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES31 In the current energy model of “mandatory pool” or “single buyer”, the investment needs of the generating companies are not fully financed except for certain years. Subsequently, underfunding of development programs will result in an increase in wear and tear, interruptions in power supply, increase in the accident rate of equipment of the power units, increase in repair time and lack of capacities. Need for investments in construction, million USD NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Total 2018E 7 248 0 133 277 285 580 736 2 265 2019E 27 396 0 154 494 114 274 833 2 292 2020E 148 149 0 233 742 105 265 846 2 486 2021E 195 198 0 261 850 238 322 554 2 617 2022E 335 0 0 277 717 238 388 675 2 629 2023E 335 0 0 250 584 95 295 878 2 437 2024E 537 0 0 206 290 71 136 671 1 911 2025E 402 0 0 84 106 71 115 261 1 039 NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Total 2026E 402 0 0 45 0 67 118 113 744 2027E 302 0 0 45 0 67 109 158 679 2028E 0 0 0 36 0 67 109 225 436 2029E 0 0 0 23 0 67 109 225 423 2030E 0 0 0 0 0 0 65 135 200 Total 2 690 990 0 1 746 4 060 1 482 2 883 6 307 20 158 Source: Metropoliya Group of Companies
  33. 33. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 32 Source: UIF calculations Source:Ukrenergo Need for investments in maintaining existing capacities, million USD Technical condition of the overhead power lines NPP CHPP HPP Total 2018E 161 22 49 232 2019E 154 21 47 222 2020E 152 20 46 219 2021E 152 20 46 219 2022E 149 20 46 215 2023E 149 20 46 215 2024E 149 20 46 215 2025E 149 20 46 215 NPP CHPP HPP Total 2026E 149 20 46 215 2027E 149 20 46 215 2028E 149 20 46 215 2029E 149 20 46 215 2030E 149 20 46 215 Total 1 961 264 601 2 827 PLANS FOR DEVELOPMENT OF POWER GRIDS Main equipment installed in the transmission system, which operates continuously and determines the reliability and efficiency of operation, is made mainly in the 50s-70s of the last century. According to the main technical characteristics (weight and dimensions, reliability and efficiency indicators, etc.), it yields to modern equipment and needs more and more repairs. Thus, 17.3% of substation equipment and 56% of power transmission lines have been in operation for more than 40 years. 2.3.1. Plans Voltage Total, km incl. those operated, years less than 25 25-30 30-40 More than 40 800 кВ 98,5 – – – 98,5 750 кВ 4 120,5 218,1 411,6 2 382,7 1 108,2 500 кВ 374,8 38,1 – 159,6 177,1 400 кВ 339,0 – – – 339,0 330 кВ 13 423,7 1 276,4 798,3 2 202,9 9 146,1 220 кВ 3 976,0 178,6 56,4 338,2 3 402,7 110 кВ 549,7 52,7 26,9 34,1 436,0 35 кВ 114,0 21,3 12,5 17,4 62,8 Total 22 996,2 1 785,2 1 305,7 5 134,9 14 770,4 2.3.
  34. 34. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES33 Such a condition greatly affects the increase of electric power losses in the transmission system and limits the possibility of preventing technological disturbances – damage to electrical equipment or its perfor- mance disturbance, which results in disturbance of the normal operation of power plants of the electricity generating facilities and the UES of Ukraine as a whole. A particular problem is reliability of electricity supply, which is measured for electricity distribution compa- nies by the following indicators: for distribution power transmission grids – average duration index of long power interruptions in the system (SAIDI); for main power transmission grids – calculated volume of energy not supplied (ENS). Growth of both indicators in the dynamics indicates a deterioration in of the grids condition and increase in the frequency of shutdowns of electricity supply of the consumers. Reliability of electricity transmission and distribution SAIDI of the European countries, minutes Source:NEURC Source:NEURC – through the fault of the companies – due to scheduled shutdowns ENS,millionkWh SAIDI,min. Ukraine Romania Poland Croatia Latvia Estonia Czech Republic Lithuania Finland Germany Ukraine Finland Germany Latvia Croatia Romania Lithuania Czech Republic Poland Estonia
  35. 35. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 34 Development of distribution grids Compared to the EU countries, the SAIDI indicators in Ukraine are much higher. This is due to existence of system monitoring and regulation of the electricity supply reliability in the EU, high level of deterioration of power grids in Ukraine, and a significantly higher share of cable networks in the EU, which reduces the frequency of shutdowns of electricity supply. Enhancing the reliability of power supply requires development of distribution and transmission grids in accordance with the plans developed. Power grid type Purpose of activities 150 kV overhead line 110 kV overhead line 110 kV overhead line 110 kV overhead line 150 kV Substation 150 kV 110 kV Substation Novyi Buh - Yelanets Usatove - Tsentrolit From 330 kV Substation “Drohobych” (110 kV Substation “Drohobych-21”, 110 kV Substation “Dobrivliany-T”, 110 kV Substation “Boryslav-1”, 110 kV Substation DDZ circle A and B), Boryslav-Sambir Boryslav - Turka - Tukhlia 330 kV Substation Melitopolska and Molochanska through 150 kV Substation Robitnicha, Berdianska and Chernihivka ZaTPP - GNS - ZRK - Fedorivka - Molochanska Zakhidna in the area of 330 kV Substation Khmelnytska Construction Construction Construction Construction Construction Construction Construction Enhancing the reliability of power supply to two power units of Mykolaiv region, as well as Mykolaiv-Kherson power node grid. Provision of reliable power supply to the consumers of 150 kV Substation “Raionna” under the conditions of shutdown of 330/150 kV autotransformer of South-Ukraine NPP. Enhancing the reliability of power supply of Odessa and increase in transmission capacities of intersection of the UES of Ukraine - Odessa, Moldova. Tying of the completed 330 kV Substation Drohobych to the 110 kV electricity grids of the region. Reliable electricity supply to the consumers of oil pumping stations, electrified sections of the Lviv railway, as well as strengthening of connections between substations of the transmission system 220 kV Boryslav, Stryi and Volovets. Strengthening of connections between the specified lines in order to ensure reliable electricity supply to the consumers of 330 kV Substation Melitopolska, as well as to increase the potential power output of RES. Provision of power supply of Zaporizhzhia TPP in the repair modes of shutdown of 150 kV overhead line ZaTPP - Luch - V. Bilozerka - Frehat - Tavriysk - Molochanska. Transmission to a new 110 kV substation of the consumers on a 10 kV voltage type from 330 kV Substation Khmelnytska. Connection/facility Type of activities Source:Transmissionsystemdevelopmentplanfor2019-2028(Ukrenergo)
  36. 36. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES35 Power grid type Purpose of activities 35 kV Substation 110 kV Substation 110 kV overhead line 110 kV 330 kV substation and 110 kV substation 110 kV Substation 110 kV power transmission line 110 kV Substation Lisovi Hrynivtsi (Khmelnytskyi) Dniprovska in the area of 330 kV Substation Cherkaska Koziatyn 330 - Koziatyn traction Bar - Cherniatyn - Zhmerynka Kakhovka HPP - Mykilske - Kherson CHPP between 330 kV Substation Vinnytska and 110 kV Substation Tulchyn Mykhailivka Vinnytska 750 - Skhidna Zakhidna in the area of 330 kV Substation Khmelnytska Bila Tserkva - Ros - Fastiv, Bila Tserkva - Myronivka Modernization Construction Construction Replacement of wire in transit Modernization Restoration of communication channel Installation of line protection Construction Construction Modernization Conversion from voltage 35 kV to 110 kV. This will enable to divide of the TPA line - Zapadyntsi, which will enhance the reliability of connection between 330 kV Substation Khmelnytska and 330 kV Shepetivka Substation. Transmission to a new 110 kV substation of the consumers on a 10 kV voltage type from 330 kV substation. Enhancing the reliability of power supply of traction substations, consumers connected to dual-circuit transit of 110 kV Koziatyn-traction - Fastiv, and strengthening of connections between 330 kV Substation Koziatyn and Novokyivska. Provision of load redundancy of 330 kV Substation Vinnytska and Bar in the 110 kV transit network. Increase in transmission capacities. Enabling parallel operation of 110 kV grid between 330 kV Substation Vinnytska and Ladyzhynska TPP in order to enhance the reliability of the power output of Unit 1 of Ladyzhynska TPP and reliability of the consumers' supply in the Vinnytsia region. Enhancing the reliability of the power output of Unit 1 of Ladyzhynska TPP and reliability of consumers’ supply in the Vinnytsia region. Load redundancy of 330 kV Substation Vinnytska, enhancing the reliability of power supply of Vinnytsia and enabling the industry development in Vinnytsia. Transmission to a new 110 kV substation of the consumers of PJSC “Khmelnytskoblenergo” , which currently receive power supply on a 10 kV voltage type from 330 kV Substation Khmelnytska. Provision of reliable power supply to the consumers in the southern part of the Kyiv region. Connection/facility Type of activities Development of distribution grids
  37. 37. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 36 Power grid type Purpose of activities 150 kV OSG of Zaporizhzhia TPP, 330 kV Substation Molochanska 150 kV Substation 150 kV Substation 150 kV Substation 150 kV 150 kV overhead line 330 kV Substation 150 kV Substation 150 kV 150 kV Substation 150 kV 110 kV Substation ZaTPP - GNS - ZRK - Fedorivka - Molochanska М-1 Aluminiieva F-1 ZaTPP - Molochanska Molochanska - Chernihivka Partyzany - N. Troitsk - Dudchyne - Kakhovska 330 Quartzite Vuzlova Substation DZU Nikopolska Suputnyk - Grushivska - Ferosplavna 330 Dniprovska in the area of 330 kV Substation Cherkaska Modernization of 150 kV OSG of Substation ZRK and GNS Modernization of 150 kV OSG Modernization Modernization Modernization Modernization Modernization Modernization Circuit breakers replacement Modernization Modernization Construction Resolution of the reliability problem of the tying scheme of 150 kV OSG of Zaporizhzhia TPP to a 150 kV grid of the adjacent energy area. Enhancing the reliability of transit of power output of Dniprovska HPP-2. Ensuring the full power output of Dniprovska HPP-2. Ensuring the redundancy of power output of Dniprovska HPP-1. Enhancing the reliability of transit, increase in transmission capacities. Increase in transmission capacities of the transit 150 kV Molochanska - Chernihivka - Andriivka - Berdiansk - Melitopol. Increase in transmission capacities. Implementation of the design connection diagram of 330 kV Substation Quartzite to 150 kV grid. Ensuring the reliability of transit connections in the repair modes. Enhancing the reliability of normal and repair schemes in the adjacent energy area. Enhancing the reliability of transit of 150 kV Nikopolska 330 - Ferosplavna 330 in the repair modes. Ensuring the reliability of transit. Transmission to a new 110 kV substation of the consumers on a 10 kV voltage type from 330 kV substation. Connection/facility Type of activities Source:Transmissionsystemdevelopmentplanfor2019-2028(Ukrenergo) Construction of the second transit 150 kV Quartzite - Tymkove, replacement of the wire on the sections of the operating 150 kV overhead line
  38. 38. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES37 Project Estimated cost, thousand UAH (excl. VAT) Construction of 750 kV overhead line Zapor- izhzhia NPP - Kakhovka with 750 kV Substa- tion Kakhovska Modernization of 750 kV Substation Kyivska with installation of a second 750 kV autotransformer and construction of 330 kV overhead lines in the Kyiv region Construction of 330/110/35 kV Substation Zakhidna with 330 kV overhead line Second Electricity Transmission Project (ETP-2) Construction of 500/220 kV Substation Kreminska with approach of 500 kV overhead line Donbaska-Donska and tying to 220 kV grid Modernization of 400/220/110 kV Substation Mukacheve Construction of 330 kV overhead line Zakhid- noukrainska-Bogorodchany with moderniza- tion of 330 kV Substation Bogorodchany and 750 kV Substation Zakhidnoukrainska Modernization of an outdoor electric substa- tion switchgear of 330 kV with installation of AT-3 on 330/110/10 kV Substation Novokyivs- ka Installation of the third 330/110/35 kV autotransformer on 330 kV Substation Chernivetska Ensuring the normative conditions for power output of Zaporizhzhia NPP (6,000 MW). It will enable to enhance the reliability and quality of the power supply of the energy-de- ficient consumers, namely the Central and Northern regions of the UES of Ukraine, due to transit of the generating capacities from Rivne and Khmelnytskyi NPP, which in turn enable to reduce the coal and gas consump- tion. Enhancing the reliability of consumers' supply in Kyiv. Improvement of safety, reliability and efficien- cy of electricity transmission, as well as improvement of the situation with compensa- tion of reactive power in the grids. Provision of reliable electricity supply to the consumers in the northern part of the Luhansk region. Provision of internal system connections in the UES of Ukraine and system interconnec- tion (export of electricity to the European countries). Enhancing the reliability of the grid and power supply to the consumers of the adjacent power node grid. Provision of connection to the main power grids of 110/10 kV Substation Chabany of PJSC “Kyivoblenergo”. Resolution of existing critical operational problems, ensuring reliable electricity supply to the consumers of Chernivtsi power node grid, creating grounds for infrastructure development in the Chernivtsi region increasing the volume of the scheduled electricity export. 7 981 547 1 956 401 1 066 148 n/a n/a 199 442 254 744 n/a 279 889 Rationale Development of main power transmission grids
  39. 39. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 38 Project Estimated cost, thousand UAH (excl. VAT) Installation of the second 330/110/35 kV autotransformer on 750/330/110 kV Substa- tion Vinnytska Expansion of 330 kV Substation Kremenchuk with installation of 4AT Modernization of 330 kV Substation Brovars- ka with installation of АТ-3 Modernization of 220/35/10 kV Substation Berezan Construction of the transit of 330 kV overhead line Pobuzhzhia-Talne-Poliana with 330 kV Substation Talne Construction of 330 kV overhead line Lutsk North-Ternopil with modernization of 330 kV Substation Lutsk North and 330 kV Substa- tion Ternopilska Construction of 330 kV overhead line Terno- pilska - Chernivetska with modernization of 330 kV Substation Chernivetska Modernization of outdoor switchgears 750 kV, 330 kV, 110 kV, 35 kV at 750 kV Substation Dniprovska, 750 kV Substation Zaporizka, 330 kV Substation Kharkivska, 330 kV Substation Zaliutine (Dnipropetrovsk, Zaporizhzhia, Kharkiv regions) Construction of approaches of 330 kV Substation Kryvorizka TPP - Trykhaty to 330 kV Substation Mykolaivska with replacement of two autotransformers and modernization of 330 kV switchgear of 330 kV Substation Mykolaivska Construction of 330 kV overhead Line Novoodeska - Artsyz with replacement of 2AT at 330 kV Substation Artsyz from 125 MVA to 200 MVA Resolution of the problem of reliable power supply for industrial and household consum- ers in Vinnytsia. Due to operating measures, it will be possible to avoid power failures of the consumers in the event of emergency shutdown of both systems of 330 kV Substation Kremenchuk. Redundancy of full load capacity of busbar of 330 kV Substation Brovarska. Ensuring growing electricity needs of Brovary district of the Kyiv region. Ensuring operation of solar power plants. Enhancing the reliability of the existing electricity supply and the possibility of joining of prospective consumers to the grids of the Cherkasy power node grid. Provision of the repair and emergency modes with a decrease in operation of the ARS OL RNPP and unloading of the station in the post-emergency modes. Operating grid 330-750 kV does not provide for transmission of surplus capacity from the west to other regions of Ukraine in the repair and maintenance and emergency schemes. Provision of repair of 750/330 kV autotrans- former on Zaporizhzhia NPP, 750 kV Substation Dniprovska and Zaporizka under the condi- tions of the lowered generation of TPP. Enhancing the reliability of electricity supply to the consumers in the Kherson and Mykolaiv regions. Provision of the necessary level of reliability of power supply and maintenance of acceptable voltage profile in the southwestern part of the Odessa region. n/a n/a 885 532 277 146 2 135 500 1 985 185 1 868 400 5 101 709 101 205 2 537 910 Rationale Source:Transmissionsystemdevelopmentplanfor2019-2028(Ukrenergo)
  40. 40. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES39 Project Estimated cost, thousand UAH (excl. VAT) Construction of 330 kV Substation Slobo- zhanska with approaches of 330 kV overhead line Construction of 330 kV cable line Zakhidna - Nyvky with modernization of Substation Nyvky Modernization of 750 kV Substation Dniprovska with installation of AT-3 Construction of 330 kV overhead line Dniester HPSPP – 750 kV Vinnytska with modernization of 330 kV switchgear of Dniester HPSPP and 330 kV switchgear of 750 kV Substation Vinnytska Construction of the second 330 kV overhead line Dniprovska 750 - VDGMK with moderniza- tion of 330 kV Substation VDGMK Construction of 330 kV bay at 330 kV Substa- tion Melitopolska for connection of 330 kV overhead line of Zaporizhzhia WEP Construction of 330 kV Substation Vorskla with approaches of 330 kV overhead line Poltava - Pivnichnoukrainska Construction of 750 kV Substation Prymorska with approaches of 750-330 kV overhead line Construction of 750 kV overhead line Prymorska -Kakhovska Modernization of 220 kV Substation Tsentrolit with conversion to nominal voltage 330 kV Modernization of 330 kV Substation Adzhalyk with replacement of autotransformers New construction of 330 kV Substation Akvilon with approaches of 330 kV power lines in the Kherson region Construction of approaches of 750 kV overhead line Zakhidnoukrainska-Vinnytska to Dniester HPSPP Construction of double circuit 330 kV overhead line Khmelnytskyi NPP - Lisova - Kyiv Enhancing the reliability of electricity supply to the consumers in Kharkiv and the Kharkiv region. Reduction in electric power losses. Provision of reliable electricity supply in the central districts of Kyiv. Coverage of growing consumption in the area of the Dnipro energy system. Ensuring the operation of Dniester HPSPP in the normal scheme. Enhancing the reliability of the power supply to the industrial enterprises in the north of the Dnipropetrovsk region. Provision of connection of the wind power plant of EuroCape Ukraine I, LLC. Provision of reliable electricity supply of Poltava and adjacent areas. Resolution of the supply problem of the Odessa region. Provision of mutual redundancy between 750 kV Substation Prymorska and Kakhovska. Coverage of the growing load of Odessa in the absence of own energy sources. Coverage of growing consumer load. Provision of connection of two wind power plants of Windcraft Kalanchak LLC to the grid. For power acceptance/output of Dniester HPSPP when commissioning of 5, 6 and 7 hydroelectric units. Ensuring power output of the KhNPP when commissioning of units No. 3 and 4. 2 813 178 4 173 333 n/a 420 000 653 940 n/a n/a 10 120 500 4 281 750 1 712 700 279 066 949 770 n/a n/a Rationale Development of main power transmission grids
  41. 41. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 40 Project Estimated cost, thousand UAH (excl. VAT) Construction of 330 kV overhead Line Novovolynsk-Yavoriv with modernization of 330 kV Substation Novovolynsk and 330 kV Substation Yavoriv Completion of construction of 330/110 kV Substation Drohobych with 330 kV overhead Line Zakhidnoukrainska - Drohobych Construction of 400 kV Substation Uzhhorod with approaches of 400 kV overhead line Mukacheve-Kapushany Connection of 750 kV Substation Kyivska to the 330 kV grid (with re-commissioning of 330 kV Substation ChNPP - Mozyr to Substa- tion Kyivska, 330 kV Substation ChNPP-Slavu- tych to Substation Kyivska) Construction of 330 kV Substation Skhidna with approaches of 330 kV overhead line of Kyiv TPP-5 -Brovarska Construction of 330 kV Substation Novohrad-Volynska with approaches of 330 kV overhead line Khmelnytskyi NPP - Lisova Construction of 330 kV overhead line Kaniv HPP - Poliana, 330 kV overhead line Kaniv HPSPP - Bila Tserkva and Kaniv HPSPP - Talne Construction of 330 kV Substation Prydni- provska TPP - Livoberezhna with 330 kV Substation Livoberezhna Construction of 330 kV Substation Vuzlova with approaches of 330 kV Substation Prydniprovska TPP - Pershotravneva Extension of 500 kV Substation Kreminska with construction of 330 kV grids Construction of 330 kV overhead line Kurakh- ivska TPP - Bilytska Prevention of overloading of one 750/330 kV autotransformer at 750 kV substation Zakhidnoukrainska at shutdown of the second one, provision of power output of RES, as well as reliable electricity supply to the consumers of this power node grid and the Lviv power node grid. Enhancing the reliability of the electricity supply of the Boryslav power node grid by transmission of a part of the load from “Burshtynska TPP island” to power from the UES of Ukraine. Provision of reliable electricity supply to the consumers in the Zakarpattia region. Enabling decommissioning of outdoor switchgear 750 kV and 330 kV of Chernobyl NPP. Provision of reliable power supply to the existing and prospective consumers of the Boryspil and Brovary district of the Kyiv region and the left bank part of Kyiv. Provision of electricity supply to the Novohrad-Volynsky power node grid. Provision of the power output of Kaniv HPSPP. Provision of electricity supply to the consum- ers of the left-bank part of Dnipro. Coverage of growing load of the southern districts of Dnipro. Removal of restrictions on consumption of electricity in the Kupyansk power node grid. Unloading of Kurakhivska TPP in the event of an emergency shutdown of 330 kV overhead line Kurakhivska TPP - Zaporizka 750. 830 000 622 800 1 245 600 3 114 000 1 401 300 n/a 1 557 000 1 868 400 n/a n/a n/a Rationale Source:Transmissionsystemdevelopmentplanfor2019-2028(Ukrenergo)
  42. 42. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES41 * - Energy Strategy of Ukraine by 2035 need for investments annually need for investments annually 2.3.2. Investment needs In Ukraine, investments per 1 km of grids from distribution companies are about EUR 130, which is more than 10 times less than the average for the EU countries (EUR 1,600). The similar indicator for transmission grids of NEC Ukrenergo is EUR 3,500, with the European standard EUR 17,000 (4.5 times less). Compared to the European companies, Ukrainian companies have a significant need for investment resources. Investment needs of distribution companies Investment needs of Ukrenergo × 12 times more €1,357 bln €1 600* /1км × 4,5 times more € 0,440 bln €17 000* /1км According to the Energy Strategy, investments of EUR 350 per 1 km of distribution grids can reduce losses by 1%. Accordingly, investments of EUR 1,600 will reduce losses by 4.0-4.5%.
  43. 43. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 42 Source: Energy Strategy of Ukraine by 2035 Reduction of distribution losses in forecasting is taken into account by annual adjustment of share of these losses in gross consumption to the coefficient, which determines the theoretical reduction of losses based on the level of investments per 1 km of grids (this level varies within the range of EUR 430-540 in the model). This approach enabled to exclude the influence of the factor of increase in losses due to increased electricity consumption. With the increase of investments, losses in the transmission grids are expected to decrease, while the level of in-process electricity consumption by power plants is unchanged. In the forecasts of losses in the grids, the following assumptions are made: Without reform – maintenance of losses at the level of 2017, since the amount of investment resource does not allow to improve the quality of the grids. As a result of reform – reducing the volume of losses in proportion to the amount of investments. Forecast of gross consumption was obtained by adding losses to the net consumption arising from generation and transmission of electricity, as well as the volume of exports and imports. Forecast of electricity generation to cover a certain volume of gross consumption is made in the following order: 1. Based on the installed capacity and volumes of electricity generation in 2017, the number of hours of operation at full load for each generation type was calculated. 2. In the forecast period, for all types of generation, except for TPPs, the number of hours of operation at full load at the level of 2017 is taken. Investments in the distribution grids result in reduction of losses by 1%, EUR per 1 km GROSS CONSUMPTION AND GENERATION BALANCE2.4. 350 Germany Poland Latvia
  44. 44. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES43 Source: NEURC, UIF calculations Source: NEURC, UIF calculations 2.4.1. Without reform 3. Based on the number of hours of operation at full load and installed capacity, annual volumes of electricity generation by the generation types are calculated. 4. The volumes of electricity generation at the TPP are determined as a residual. It is expected that without the reform, condition of the grids will be maintained at the current level, so losses in the forecast period (as a percentage of gross consumption) will be unchanged (at the average level for 2015-2017). Load of generating capacities in 2017 Forecast of the share of losses in gross consumption Generation type Number of hours of operation, thousand per year Installed capacity utilization factor (ICUF), % NPP CHPP HPP HPSPP SPP WEP Biofuel TPP 6,2 70,6% 2,1 23,7% 1,9 21,7% 1,1 12,0% 0,9 9,8% 2,9 33,2% 3,0 33,8% Share of own needs and expenses in the oblenergo networks Share of expenses in the transmission networks Share of expenses for in-house needs of power plants
  45. 45. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 44 Taking into account the forecast losses, electricity consumption (including exports) will grow by an average of 1.7% per year. To cover the growing demand of load of the installed capacities of the TPP will increase from 20.9% in 2017 to 37.6% in 2030. According to the forecast generation balance, without the reform, nuclear generation covers 43-55% of the total electricity demand. Share of thermal generation (GC TPP) is gradually increasing from 37% in 2017 to 43% in 2030, which will have a greater impact on the environment. Utilization of the TPP capacities to ensure the gross consumption and export Electricity generation balance, million kWh Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations Gross consumption, million kWh Export, million kWh ICUF GC TPP NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP
  46. 46. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES45 Source:NEURC,UIFcalculationsSource:WorldBank 2.4.2. As a result of the reform The reform scenario takes into account the gradual reduction of transmission and distribution losses associated with an increase in the investment volume in the grids. Total electricity losses for transmission and distribution will decrease from 11.2% in 2018 to 9.3% in 2030. The specified trend indicates approaching of the level of losses in Ukraine to the average European level. Should the reform be implemented, gross electricity consumption will increase by 2.3% per year. TPP loading will increase from 20.9% in 2017 to 36.5% in 2030. Forecast of the share of losses in gross electricity consumption Level of losses for electricity transmission and distribution (in % to generation) Share of own needs and expenses in the oblenergo networks Ukraine EU Share of expenses in the transmission networks Share of expenses for in-house needs of power plants
  47. 47. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 46 Utilization of the TPP capacities to ensure the gross consumption and export Electricity generation balance, million kWh Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Gross consumption, million kWh Export, million kWh ICUF GC TPP
  48. 48. * – export forecast is provided in section 2.8. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES47 Forecast of gross electricity consumption (without reform) million kWh 20162015 2017 2018E 2019E 2020E 2021E 2022E 2023E Net electricity consumption Own needs and expenses in the oblenergo networks Expenses in the transmission networks Expenses for own needs by power plants Gross consumption EXPORT* Share of own needs and expenses in the oblenergo networks in gross consumption Share of expenses in the transmission networks in gross consumption Share of expenses for own needs by power plants in gross consumption 118 725 12 612 4 369 14 780 150 486 9 303 8,4% 2,9% 9,8% 118 257 12 885 3 755 14 450 149 346 5 471 8,6% 2,5% 9,7% 118 927 12 932 3 855 14 012 149 726 5 688 8,6% 2,6% 9,4% 120 334 12 993 4 049 14 620 151 997 6 000 8,5% 2,7% ,6% 121 815 13 153 4 099 14 800 153 867 4 500 8,5% 2,7% 9,6% 123 395 13 324 4 153 14 992 155 863 1 500 8,5% 2,7% 9,6% 125 143 13 512 4 211 15 204 158 070 1 500 8,5% 2,7% 9,6% 127 152 13 729 4 279 15 448 160 608 1 500 8,5% 2,7% 9,6% 129 232 13 954 4 349 15 701 163 236 1 500 8,5% 2,7% 9,6% Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations
  49. 49. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 48 million kWh 2025E2024E 2026E 2027E 2028E 2029E 2030E Net electricity consumption Own needs and expenses in the oblenergo networks Expenses in the transmission networks Expenses for own needs by power plants Gross consumption EXPORT* Share of own needs and expenses in the oblenergo networks in gross consumption Share of expenses in the transmission networks in gross consumption Share of expenses for own needs by power plants in gross consumption 131 400 14 188 4 422 15 964 165 974 4 500 8,5% 2,7% 9,6% 133 744 14 441 4 501 16 249 168 935 4 500 8,5% 2,7% 9,6% 136 272 14 714 4 586 16 556 172 128 4 500 8,5% 2,7% 9,6% 139 027 15 012 4 679 16 891 175 608 5 500 8,5% 2,7% 9,6% 142 101 15 343 4 782 17 264 179 491 5 500 8,5% 2,7% 9,6% 145 539 15 715 4 898 17 682 183 833 5 500 8,5% 2,7% 9,6% 149 459 16 138 5 030 18 158 188 785 5 500 8,5% 2,7% 9,6%
  50. 50. * – export forecast is provided in section 2.8. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES49 Forecast of gross electricity consumption (with reform) million kWh 20162015 2017 2018E 2019E 2020E 2021E 2022E 2023E Net electricity consumption Own needs and expenses in the oblenergo networks Expenses in the transmission networks Expenses for own needs by power plants Gross consumption EXPORT* Share of own needs and expenses in the oblenergo networks in gross consumption Share of expenses in the transmission networks in gross consumption Share of expenses for own needs by power plants in gross consumption 118 725 12 612 4 369 14 780 150 486 9 303 8,4% 2,9% 9,8% 118 257 12 885 3 755 14 450 149 346 5 471 8,6% 2,5% 9,7% 118 927 12 932 3 855 14 012 149 726 5 688 8,6% 2,6% 9,4% 120 334 12 993 4 049 14 620 151 997 6 000 8,5% 2,7% 9,6% 121 815 12 912 3 924 14 755 153 405 4 500 8,4% 2,6% 9,6% 123 395 12 861 3 968 14 923 155 148 4 500 8,3% 2,6% 9,6% 125 143 12 816 3 925 15 099 156 982 4 500 8,2% 2,5% 9,6% 127 152 12 815 3 982 15 319 159 267 4 500 8,0% 2,5% 9,6% 129 232 12 808 3 875 15 528 161 444 13 490 7,9% 2,4% 9,6% Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations
  51. 51. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 50 million kWh 2025E2024E 2026E 2027E 2028E 2029E 2030E Net electricity consumption Own needs and expenses in the oblenergo networks Expenses in the transmission networks Expenses for own needs by power plants Gross consumption EXPORT* Share of own needs and expenses in the oblenergo networks in gross consumption Share of expenses in the transmission networks in gross consumption Share of expenses for own needs by power plants in gross consumption 131 400 12 826 3 934 15 767 163 928 13 490 7,8% 2,4% 9,6% 133 744 12 846 3 828 16 008 166 425 13 490 7,7% 2,3% 9,6% 136 272 12 898 3 895 16 289 169 355 13 490 7,6% 2,3% 9,6% 139 027 12 971 3 969 16 598 172 566 13 490 7,5% 2,3% 9,6% 142 101 13 056 3 871 16 924 175 952 25 040 7,4% 2,2% 9,6% 145 539 13 188 3 960 17 313 180 000 25 040 7,3% 2,2% 9,6% 149 459 13 344 3 873 17 738 184 414 25 040 7,2% 2,1% 9,6%
  52. 52. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES51 Forecast balance of generation (without reform), million kWh Type 20162015 2017 2018E 2019E 2020E 2021E 2022E 2023E NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Total 87 628 49 386 12 252 5 235 1 574 465 979 148 157 665 80 950 49 902 13 107 7 664 1 634 462 923 175 154 817 85 576 44 960 12 414 8 982 1 585 653 956 287 155 414 85 576 45 854 12 456 8 982 1 585 825 1 830 888 157 997 85 576 44 775 12 362 8 982 1 585 911 2 369 1 805 158 367 85 576 42 431 11 758 8 982 1 585 1 015 2 850 3 167 157 363 85 576 43 121 11 916 8 982 1 585 1 110 3 374 3 906 159 570 85 576 43 272 12 649 8 982 1 585 1 325 4 102 4 617 162 108 85 576 43 823 12 629 8 982 1 585 1 540 4 830 5 771 164 736 Forecast balance of generation (with reform), million kWh Type 20162015 2017 2018E 2019E 2020E 2021E 2022E 2023E NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Total 87 628 49 386 12 252 5 235 1 574 465 979 148 157 665 80 950 49 902 13 107 7 664 1 634 462 923 175 154 817 85 576 44 960 12 414 8 982 1 585 653 956 287 155 414 85 576 45 854 12 456 8 982 1 585 825 1 830 888 157 997 85 576 44 266 12 362 9 030 1 585 911 2 369 1 805 157 905 85 576 44 443 11 758 9 096 1 744 1 015 2 850 3 167 159 648 85 576 44 317 11 916 9 277 2 006 1 110 3 374 3 906 161 482 85 576 43 216 12 649 9 515 2 767 1 325 4 102 4 617 163 767 85 576 51 422 12 629 9 796 3 370 1 540 4 830 5 771 174 934 Source: Ministry of Energy and Coal Industry of Ukraine, UIF calculations
  53. 53. Type 2025E2024E 2026E 2027E 2028E 2029E 2030E NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Total 85 576 48 060 12 597 8 982 1 585 1 626 5 121 6 925 170 474 85 576 50 252 12 624 8 982 1 585 1 691 5 325 7 398 173 435 85 576 53 146 12 479 8 982 1 585 1 755 5 558 7 546 176 628 85 576 56 214 12 479 8 982 1 585 1 816 5 762 7 694 181 108 85 576 59 515 12 500 8 982 1 585 1 876 5 966 7 990 184 991 82 855 66 206 12 313 8 982 1 585 1 936 6 170 8 286 189 333 82 855 70 577 12 333 8 982 1 585 1 997 6 374 8 582 194 285 Type 2025E2024E 2026E 2027E 2028E 2029E 2030E NPP GC TPP CHPP HPP HPSPP SPP WEP Biofuel TPP Total 85 576 51 364 12 597 10 077 4 132 1 626 5 121 6 925 177 418 91 762 46 167 12 624 10 476 4 472 1 691 5 325 7 398 179 915 91 762 48 476 12 479 10 638 4 630 1 755 5 558 7 546 182 845 91 762 51 227 12 479 10 686 4 630 1 816 5 762 7 694 186 056 97 947 59 349 12 500 10 733 4 630 1 876 5 966 7 990 200 992 95 226 65 698 12 313 10 781 4 630 1 936 6 170 8 286 205 040 95 226 69 483 12 333 10 828 4 630 1 997 6 374 8 582 209 454 uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 52
  54. 54. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES53 To assess the sufficiency of generating capacities, the volume of the capacity shortage/surplus was determined to cover the base and peak load. The capacities with the priority load include capacities of NPP, HPP and HPSPP, RES, calculated in accordance with the installed capacity utilization factor in 2017. Forecast of the priority load is based on the growth rate of the gross electricity consumption and average load in 2017-2018. Availability of a shortage/surplus of the peak capacity was assessed based on the assumption that the peak load would be covered by the TPP. The peak capacities are calculated by subtracting reserves and capacities that cannot be utilized in the peak from the installed capacities of the TPP. It is assumed that without the reform, new capacities of NPP, HPP and HPSPP will not be commissioned due to lack of sufficient funding. The calculations made show shortage of the priority capacities of NPP, HPP and HPSPP, RES after 2029. Available maneuvering capacities will be able to cover both base and peak loads but hereafter, this shortage is expected to increase and, as a consequence, the lack of generating capacities to cover it. SUFFICIENCY ASSESSMENT OF GENERATING CAPACITIES 2.5.1. Without reform Surplus (-shortage) of base capacity, MW Source:Ukrenergo,UIFcalculations 2.5. Base load, MWBase capacities, MW
  55. 55. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 54 2.5.2. As a result of the reform Source:Ukrenergo,UIFcalculationsSource:Ukrenergo,UIFcalculations Surplus (-shortage) of peak capacity, MW Surplus (-shortage) of base capacity, MW It is expected that the reform will allow generating companies to finance commissioning of new capacities specified in development plans in full. The obtained results indicate that there is no shortage of basic capacities in the forecast period due to construction of new capacities of NPP and HPP. Base load, MWBase capacities, MW Capacities of TPP that can be utilized in the peak Required maneuvering capacities, MW
  56. 56. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES55 Maneuvering capacities of TPP will be able to cover the peak loads in full. In the “single buyer” market model, the wholesale market prices (WMP) are defined as follows: NPP, HPP and CHPP: the tariff is set by NEURC; TPP: the price at which Energorynok SE purchases electricity is calculated for each settlement period (time) in accordance with the wholesale market rules and is mainly formed at the level of the highest price bid of the power unit involved in the operation. Energorynok SE defines a list of power units that will operate in the energy system; RES: the tariff is set at the legislative level (Law of Ukraine on Alternative Energy Sources); Subsidy certificates: the wholesale market price includes the amounts of compensation for losses from the electricity supply to the public at a reduced (regulated) tariff imposed by NEURC; Other payments: excise tax, payments by NEC Ukrenergo, Energorynok SE. Surplus (-shortage) of peak capacity, MW 2.6.1. Without reform FORECAST OF THE WHOLESALE PRICES2.6. Source:Ukrenergo,UIFcalculations Capacities of TPP that can be utilized in the peak Required maneuvering capacities, MW
  57. 57. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 56 Mechanism of WMP formation In the structure of WMP in 2018, the component of tariffs of the electricity producers is about 75%. Another large component is subsidy certificates, about 20% of WMP. Mechanism of WMP forecast: 1. Establishing the forecast balance of electricity of the UES of Ukraine. 2. Tariff of NPP, HPP, and CHPP is determined by annual adjustment to the manufacturer price index. 3. Tariff of TPP is determined by adjustment for the forecast of the coal price and the UAH/USD rate. 4. Tariff of RES is fixed at the level of EUR 0.15 per kWh till 2029. After 2029, it is assumed that the tariff of RES will be equal to the average producer tariff. 5. To determine the average tariff per 1 kWh, the producer tariffs are weighed against their share in the generation balance. 6. The amount of the subsidy certificates is defined as the share of the subsidies in the weighted average retail tariff to household consumers (see section 2.10), which is divided into the total consumption and exports. 7. The amount of the excise tax, payments of Ukrenergo and Energorynok are forecast based on their total share in WMP – about 6%. Source: NEURC Source:NEURC Planned structure of WMP by 2018, % Cost of electricity purchased from producers (NPP, HPP, CHPP, RES) Cost of electricity purchased from producers operating on the price bids (TPP) Payments to compensate for the losses from electricity supply at regulated tariff (SUBSIDIES) Excise tax (2018 – 3.2%) Payment of NEC Ukrenergo (dispatching costs) Payment for services of Energorynok, SE WMP TPP NPP HPP CHPP RES Ukrenergo Excise tax Subsidies Energorynok
  58. 58. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES57 Source:UIFcalculations The average growth rate of WMP in 2019-2029 will be 7.0% per year. In 2030, WMP is expected to decrease by 16.8% due to expiration of the so-called “green tariffs” for the RES electricity producers. Along with the cost of electricity, the amount of the subsidies will increase, which share in WMP will increase to 36% by 2030. Source: UIF calculations WMP forecast, UAH/kWh WMP forecast, kop./kWh 2019Е2018Е 2020Е 2021Е 2022Е 2023Е 2024Е Producer tariffs: NPP HPP TPP CHPP RES Shares in generation volumes: NPP HPP TPP CHPP RES Cost of electricity, UAH/kWh Subsidy certificates, UAH/kWh Excise tax, Energorynok SE, NEC Ukrenergo WMP, UAH/kWh excluding VAT WMP, EUR/MWh 54,5 54,7 180,0 215,0 530,8 54,2% 6,7% 29,0% 7,9% 2,2% 1,14 0,25 0,07 1,56 45,8 59,1 59,3 174,4 233,0 579,2 54,0% 6,7% 28,3% 7,8% 3,2% 1,22 0,28 0,07 1,57 43,3 63,8 64,0 171,0 251,7 609,0 54,4% 6,7% 27,0% 7,5% 4,5% 1,31 0,32 0,08 1,71 44,8 68,6 68,9 166,4 270,6 614,0 53,6% 6,6% 27,0% 7,5% 5,3% 1,39 0,35 0,08 1,82 47,4 73,4 73,7 172,3 289,4 654,1 52,8% 6,5% 26,7% 7,8% 6,2% 1,53 0,39 0,09 2,01 49,2 78,0 78,3 176,7 307,6 681,5 51,9% 6,4% 26,6% 7,7% 7,4% 1,66 0,44 0,10 2,20 51,7 81,9 82,2 179,0 323,0 701,4 50,2% 6,2% 28,2% 7,4% 8,0% 1,77 0,47 0,11 2,34 53,5 Excise tax, Energorynok SE, NEC Ukrenergo Subsidy certificates Cost of electricity
  59. 59. uifuture.org FORECAST OF DEVELOPMENT OF ENERGY SECTOR AND ECONOMY OF UKRAINE 58 Source: UIF calculations Structure of the wholesale electricity market as a result of the reform: on the emerging market/on the stable market 2026Е2025Е 2027Е 2028Е 2029Е 2030Е Producer tariffs: NPP HPP TPP CHPP RES Shares in generation volumes: NPP HPP TPP CHPP RES Cost of electricity, UAH/kWh Subsidy certificates, UAH/kWh Excise tax, Energorynok SE, NEC Ukrenergo WMP, UAH/kWh excluding VAT WMP, EUR/MWh 86,0 86,3 184,2 339,1 722,0 49,3% 6,1% 29,0% 7,3% 8,3% 1,86 0,51 0,11 2,48 55,0 90,3 90,6 193,8 356,1 743,1 48,4% 6,0% 30,1% 7,1% 8,4% 1,95 0,56 0,12 2,63 56,6 94,8 95,1 203,9 373,9 764,8 47,5% 5,9% 31,2% 6,9% 8,5% 2,05 0,61 0,12 2,78 58,2 99,5 99,9 214,4 392,6 787,2 46,5% 5,7% 32,3% 6,8% 8,6% 2,16 0,67 0,13 2,96 60,1 104,5 104,9 225,6 412,2 810,4 44,0% 5,6% 35,2% 6,5% 8,7% 2,29 0,74 0,14 3,17 62,5 109,7 110,1 237,3 432,8 183,4 42,9% 5,5% 36,5% 6,4% 8,8% 1,83 0,67 0,14 2,64 50,6 2.6.2. As a result of the reform Law of Ukraine on the Electricity Market provides for removal of the Regulator from the pricing process on the electricity market. That is, the price is formed by the market. Pricing principles will depend on the market segment. Bilateral contract market Day ahead market Intraday market Balancing market Ancillary services market Exchange segment Market share up to 10%/40-60% Market share up to 90%/35-55% Market share up to 3%/5-7%
  60. 60. ELECTRICITY MARKET REFORMS IN UKRAINE: CHALLENGES AND OPPORTUNITIES59 On the bilateral contract market, direct contracts between consumers (suppliers) and electricity producers are concluded including long-term price fixing. Bilateral contracts should cover the main volumes of industrial needs for electricity. An important factor affecting the share of this market segment is the possibility of hedging the risks of price change and volumes for the long-term. But a significant degree of unpredictability caused by high macroeconomic risks, high volatility, will be included in the price. We believe that at the first stage of the market, the price may be linked to the prices in the exchange segment, which reduces the possibility of hedging but fixes the volume of supplies. Therefore, until achievement of the macroeconomic stability, the share of this segment will not be high, and the prices will correspond to those that have emerged in the exchange segment. The day ahead market and the internal market are regulated (exchanging). These segments shall cover the short-term needs of the consumers (suppliers) and provide for the market access for those who have not concluded bilateral contracts. The price of electricity on these markets is determined by the principle of margin pricing based on the balance of aggregate demand and supply. On the balancing market participants who have imbalances, buy/sell such imbalances. Price will be calculated by the transmission system operator (NEC Ukrenergo) in accordance with the approved rules. Prices on the balancing market will be higher than in other segments. Therefore, participants have incentives to reduce imbalances and accordingly to limit the share of this market segment. On the ancillary services market there is no sale and purchase of electricity. There is a purchase of services to be provided to the transmission system operator including capacity reservation for use on the balancing market. Since the share of the exchange segments can take up to 90% at the beginning of formation of new markets, and the prices on the bilateral contract market will be tied to the exchange prices at the first stage, the exchange segment will form the price on the market by the principle of margin pricing. But over time, the share of the bilateral contract market will increase and can reach 40-60% of the market, which will affect pricing. Mechanism of marginal pricing on the electricity market RES +CHPP (must run) HPP NPP TPP CHPP Capacity that can be utilized, MW, cumulatively Price Capacity requested by the consumers at a time Market (marginal) price

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