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Ukrenergo Sustainability Report for 2019

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NPC Ukrenergo’s Sustainability Report for 2019 covers key results achieved by the Company during the year in two fundamentally different circumstances: in the old model of the electricity market, and since 1 July — in the European market conditions, therefore the document puts much emphasis on the new model of the electricity market in Ukraine, and Ukrenergo’s place, role, functions, and achievements in it. New challenges of 2019 highlighted in the Report are the issues of cybersecurity and integration of renewable energy sources into the power system.

All data summarizing the Company’s operations are presented in a transparent and clear form. The priority aspects highlighted in the Report are such most important for all stakeholders issues as the reliability and security of electricity supply, key investment projects and grid development, actions implemented for the integration of the Ukrainian power system into the ENTSO-E, transparency of procurement, environmental footprint and energy saving, personnel development and initiatives of the Company in the area of the corporate social responsibility, as well as the compliance and the prevention of corruption.

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Ukrenergo Sustainability Report for 2019

  1. 1. 3UKRENERGO – SUSTAINABILITY REPORT 20192 Content UKRENERGO – SUSTAINABILITY REPORT 2019 4-7 50-57 102-109 8-27 58-69 110-117 28-33 70-83 118-127 34-43 84-91 128-135 44-49 92-101 136-145 Introductory word Supply chains Integration into ENTSO-E and development of international relations Structure and management The Integrated Power System of Ukraine Information technology and cybersecurity Stakeholders New model of the electricity market Personnel Compliance and combating corruption Investments and network development Corporate social responsibility Financial indicators Integration of renewable energy sources Environment and resource usage The amounts are converted into euros at the average annual exchange rate of the National Bank of Ukraine in 2019, 28.95 UAH/EUR.
  2. 2. 5UKRENERGO – SUSTAINABILITY REPORT 20194 SEVKI ACUNER Chairman of the Supervisory Board DEAR PARTNERS AND COLLEAGUES! Ukrenergo, as the transmission system operator, facilitates the integration of renewable energy sources (RES) into the power system of Ukraine. We use the best European practices and conduct relevant studies to make such RES integration safe and effective. At the same time, in the existing market model, it is crucial to comply with operational safety standards and ensure the stable operation of the power system. Ukrenergo also continues qualitative transformations within the Company aimed to improve the efficiency and reliability of its operation. We have achieved the balance between the equal and key parts of the sustainable development – operational efficiency, personnel development, and care for the environment. There are new challenges ahead, which we will overcome driven by our joint understanding of prospects, cooperation, and coordinated and sustained actions of stakeholders, policymakers, as well as the support of our partners. This is the key to the safe, reliable and high quality energy supply, the energy security of the country, and the successful integration of Ukrainian and European power systems. We are thankful to all those who, in close cooperation with Ukrenergo, make efforts to resolve the complex issues of the Company’s certification as an independent system operator,as well as to improve market mechanisms and implement European principles of the electricity market operations. I firmly believe that together we will be able to implement the ambitious plans of the Company’s development, and the Ukrainian power system will become part of the single European energy space, which will be the first significant step towards uniting the energy markets of Ukraine and Europe. I am addressing you on behalf of the Supervisory Board of NPC Ukrenergo that for the second year in a row is governing the Company and integrating its strategic vision into the achievement of key goals. The year 2019 was marked by significant changes for Ukrenergo and for the industry as a whole – the completion of the Company's corporatization and the introduction of the European model of the elec­tricity market. These key events have impacted on all areas of Ukrenergo's operation and, at the same time, confirmed for the stakeholders the Company's firm commitment to the European principles of the electricity market management and functioning. Over the year,Ukrenergo was using its best endeavours to achieve the Company's strategic goals, such as the compliance with the European principles of TSO independence,the implementation of measures for integration into the ENTSO-E Continental European network, and the introduction of a competitive electricity market. In 2019, the Company fulfilled the conditions required for certification as an independent system operator according to the OU (Ownership Unbundling) model stipulated in the laws of Ukraine, which was confirmed by a positive decision of the industry Regulator – NEURC. However, due to necessary changes to relevant laws, Ukrenergo's certification according to this model is still pending. Therefore, to ensure the certification as an independent system operator, the Company is taking a proactive position to change the “unbundling” model from OU to ISO (Independent System Operator) to satisfy the ownership unbundling requirements. Ukrenergo's persistence in the issue of certification, successful testing of thermal and hydroelectric power plants in 2019, as well as signing the Service Contract with the Consortium of ENTSO-E indicate the sustainability of Ukrenergo's strategic goals of Ukraine's power system integration into the Continental European network. INTRODUCTORY WORD
  3. 3. 7UKRENERGO – SUSTAINABILITY REPORT 20196 INTRODUCTORY WORD VOLODYMYR KUDRYTSKYI the Chairman of the Management Board DEAR COLLEAGUES AND PARTNERS! Ukrenego's certification as an independent system operator is one of the key tasks towards its strategic objective–to integrate the Ukrainian power system into ENTSO-E. However, despite the preliminary approval by the Regulator, the independence certification under the Ownership Unbundling (OU) model, which is envis­­ aged by law, was not obtained. As such, in 2020 the unbundling model will be changed to the Independent System Operator (ISO) model and the certification procedure finally will be completed. 2019 was also a defining year for Ukrenergo in terms of its “homework” to prepare the power system for synchronisation with ENTSO-E. The power plant units were successfully studied and the findings are now being used by ENTSO-E to build a joint mathematical model of the two power systems. We have completed the lion’s share of technological tasks in order to prepare the energy system for isolated operation. A successful test of the isolated operation of the power system will be a defining point for the synchronisation of the two power systems, which is scheduled for 2023. In 2019, we continued to develop and reconstruct the networks. Capital investments for the year amounted to more than EUR 104 mln, of which more than 60% were funds from international financial institutions. These funds were allocated to projects that will address the issues of reliability and security of power delivery in the regions, ensure the generating capacity and bring transmission networks up to the European grade of technical performance and security. Also, 2019 marked the start of a new project for the reconstruction and automation of 12 substations of Ukrenergo, which raised EUR 149 mln through EBRD loans. Furthermore, extensive efforts have been made to build a reliable IT infrastructure and cybersecurity system, which are an important technological link in the reliability and security of the transmission system. This sustainability report of NPC Ukrenergo for 2019 contains key results of the company's operations carried out during the year in two fundamentally different situations: under the old relationship model of the electricity market, and from July 1 – under the European market conditions. Introduction of a new market model has become a major challenge for the entire energy industry and a factor that has significantly affected virtually all areas of the company. That is because Ukrenergo gained new additional functions and obligations on 1 July 2019. This has significantly strengthened Ukrenergo’s role and responsibility in the electricity market, the principles of which significantly differ from the prior relationship model between market participants. We adapted quickly and learned how to balance the energy system using new market tools. Under these conditions, the higher share of renewable energy sources (RES) in the energy balance became a significant challenge for Ukraine's energy sector. An intensified integration of the “green” generation revealed a critical need for immediate changes in the regulatory and legal framework of the energy sector and requires certain measures to be taken to enhance its flexibility. The year was fruitful for Ukrenergo in terms of implementing the rules of the EU's Third Energy Package. In particular, Ukrenergo has made a significant step towards unbundling, that is, it was placed under the administration of the Ministry of Finance of Ukraine. This transition allowed to avoid the conflict of interests in order to comply with the unbundling principle whereby the system operator is required to separate its activities from energy production and supply segments. As a result of corporatisation, Ukrenergo was transformed into a private joint stock company fully owned by the state. In order to meet the investment plans of Ukrenergo, a productive procurement system is required. Effective planning, marketing research and com­munica­­tion strategy with potential counterparties allow us to increase competition during the bidding process and achieve an optimal price-quality balance. This is a key factor when it comes to cost savings, which amounted to EUR 28 mln in 2019. As a result of continuous reforms in 2019, Ukrenergo's procurement system has achieved a new level of procurement transparency and supply chain management. This is demonstrated through the readiness of Ukrenergo’s procurement system for the CIPS certification, which is expected as early as in 2020. At the same time,the main driver of qualitative changes at Ukrenergo and achievement of strategic goals is our personnel. We are creating the environment that enables a higher employee involvement, which is currently at 60%. This motivates us to enhance the HR policy in terms of improving working conditions and remuneration, employee development and training, promoting corporate culture and employer branding. Ukrenergo continues to be an example of successful reforms in the public sector. Our experience in implementing corporate governance best practices and reforming procurement procedures is a case study for the Organisation for Economic Cooperation and Development (OECD). In 2020, there are even more ambitious tasks ahead of Ukrenergo in infrastructure development, raising investments,preparing the energy system for integration into the European energy space. And the results of 2019 are best evidence that we are ready to succeed accomplishing them.
  4. 4. and managementKEY ACHIEVEMENTS • Corporatisation • Transition to the administration • of the Ministry of Finance of Ukraine 2Structure
  5. 5. 11UKRENERGO – SUSTAINABILITY REPORT 201910 VISION STRUCTURE AND MANAGEMENT UKRENERGO is a certified operator of the transmission system synchronised with ENTSO-E, the European Network of Transmission System Operators. Ukrenergo is the leader among Eastern European TSOs in efficiency, reliability, energy security, and technological development. It is also a platform for implementation of new power technologies.
  6. 6. 13UKRENERGO – SUSTAINABILITY REPORT 201912 MISSION Our mission is to create conditions for the sustainable development of the Ukrainian economy by ensuring a shared competitive and liberal electricity market with the European Union, equal opportunities for an immediate and continuous access of market participants to the transmission network SLOGAN As a transmission system operator, we dedicate all our efforts to man­ aging energy. We live and work in a rapidly changing time, so we have to constantly improve ourselves. The slogan of Ukrenergo – Driving the power of changes – reflects our goal to be the flagship of changes in Ukraine. National Power Company Ukrenergo is a private joint stock company fully owned by the state that acts as the operator of the Integrated Power System of Ukraine. The corporate rights are managed by the Ministry of Finance. The Energy Policy is developed by the Ministry of Energy of Ukraine. OUR VALUES EFFECTIVENESS CONSTRUCTIVENESS TRANSPARENCY RESPONSIBILITY PROACTIVITY FUNCTIONS NPC Ukrenergo performs functions of the transmission system operator, manages and operates trunk electricity power networks,acts as a commercial metering administrator, settlements administrator and performs a number of other functions in accordance with its Charter. Key objectives of Ukrenergo are: • centralised dispatch (operational and technological) control of the IPS of Ukraine to ensure the balance between electricity generation and consumption in compliance with operational security requirements; • electricity transmission via trunk and interstate power grids in accordance with the quality criteria for electricity; • maintenance and development of the transmission network, ensuring connection of power generation and consumption facilities to the transmission network; • ensuring operation of the balancing market and ancillary services market to maintain operational security; • ensuring parallel operation with adjacent power systems, integration of the IPS of Ukraine into ENTSO-E, etc. STRUCTURE NPC Ukrenergo is established under the regional principle.It incorporates six power systems and performs the functions of dispatch control and operation of trunk and interstate power grids. In addition, NPC Ukrenergo has two separate subdivisions: • PE Construction and Repair (Kyiv), established in 2019, that performs repairs, prepares cost estimates and technical documentation for construction and assembly works, etc. PE Vinnytsiaelectrotechnology, being part of this subdivision, manufactures power grid main­ tenance and repair equipment, means of protection, etc.; con­ ducts live works and provides personnel training. • PE UKRENERGOSERVICE (Kyiv) – responsible for material and technical and service support of Ukrenergo (transport,catering, booking of tickets and hotel services, printing, conference services, etc.). In addition, NPC Ukrenergo includes production enterprises located on the temporarily occupied territory: Krymska PS, Dzhankoi Trunk Power Grid (TPG),Feodosiya TPG,Simferopol TPG, recreational facility Semydviria, a pension facility Energetyk and PE Pivdenenergoprom in the Autonom­ ous Republic of Crimea, as well as Donbaska PS (Bakhmut),Chaikyne TPG (Mariupol) and Luhansk TPG (Bakhmut). PE Scientific and Design Centre for Development of the IPS of Ukraine (discontinued operations and closed on 8 May 2020) and State Inspectorate of Energy Supervision of Ukraine as of 31 December 2019 were in the process of liquidation. Tsentralna PS (Kyiv): Power supply of Zhytomyr, Kyiv, Chernihiv and Cherkasy regions and the city of Kyiv KYIV 1 2 Zakhidna PS (Lviv): Power supply of Volyn, Zakarpattia, Ivano-Frankivsk, Lviv, and Rivne regions LVIV 5 Pivnichna PS (Kharkiv): Power supply of Sumy, Poltava, Kharkiv regions and controlled territories of Donetsk and Luhansk KHARKIV 3 Dniprovska PS (Zaporizhia): Power supply of Dnipropetrovsk, Zaporizhia, Kropyvnytskyi, Donetsk (controlled territories) regions ZAPORIZHIA Pivdenno-Zakhidna PS (Vinnytsia): Power supply of Ternopil, Khmelnytskyi, Vinnytsia and Chernivtsi regions VINNYTSIA 4 Pivdenna PS (Odesa): Power supply of Odesa, Mykolaiv and Kherson regions ODESA 6 POWERSYSTEMS STRUCTURE AND MANAGEMENT
  7. 7. 15UKRENERGO – SUSTAINABILITY REPORT 201914 SEVKIACUNEROLEKSANDRPOPLAVSKYI MAKSYMNEMCHYNOV SERHIIKUSHNIRLUIGIDEFRANCISCI PEDEROSTERMARK ANDREASEN OLIVIERAPPERT MANAGEMENT BODIES Financial and business operations of the company are managed and supervised by the General Meeting, the Supervisory Board and the Management Board. General Meeting is the supreme body of the company, the powers and functions of which are exercised by a single shareholder – the state, represented by the Ministry of Finance of Ukraine. The Supervisory Board is a collegial body that protects the rights of shareholders and manages the company, supervises and regulates the Management Board. The Supervisory Board includes four independent members and three representatives of the state. MEMBERS OF THE SUPERVISORY BOARD Sevki Acuner – Director of the European Bank for Reconstruction and Development in Ukraine (2013-2018). He occupied management positions at big companies in France, Germany, Lithuania, Poland, Russia, Belarus, Azerbaijan and Turkey. Luigi de Francisci has over 20 years of experience in the energy sector, 13 of which are at top management of TERNA S.p.A. (an Italian TSO), as a member of the Council and General Assembly of ENTSO-E. Olivier Appert has experience as the chairman and chief executive officer of the French Institute of Petroleum, member of the Board of Directors of major players in the French energy market, including EDF (Électricité de France)–France’s largest state-owned producer of electricity and the world’s most powerful nuclear plant operator. Peder Ostermark Andreasen – president of ENTSO-E in 2015- 2017 and chief executive officer of Energinet.dk–a Danish electricity and gas trunk grids operator,has knowledge and experience in competitive energy markets. REPRESENTATIVES OF THE STATE AS OF 31 DECEMBER 20191 : Oleksandr Poplavskyi – Advisor to the Vice Prime Minister of Ukraine; Serhii Kushnir – Deputy State Secretary of the Cabinet of Ministers of Ukraine (2017-2018). Maksym Nemchynov (until 29 July 2019)–State Secretary of the Ministry of Energy and Coal Industry of Ukraine. COMMITTEES The Audit Committee supervises the financial reporting, financial and business activity and risk management, preliminary consideration of the annual financial plan and its implementation report, organisation of internal audit, analysis and performance assessment of internal and independent audit. As of 31 December 2019, the Com­ mit­tee is represented by: Peder Andreasen (Chairman),Sevki Acuner and Oleksandr Poplavskyi. The Appointment and Remuneration Committee is responsible for candidate selection procedures for appointing the chairperson and members of the Management Board, submitting proposals to the Supervisory Board with regard to the size of remuneration of the chairperson and members of the Management Board,other officers appointed by the Supervisory Board. Since 2019,the committee monitors and assesses compliance of independent members of the Supervisory Board with the independence criteria, assesses performance of the Supervisory Board and its committees, etc. As of 31 December 2019,the Commit­ tee is represented by: Olivier Appert (Chairperson) Luigi de Francisci,Sevki Acuner and Oleksandr Poplavskyi. The Committee for Investments and Strategy organises review of investment and strategic development plans, provides guidance to the Supervisory Board with regard to the functioning of the electricity market, integration of the IPS of Ukraine into ENTSO-E, development and implementation of investment programmes. As of 31 December 2019, the Com­ mittee is represented by: Luigi de Francisci (Chairperson), Olivier Appert and Peder Andreasen. 1 By Order of the Ministry of Finance of Ukraine No. 92 dated 28 February 2020 and Decree of the Cabinet of Ministers of Ukraine No. 156-p dated 26 February 2020, the powers of state representatives were terminated. Newly appointed state representatives are Yurii Heletii (Deputy Minister of Finance of Ukraine for European Integration), Lev Pidlisetskyi (Chairman of Power Engineering Subcommittee of the Verkhovna Rada Committee on Fuel and Energy Complex, Nuclear Policy and Nuclear Safety) and Yurii Tokarskyi (former advisor to the Prime Ministry of Ukraine, Counsellor- Envoy of the Embassy of Ukraine in the Austrian Republic). IN 2019 THE MANAGEMENT BOARD OF NPC UKRENERGO WAS FORMED AS A COLLEGIAL EXECUTIVE BODY THAT MANAGES DAY-TO-DAY OPERATIONS OF THE COMPANY. https://ua.energy/activity/reporting/. SUPERVISORYBOARD Annual performance reports of the Supervisory Board are published on the website of NPC Ukrenergo and can be accessed through sections About the Company Supervisory Board / Annual Reports of the Supervisory Board or at the link below: STRUCTURE AND MANAGEMENT
  8. 8. 16 MANAGEMENT BOARD IN 2019 DIRECTORS Maryna Bezrukova Member of the Management Board Maksym Yurkov Member of the Management Board Andrii Nemyrovskyi Deputy Chairperson of the Management Board Vsevolod Kovalchuk Acting Chairperson of the Management Board (until 26 February 2020) Volodymyr Kudrytskyi First Deputy Chairman of the Management Board (from 27.02.2020 – Acting Chairman of the Management Board, from 03.08.2020 – Chairman of the Management Board) Vitalii Zaichenko Director for Management of the IPS of Ukraine – Chief Dispatcher Oleksii Brekht Director for Network Operation and Development Mykyta Vyshnevskyi Director for Market Operations Serhii Halahan IT Director Oleksandr Karpenko Director for Commercial Metering STRUCTURE AND MANAGEMENT
  9. 9. 19UKRENERGO – SUSTAINABILITY REPORT 201918 Dmytro Rastrihin Financial Director Oleh Pavlenko Investment Director Natalia Vinnikova Human Resources Director Hlib Bakalov Commissioner for the Implementation of the Anti-Corruption Programme (Compliance) key elements long-term goals UPDATED STRATEGY: annual, short- and long-term target indicators and objectives Strategy of NPC Ukrenergo 49 227 10 It is necessary to respond adequately and effectively to changes in the foreign economic conditions, national and global trends, as well as to dynamic changes inside the company.Therefore,with participation of the company’s stakeholders, the updated strategy of NPC Ukrenergo was presented and approved by the Supervisory Board on 17 April 2019. Ukrenergo's strategy is a fundamental document based on the objectives and challenges faced by the company with reference to expectations of the stakeholders. The strategy identifies the priority areas of Ukrenergo's development and the necessary steps to achieve its strategic goals. STRUCTURE AND MANAGEMENT
  10. 10. 1 2 3 4 5 76 8 9 10 TRANSMISSION NETWORK DISPATCHING INFORMATION TECHNOLOGY FINANCE INTEGRATION INTO ENTSO-E RES INTEGRATION COMMUNICATIONS PERSONNEL CORPORATE SOCIAL RESPONSIBILITY, SECURITY AND ECOLOGY ELEMENTS ELECTRICITY MARKET 94% average indicator of progress in achieving annual strategic goals of NPC Ukrenergo by assessment results OFUPDATEDSTRATEGY Management optimisation of transmission system equipment and modes of operation, compliance of dispatching standards with requirements of the Codes and SAFA (until April 2019 – Operation Handbook) ENTSO-E, creation of a modern format of the dispatcher's workplace. Remote management of substations, implementation of technologies for conducting live works,harmonisation of technical standards with European standards,separation of transmission system operation and maintenance functions, improving the rate of readiness of the transmission system, enhancing reliability of power supply in the Eastern region and separate hubs, transmission system development for RES integration, restoration of lines and towers. Implementation of IT solutions for reliable dispatching of the IPS of Ukraine,business process automation, cybersecurity, ensuring reliable IT infrastructure and transfer of technology information, building a service-oriented organisation of IT processes. Transition to an incentive tariff model (RAB-tariff),optimisation of operating costs and minimisation of the cost of company services in the long run. Implementation of the balancing market and ancillary services market, ensuring functions of the commercial metering administrator and settlement administrator, trans-border capacity allocation and implementation of the ITC mechanism, ensuring inclusiveness of the market. Readiness of the IPS of Ukraine to isolated operation mode, ENTSO-E membership, implementation and harmonisation of the national law with European regulations,achieving transmission capacity between the IPS of Ukraine and ENTSO-E of more than 2200 MW by 2024, implementation of interconnectors development programme under PMI projects. Ensuring availability of sufficient reserves to balance the power system, implementation of RES generation forecast system, creation and expanding possibilities to connect renewable energy sources (RES) to the power system, implementation of a demand management tool. Improving the system of domestic and international communications, publicity. Enhancing labour productivity and personnel engagement,remuneration system improvement,implementation of a long-term personnel development system and diversity policy. Development of a corporate social responsibility system (CSR), creating demand for new knowledge for the needs of the industry,improving image of state-owned companies among younger generations, improvement of environmental policy, creation of a health, safety, environment (HSE) management system and a new model of fire safety management.
  11. 11. 23UKRENERGO – SUSTAINABILITY REPORT 201922 CORPORATISATION By Order of the Ministry of Finance of Ukraine No. 321 dated 29 July 2019, Private Joint Stock Company NPC Ukrenergo was established as a result of transformation of the state-owned Company NPC Ukrenergo. In addition, a new Charter was approved and a decision on issuing shares was made. The order established that the state, represented by the entity that manages equity rights of the state – The Ministry of Finance of Ukraine, is the owner of 100% of shares and addressed other corporatisation-related matters. Ordinary registered shares with the par value of EUR 34.54 were issued (Certificate of the National Securities and Stock Market Commission No. 47/1/2019 dated 9 August 2019 on registration of the share issue). Therefore, the corporatisation of NPC Ukrenergo has been completed. For more details about strategy implementation measures, refer to relevant sections of this report. The updated Strategy of NPC Ukrenergo is available at its official website and can be accessed through sections: About the company / Strategy https://ua.energy/about_us/ukrenergo-strategy/. 88% 90% 98% 87% 100% 100% 97% 93% 94% 98% Dispatching IT Communications Finance Market Implementation of goals in 2019 Personnel Integration into ENTSO-E Integration of renewable energy sources into the IPS of Ukraine Transmission network Corporate social responsibility, security and ecology 1 1 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 9 10 UNBUNDLING 2019 is a year of significant progress in unbundling – the process of separation of management of trans­ mission facilities and electricity producers. Previously, NPC Ukrenergo subordinated to the Ministry of Energy and Coal Industry of Ukraine that managed the largest electricity producer in Ukraine SE NNEGC Energoatom, PJSC Ukrhydroenergo and other market participants. As a part of unbundling, in accordance with Resolution of the Cabinet of Ministers of Ukraine No. 1001-p dated 14 November 2018, an integral property complex of NPC Ukrenergo (a state-owned company at the time) was transferred from the Ministry of Energy and Coal Industry of Ukraine to the Ministry of Finance of Ukraine. A respective acceptance certificate was approved by the Ministry of Finance of Ukraine on 4 February 2019. Transition of Ukrenergo to the administration of the Ministry of Finance of Ukraine allowed to: • comply with the Law of Ukraine “On Electricity Market” and Dir­ ec­tive of the European Parliament and of the Council 2009/72/EC dated 13 July 2009; • create prerequisites for sub­mitting a request for the TSO certifi­­cation; • ensure independence of the transmission system operator, create prerequisites for preven­ ting discrimination, political pressure and interference of central executive authorities with the TSO’s operation. CORPORATISATION OF THE COMPANY COMPLIANCE WITH THE LAW OF UKRAINE “ON ELECTRICITY MARKET” (PART 3, ARTICLE 31) AND CREATION OF PREREQUISITES FOR CERTIFICATION OF NPC UKRENERGO AS AN INDEPENDENT TRANSMISSION SYSTEM OPERATOR FOR FURTHER INTEGRATION OF THE IPS OF UKRAINE INTO ENTSO-E. Corporatisation of Ukrenergo is the change of its form of incorporation from a state- owned to joint stock company. However, 100% of shares remain in state ownership, as explicitly required by the law. The process of corporatisation lasted less than six months, that is a significant achievement for a state-owned company as big as Ukrenergo. share capital of NPC Ukrenergo BLNEUR Private Joint Stock Company NPC Ukrenergo is established – corporatisation is completed MAKSYM YURKOV Member of the Management Board 4 FEBRUARY 2019 transition of Ukrenergo to the administration of the Ministry of Finance of Ukraine 29 JULY 2019 1.2 STRUCTURE AND MANAGEMENT
  12. 12. 25UKRENERGO – SUSTAINABILITY REPORT 201924 IT IS NECESSARY TO PROVIDE FOR A POSSIBILITY OF CERTIFICATION OF NPC UKRENERGO IN ACCORDANCE WITH THE ISO UNBUNDLING MODEL 14 August 2019 all necessary documents and certification request were sent to NEURC. 7 October 2019 NEURC issued a decision on the preliminary certification (Resolution No. 2094), its provision together with the necessary documents to the Energy Community Secretariat. CERTIFICATION Transmission system operator is a business entity certified in accordance with the Directive 2009/72/EC and EU Regulation. This requirement is implemented in the Ukrainian legislation and enshrined in the Law of Ukraine “On Electricity Market”. Certification of NPC Ukrenergo as an independent transmission system operator is a mandatory condition for the Ukrainian power system to synchronise with ENTSO-E, which is governed by uniform European rules of the Directive identified above. Furthermore, Ukrenergo certification is a mandatory condition to acquire an observer membership in ENTSO-E. The decision on certification is approved by NEURC based on verification of the TSO’s compliance with unbundling and independence requirements of the Law of Ukraine “On Electricity Market”, as well as taking into account the conclusion of the Energy Community Secretariat. Mandatory conditions for certific­a­ tion are successful corporatisation, unbundling and independence of transmission system operator. In this regard, a number of significant steps have been taken during the reporting period. Currently, the only factor preventing Ukrenergo from obtaining the status of an independent transmission system operator is the lack of the necessary ownership of the transmission network. It is expected that the necessary ownership will not be obtained as part of ownership unbundling (OU), as there are legislative restrictions, such as ban on pro­per­ty privatisation that ensures integrity of the IPS of Ukraine and dispatch control, trunk and interstate transmission lines. For this reason, Ukrenergo is working on implementing the independent sys­tem operator (ISO) unbundling model. The certification of NPC Ukrenergo is made possible due to amendments to the Law of Ukraine “On Electricity Market” regarding the certification of the transmission system operator in accordance with the ISO unbundling model. The ISO model assumes that the TSO has assets in use, rather than ownership, as provided for in the OU model, and that it has the financial, technical, material and human resources needed to carry out electricity transmission. As of today, draft laws have been prepared and are being considered by the Parliament, that will allow for certification of Ukrenergo under the ISO unbundling model. ! SOLUTIONS STRUCTURE AND MANAGEMENT
  13. 13. 27UKRENERGO – SUSTAINABILITY REPORT 201926 INTEGRATED MANAGEMENT SYSTEM In 2019, auditors of LLC “DQS CERTI­FIC UKRAINE” (official representative of DQS Holding GmbH in Ukraine, a German agency for management systems certification) audited Ukrenergo's subdivisions for compliance of the integrated management system with international standards: • ISO 9001 Quality management systems – Requirements; • ISO 14001 Environmental man­ agement systems – Requirements with guidance for use; • ISO 45001 Occupational health and safety management sys‑­­­­­­ tem – Requirements with guid­ ance for use. Successful recertification audit and obtaining international cer­tificates of conformity to ISO 9001, ISO 14001, and ISO 45001 are evidence of im­ plementation of modern principles, business management methods and business responsibility, and are one of the milestones for the integration of Ukraine’s power system into ENTSO-E. In order to ensure adequate com­ pliance with the requirements of ISO 9001, ISO 14001, and ISO 45001, Ukrenergo conducts internal audits on a regular basis. PROCESS MANAGEMENT ISO 9001 requires the use of a process approach as one of the seven defining principles in the development of management systems. For this reason, Ukrenergo initiated a project “Implementation of process approach to activity management”as early as in 2016. The project aimed at improving the existing management model as a set of interconnected processes,their documentary description, as well as the use of tools and mechanisms to determine effectiveness of those processes, create prerequisites for effective supervision, ensure timely and objective data processing, identify causes of deviations and concentration of managerial influence at all stages of the process. As a result, more than 120 pro­­ cesses were modelled, which are con­­stantly being improved and updated. Implementation of a pro­cess management system at NPC Ukrenergo is aimed at con­tinu­­- ­ous improvement of performance for both the major stakeholders of the company and society as a whole. Selection of processes, their analysis and further improvement is a huge reserve for increasing the competitiveness and performance of Ukrenergo. Six benefits of improving business processes: • conditions for a broad delegation of powers and responsibility, which contributes to an improved 38 BUSINESS PROCESSES IN SEVEN BUSINESS AREAS WERE REVISED/ADJUSTED IN 2019. internal audits conducted in accordance with international standards internal auditors certified according to ISO 9001, ISO 14001, and ISO 45001 quality of work and processes; • each employee has a clear understanding of the result of their work and responsibility for its quality; • fewer levels of decision-making, that increases the efficiency and adaptability of the company; • elimination of undue costs that do not contribute to value generation; • improved communication to avoid misrepresentation and facilitate exchange of information; • conditions that enable automation of technological processes. The main tasks for 2020, in the sphere of integrated management system, are further modelling of the most efficient and convenient processes, implementation of an effective internal control system, use of lean production tools, as well as preparation of the company for an external supervisory audit and prolongation of international certificates ISO 9001, ISO 14001, and ISO 45001 for another year. THESE INDICATORS SHOW A SIGNIFICANT INTEREST OF THE COMPANY IN THE EFFECTIVE FUNCTIONING OF THE INTEGRATED MANAGEMENT SYSTEM. STRUCTURE AND MANAGEMENT
  14. 14. 3Stakeholders
  15. 15. 31UKRENERGO – SUSTAINABILITY REPORT 201930 STAKEHOLDERS STAKEHOLDERS Sustainable development and achieve­ ment of strategic goals of Ukrenergo requires coherent cooperation with stakeholders. Ukrenergo is mindful of the need to expand and develop contacts to ensure the integration of Ukraine's power system into the ENTSO-E Continental Europe network, create a joint competitive and transparent electricity market with Europe, and ensure sustainable development. STAKEHOLDER ENGAGEMENT Ukrenergo maintains a high level of interaction with stakeholders who have the greatest influence on the company and, accordingly, are influenced by the company.The format and frequency of interaction largely depends on the functional need at the request of stakeholders or on the initiative of Ukrenergo.An online survey was carried out to identify significant topics of the report. FORUM OF STAKEHOLDERS In February 2019, Ukrenergo held an annual meeting with its stakeholders under the symbolic title “10 steps towards Europe”, to which more than 200 stakeholder representatives were invited. During the meeting, Ukrenergo's manage­- ment presented the key achievements of 2018, development plans and had the opportunity to receive direct feedback.The event took the form of a presentation and an informal part for networking purposes. In future, it is planned to hold such events on an annual basis.In particular,the second annual meeting with stakeholders was held in February 2020. LIST OF STAKEHOLDERS INTERNAL Group Representatives Shareholders The state represented by the Ministry of Finance of Ukraine Employees All company employees Counterparties Representatives of all contracting companies EXTERNAL State power authority The Cabinet of Ministers of Ukraine, committee of the Verkhovna Rada of Ukraine The Ministry of Energy of Ukraine National Commission for State Regulation of Energy and Public Utilities (NEURC) International institutions, energy associations Energy Community Secretariat ENTSO-E International financial institutions World Bank International Bank for Reconstruction and Development (IBRD) European Bank for Reconstruction and Development (EBRD) European Investment Bank (EIB) Kreditanstalt fur Wiederaufbau (KfW) Foreign Embassies and Representative Offices in Ukraine: Delegation of the European Union Embassy of the United States Embassy of the United Kingdom Embassy of the French Republic Embassy of Germany Embassy of Canada Transmission systems operators (TSOs), including ENTSO-E members SEPS, PSE, RTЕ, TENNET, MAVIR, 50HERTZ, ELIA GROUP, TRANSELECTRICA, TERNA, AMPRION, ENERGINET, APG, FINGRID, LITGRID, and GSE (Georgia) Electricity market participants Energy consumers Energy producers Exporters/importers, traders, etc. Suppliers of goods and services National and foreign producers and suppliers of goods and services Non-governmental organisations, industry experts Associations of producers, electricity suppliers, research organisations, development centres, etc. Local governments and local communities Elected and other bodies of local communities Local business entities Enterprises of all forms of ownership Mass media National, regional and local TV, radio, print media, online publications, and social media CONTENT AND SCOPE Ukrenergo has been working dili­ gently to unveil significant topics according to the GRI standards. To determine the content of the report, Ukrenergo adhered to the prin­ ciples of stakeholder engagement, significance, completeness, and sus­­ tainability context. The reported information was arranged in a timely manner and in accordance with the principles of accuracy, balance, clarity, comparability, and reliability. Ukrenergo reports within the limits of company operational and financial control, as well as significant topics, in which the company has restricted impact opportunities. Significant topics in respective sections of the report are unveiled in conformity with the applicable standards and disclosures, to the extent possible, based on the existing information- gathering system and reporting practices, as well as other limitations arising from objective reasons. For more information, refer to the GRI Content Index. CHANGES IN REPORTING This report restates selected information on the figures for the reporting years 2017 and 2018. This is due to updates that took place after the issue of reports, changes in approaches and measurement methods. Information presented in the report for 2019 should be seen as relevant and finalised. In preparing the report, as a result of determining its content, the list of significant topics for 2019 was changed compared to the previous year. In particular, the important topic of Internal and external communications was included in the other topics: Integration into ENTSO-E and development of international relations and Personnel.The topic of Corporate social responsibility, environmental impact was divided into two separate topics. Among the new material topics are Supply chains and New model of the electricity market. PRECAUTIONARY PRINCIPLE NPC Ukrenergo is guided by the precautionary principle in its operations, as well as operational and strategic planning. The precautionary principle is achieved through environmental impact assessments, establishment of an anti-corruption whistleblowing hotline, creation of a cyberattack prevention system,and security operation centre.For more details,refer to relevant sections. COMMUNICATION CHANNELS AND METHODS: • General Meeting of shareholders; • forum of stakeholders; • meetings, negotiations; • seminars,trainings,conferences,forums,panel discussions,press events,etc.; • official website and its functionality: “single window” forms for joining • the networks, requests, inquiries, widgets, etc .; • Facebook,Linkedln,Instagram pages,YouTube channel,Telegram,Slideshare presentations; • hotline, boxes for complaints, suggestions and comments; • corporate portal, digests, corporate magazine “50 Hz”; • mailbox, e-mail; • company reports, booklets. Ukrenergo press conference shortly before the introduction of a new electricity market model, May 2019
  16. 16. 33UKRENERGO – SUSTAINABILITY REPORT 201932 SIGNIFICANT TOPICS During the reporting period, various topics were raised through various means of communication. An online survey was carried out to identify significant topics for the report. The questionnaire provided answers to the following questions: how significant was the economic, social and environmental impact of the main aspects of Ukrenergo’s activities in 2019, and how significant were these aspects for the stakeholders. The assessment was carried out on a scale from 1 to 10, where 1 is the lowest level of significance, and 10 is the maximum. Stakeholder groups that raised specific topics were also identified. The result of topic assessment is illustrated in the matrix of significant topics. SIGNIFICANT TOPICS AND STAKEHOLDER GROUPS THAT RAISED THESE TOPICS MATRIX OF SIGNIFICANT TOPICS   Employees Counterparties Shareholder Regulator Centralexecutiveauthorities Foreignembassiesanddelegations Internationalfinancialorganisations TSOs,includingENTSO-E members Electricitymarketparticipants Suppliersofgoodsandservices NGOs Localgovernmentsandlocal communities Localbusinessentities Massmedia Transmission system development and investments + + + + + + + + + + + + + Integration into ENTSO-E + + + + + + + + + + ІТ infrastructure and cybersecurity + + + + + + Electricity market + + + + + + + + + + + Management practices and certification of Ukrenergo as an independent TSO + + + + + + + + + Compliance and anti-corruption + + + + + + + + + + Financial and operational performance + + + + + + + + + + + + Integration of RES into the power system + + + + + + + + + Employee development and management + + + + + Corporate social responsibility + + + + + + + Resource usage and environmental impact  +    +   +   +       +  +     Supply chains   +  +  +  + +   +   +  +  +   +  + 6 6,5 7 7,5 8 8,5 9 6 6,5 7 7,5 8 8,5 9 9,5 Розвиток системи передачі та інвестиції Інтеграція до ENTSO-E IT-інфраструктура та кібербезпека Ринок електроенергії Практики управління та сертифікація Укренерго як незалежного ОСП Комплаєнс та протидія корупції Фінансові та операційні показники діяльності Інтеграція генерації з відновлюваних джерел енергії в енергосистему Розвиток та управління персоналом Корпоративна соціальна відповідальність Використання ресурсів та вплив на довкілля Ланцюги постачання Transmission system development and investments Management practices and certification of Ukrenergo as an independent TSO Personnel development and management Integration into ENTSO-E Compliance and anti-corruption Corporate social responsibility IT infrastructure and cybersecurity Financial and operational performance Resource usage and environmental impact Electricity market RES integration into the power system Supply chains Howsignificantaretheeconomic,socialandenvironmentalimpactsofthecompany How significant is the aspect for the stakeholders Ukrenergo at the EBA Conference: Electricity market reform, May 2019 STAKEHOLDERS
  17. 17. • Approval of compliance policy • Launch of external whistleblowing • hotline • Partnership with UNIC KEY ACHIEVEMENTS Compliance and combating corruption
  18. 18. 37UKRENERGO – SUSTAINABILITY REPORT 201936 COMPLIANCE AND COMBATING CORRUPTION In the reporting year,NPC Ukrenergo continued to pursue a zero tolerance principle against corruption with a focus on preventing and combating prohibited actions and practices, as well as complying with anti-corruption rules and requirements.It is extremely important for the company to create a working environment in which every employee will be confident in the correctness of their actions. We treat each other, our customers, partners and general public with honesty. Priorities for 2019 were compliance development, compliance risk assessment, launching a whistleblowing hotline in accordance with the Compliance Office Roadmap approved by the Supervisory Board. COMPLIANCE POLICY On 1 February 2019, the Supervisory Board of NPC Ukrenergo approved the Compliance Policy developed by a “big four” accounting firm KPMG and a Belgian company Elia Grid International. It is primarily based on the international standards of the Organization for Economic Cooperation and Development (OECD),which underpin the effective, transparent and responsible work of state-owned companies. The policy educates employees on how to act in a situation that shows signs of corruption, whom to contact in this case, and how to avoid and resolve conflicts of interest and more. ANTI-CORRUPTION PROGRAMME IMPLEMENTATION One of the main elements of com­ bating corruption is the updated Anti- Corruption Programme approved on 1 July 2019. Changes pertained to the powers, informing and reporting of the management body due to the transfer of NPC Ukrenergo from administration of the Ministry of Energy and Coal Industry of Ukraine to the Ministry of Finance. Anti-corruption programme is a set of rules, standards and procedures for detecting, counteracting and preventing corruption in the operations of NPC Ukrenergo. In order to ensure a systematic control over the implementation of decisions on anti-corruption policy, a number of provisions were developed and introduced with regard to the following: • resolving conflicts of interest; • procedures for protecting whistleblowers who provide assistance in prevention, de­ tection and counteraction of corruption at NPC Ukrenergo; • professional conduct rules at NPC Ukrenergo; • corruption risk assessment; • procedure for conducting an anti- corruption due diligence. CORRUPTION RISK ASSESSMENT The necessary element of im­ plementing the Anti-corruption Programme is the regular assessment and monitoring of corruption risks associated with Ukrenergo’s operations in all areas. Results of such an assessment allow to take measures to prevent situations that may lead to both pecuniary, security and reputational damage to the company,whose activities are integral to the energy security of the state. Identified key corruption risks in 2019: • public procurement: collusion bet­ween procurement par­ ticipants, document forgery, posting incomplete information on the website about the pro­ curement procedure, pro­cure­ ment evaluation and ob­taining of approvals; abuse during bid evaluation in order to reject the bid, company officers pro­viding assistance to specific coun­ter­ parties to obtain illegal benefits; • capital construction: over­state­ ment of the estimated cost of purchasing equipment, goods, works and services,delay in signing acceptance certificates or non- acceptance certificates (in case of unperformed or substandard work) to obtain illegal benefits, existence of private interest among officers in allocating funds to the benefit of counterparties by performing works through their own resources; • management of finances, re­ sources and technological processes: misuse and inefficient use of funds (CapEx та OpEx), receipt of illegal payments by employees, violation of payment discipline by officers,privileged or biased approach in determining salaries and other payments, use of company resources for personal benefit and their misappropriation, violation of the property write- off (disposal) procedure, abuse in making decisions on the connection of renewable energy producers to the power networks of NPC Ukrenergo, etc.; • personnel management: con­ ditions that contribute to the violation of anti-corruption law during personnel management, recruitment and staffing. AWARENESS RAISING AND TRAININGS In order to ensure the implementation of the Anti-Corruption Programme and national anti-corruption law, Ukrenergo conducts regular communication campaigns that involve all employees, regardless of category or production unit. In the reporting year, employees were acquainted with the provisions of the Anti-Corruption Programme at the meetings of heads of functional subdivisions. Employees subject to the Law of Ukraine“On Prevention of Corruption”were acquainted with the restrictions and procedures required by the anti-corruption law.In addition, these employees communicated information about related individuals working in structural / separate subdivisions and about existence / absence of corporate rights,conflict of interest for the purpose of its timely prevention. The company has also educated new employees about the Anti-Corruption Programme and other necessary documents within two working days. THE EFFICIENCY OF ANTI-CORRUPTION MEASURES IS EVIDENCED BY THE ABSENCE OF CONFIRMED CASES OF CORRUPTION AND LITIGATIONS AGAINST THE COMPANY OR ITS EMPLOYEES. COMPLIANCE IS A TOOL FOR ENHANCING REPU­ TATION, IMPROVING CORPORATE CULTURE, PREVENTING THE RISK OF CORRUPTION AND CONFLICT OF INTEREST, AS WELL AS NON-COMPLIANCE WITH STANDARDS AND REGULATIONS THAT ARE IMPORTANT FOR SUCCESSFUL INTEGRATION INTO ENTSO-E. Ukrenergo's compliance policy is published on the company's website and can be accessed through sections About the company / Compliance / Compliance-policy or at the link below: https://ua.energy/about_us/ compliance/compliance-policy/ 2019 is the year, in which the compliance office was established at Ukrenergo. I am glad that trust has begun to emerge and that more employees are looking at the compliance office as a partner rather than a controller to be avoided. In addition, much was done in 2019 to build an ethical culture and to ensure that honesty and ethics become the focus of the Supervisory Board, top management and other Ukrenergo employees. HLIB BAKALOV Compliance Officer – Commissioner for the Implementation of the Anti- Corruption Programme
  19. 19. 39UKRENERGO – SUSTAINABILITY REPORT 201938 99% 1% 99% 1% 98% 2% Кількість співробітників, які подали е-декларації Кількість співробітників, які не подали е-декларації RESOLVING CONFLICTS OF INTEREST Timely identification and prevention of conflicts of interest is the guarantee of openness and transparency in the company's business; it promotes fair competition, avoids discrimination and prevents corruption and misuse in a timely manner. Results of the coordinated work of the compliance office and the company's personnel in 2019 are reduction in the number of identified conflicts of interest and their timely resolution. E-DECLARATIONS In the reporting period, 99% of employees subject to the requirements of Article 45 of the Law of Ukraine “On Prevention of Corruption” and employees, who were previously required to disclose their financials and held other positions at the time, have submitted their declarations. These results were achieved through the following: • clarification of the list of dis­ closing officers; • informing every disclosing officer by e-mail about the start of the declaration campaign and providing explanatory materials; • posting clarifications to fre­- quently asked questions when filling out declarations on the corporate portal; • providing for the option of filling out declarations at workplaces; • notification of employees, who resigned in 2018, about the need to submit a declaration in 2019; • systematic control over the declaration process. CONFLICTS OF INTEREST E-DECLARATIONS 22 2 5 1 1 0 2017 2018 2019 Number of confirmed conflicts of interest Employees that have submitted e-declarations Number of potential conflicts of interest new managers have been instructed on the anti- corruption law awareness-raising interviews made with employees with regard to untimely submission of e-declarations In order to mitigate and prevent the risks of bribery at Ukrenergo, two distance learning courses were developed and implemented in 2019 – on the Anti- Corruption Programme and on the resolution of conflicts of interest – followed up by respective tests. COVERAGE 5957employees 5571employees of the total number of employees successfully completed the Anti-Corruption Programme training successfully completed training in resolving the conflicts of interest 74% 69% 2018 2017 Employees that have not submitted e-declarations employees familiar with the Anti-Corruption Programme 2019 COMPLIANCE AND COMBATING CORRUPTION
  20. 20. 41UKRENERGO – SUSTAINABILITY REPORT 201940 WORKING WITH COUNTERPARTIES In implementing anti-corruption practices,Ukrenergo looks beyond the internal environment of the company, extending its own experience to cooperation with counterparties and other stakeholders. This helps to mitigate the economic and social risks of interaction with the external environment, business security in general,to develop fair and transparent relations with business partners and fair competition. The most common cases of non- compliance with the tender require­ ments were poor preparation of tender documents, existence of tax debt among counterparties, breach of commitments to Ukrenergo, signs of fictitiousness in the bidder’s documents submitted, existence of court rulings on the counterparty,etc. PARTNERSHIP WITH UNIC The partnership contemplates the preparation of an action plan before the reporting year,the implementation of which will be considered in obtaining the UNIC membership. This will allow NPC Ukrenergo to enhance anti-corruption measures, facilitate the inflow of investments into the industry, as well as deepen international relations and cooperation through seminars,educational events, methodological and expert support on compliance matters. Implementation of international best practices, in particular on ethics and compliance, will allow us to comply with the European principles, as we integrate the Ukrainian power system into ENTSO-E. UNIC is a non-profit organisation founded with the support of the OECD and the EBRD, which aims at promoting the idea of doing business ethically and responsibly. Ukrenergo has held the week of ethics on the occasion of the Global Ethics Day.“What is ethics for me?” – this question was addressed daily throughout the week in the corporate video blogs by top managers and employees engaged in the flash mob dedicated to this matter.This allowed to draw attention of employees to business ethics and encourage them to comply with ethical principles in their behaviour, communication with colleagues and partners. EFFECTIVE TOOLS ARE ANTI-CORRUPTION DUE DILIGENCE CHECKS IN VARIOUS FIELDS OF THE COMPANY’S BUSINESS, AS WELL AS EXISTENCE OF ANTI-CORRUPTION CLAUSES IN FOREIGN ECONOMIC CONTRACTS WITH COUTNERPARTIES. tender documents, contracts and supplementary agreements were examined by the compliance office in 2019 comments with proposals to reject the participation of counterparties in procurement were prepared by result of due diligence checks ON 21 FEBRUARY 2019, THE PARTNERSHIP MEMORANDUM WAS SIGNED BETWEEN NPC UKRENERGO AND UKRAINIAN NETWORK OF INTEGRITY AND COMPLIANCE (UNIC). UKRENERGO IS THE FIRST UKRAINIAN STATE-OWNED COMPANY TO BECOME A PARTNER OF UNIC. week of ethics at NPC Ukrenergo Signing Memorandum with UNIC Ukrenergo’s participation in the CEO discussion on the ethical and successful business in cooperation with UNIC COMPLIANCE AND COMBATING CORRUPTION OCTOBER 3658
  21. 21. 43UKRENERGO – SUSTAINABILITY REPORT 201942 35 24 17 7 7 4 3 3 HOTLINE Ukrenergo advocates maximum transparency and implements international best practices–engages an independent external company to receive violation reports in the field of ethics and compliance. For this purpose,an agreement was concluded with a company specialising in the registration of phone calls, e-mails and messages on a dedicated website concerning ethical and compliance violations at NPC Ukrenergo received through the hotline. The independent company Ethicontrol acts as a guarantor of anonymity and security of applicants / whistle­- blowers.In addition to the call centre, the company provided NPC Ukrenergo with software allowing whistleblowers to communicate anonymously with the compliance officer, send video and audio files, track the processing status of his or her online application, etc. Messages automatically regis­ tered through the hotline cannot be deleted or left without consideration, with the process being controlled by the Supervisory Board. ANNUAL INTEGRITY CERTIFICATION Among new developments in the reporting year,there is annual integrity declaration for top management of the company,public procurement experts (authorised parties) and managers of regional power systems. In 2019, 60 declarations were received and used by the compliance office to conduct integrity checks using data from open sources. Furthermore, potential candidates for key positions shall sign an integrity declaration and are checked by the compliance office prior to the employment decision. Main channels of communication through hotline were a dedicated website and e-mail, which accounted for 62% of all incoming messages. In 2019, the compliance office received 29 reports of violations via the hotline in five months, 19 of which contained factual verifiable data. Based on the reports obtained, 11 invest­ igations and internal inspections were conducted, two employees were fired, and six employees were deprived of quarterly and annual bonuses. In addition, a theft was identified and timely prevented,which helped avoid multimillion losses. ON 8 JULY 2019, HOTLINE WAS ESTABLISHED WEB-SITE: https://energy.ethicontrol.com E-MAIL: ue@ethicontrol.com.ua TELEPHONE: 0 800 214 286 24/7 41 21 21 17 USE OF HOTLINE COMMUNCATION CHANNELS VIOLATION REPORTS Е-mail Website Telephone Other Other Improper conduct Unfair treatment of employees Conflict of interest Gifts, bribes Theft Embezzlement Threats and physical violence Hlib Bakalov talking on ethical culture development projects at Ukrenergo at the Compliance Officers Conference, Kyiv COMPLIANCE AND COMBATING CORRUPTION
  22. 22. indicators• Revenue growth by 4.4 times • compared to 2018 • EBITDA growth up to EUR 138 mln 5FinancialKEY ACHIEVEMENTS
  23. 23. 47UKRENERGO – SUSTAINABILITY REPORT 201946 FINANCIAL INDICATORS This year was marked by a number of significant changes in the inflow and use of cash due to the introduction of a new electricity market model from 1 July 2019. The main challenge for Ukrenergo in the second half of 2019 was to ensure an adequate level of liquidity, which the company reached successfully. DMYTRO RASTRIHIN Financial Director In 2019, the corporatisation of Ukrenergo was completed. The company switched to IFRS accounting and applied the revaluation model of fixed assets. Its financial statements for 2019 were audited by Deloitte, an audit company. Fixed assets were revalued by KPMG. Cash inflows, mln EUR (incl. VAT) 2017 2018 2019 Cash inflows from SE Energorynok 334 232 123 Inflows from market participants — — 722 Loans obtained for investment projects 9 41 30 Other 39 56 44 Total 383 329 919 Use of funds, mln EUR (incl. VAT) 2017 2018 2019 Loan repayment 44 50 48 Taxes 115 45 122 Capital investments 56 102 82 Wages and salaries and related accruals 61 69 80 Financial costs 16 17 17 Payments to market participants and suppliers 99 41 533 including for performing public service obligations — — 268 Other 20 11 15 Total 412 335 896 CASH INFLOWS USE OF FUNDS TARIFFS From 1 July 2019, due to the introduction of a new electricity market model, the single tariff of Ukrenergo was divided into two separate tariffs–for electricity transmission services and for dispatch (operational and technological) control services. Major factors affecting the tariff change are market components of expenditure in the structure of tariffs for electricity transmission and dispatch (operational and technological) control. More specifically, expenditure components in the electricity transmission tariffs are cost of performing public service obligations (while increasing the share of renewable power production) and cost of acquiring electricity to compensate for technological expenses. In the dispatch control tariff, expenditure components are costs of services of commercial metering administrator and settlement administrator, as well as costs of acquiring ancillary services. UKRENERGO’S TARIFFS AS OF 31/12/2019 Company’s tariffs, EUR/MWh 2017 2018 2019 Electricity transmission Dispatch control January 1.54 1.24 1.46 February 1.54 1.24 1.46 March 1.54 1.24 1.46 April 3.94 2.21 2.45 May 3.94 1.60 2.45 June 3.94 1.60 2.45 July 1.98 1.60 12.00 0.31 August 1.98 1.87 10.78 0.31 September 1.98 1.87 4.03 0.31 October 2.36 1.87 4.03 0.28 November 2.36 1.87 4.03 0.28 December 2.36 1.19 4.03 0.28 Due to changes in market processes during the second half of 2019, Ukrenergo's tariff was revised several times. In addition to market processes, the market components of the aforementioned tariffs changed as well, while operating costs in the tariff structure remained virtually unchanged. On 10 December 2019, NEURC approved the following Ukrenergo’s tariffs for 2020: 5.37 EUR/MWh – for electricity transmission 0.35 EUR/MWh – for dispatch control 287 207 908 187 104 138 2017 2018 2019 EBITDA, mln EUR Operating income, mln EUR 4.03 EUR/MWH ELECTRICITY TRANSMISSION 0.28 EUR/MWH DISPATCH CONTROL
  24. 24. 49UKRENERGO – SUSTAINABILITY REPORT 201948 122 MLNEUR paid to the State budget (by 80% more than in 2018) TAXES Ukrenergo is a reliable taxpayer that conducts business transparently, reliably and fully meets all its commitments with regard to assessment and payment of taxes in accordance with applicable laws. The company's tax policy is based on the principles of legality,comprehensiveness and efficiency. Ukrenergo is in close dialogue with public authorities to take into account the interests of stakeholders when paying taxes, as well as to optimise the tax burden on the company. Ukrenergo assesses and pays taxes to the budgets of all levels in a timely manner and in full. This is supported by the absence of penalties for an untimely submission of tax returns,reporting inaccurate information or overdue mandatory payments. 18TH RANK IN TOP 20 of the largest taxpayers in Ukraine and the 3rd rank among power sector companies (according to the study conducted by the Rating magazine) (https://rating.zone/wp-content/uploads/2020/02/top-100.pdf) Taxes paid, mln EUR 2017 2018 2019 Income tax 31 12 34 Deductions of a portion of net profits 40 — 17 VAT 31 19 53 Other taxes (including single social contribution) 13 15 17 Total: 115 45 122 FINANCIAL INDICATORS
  25. 25. 51UKRENERGO – SUSTAINABILITY REPORT 201950 chains 6Supply • Introduction of category management • Creation of a single directory of unified • nomenclatures • 100% readiness for CIPS certification KEY ACHIEVEMENTS
  26. 26. 53UKRENERGO – SUSTAINABILITY REPORT 201952 SUPPLY CHAINS 2743 438 316 204 1135 300 12.3 6.3 25 9.1 2.8 5.4 2019 is the year, in which Ukrenergo’s procurement function was transformed. In particular, a category management system was introduced, which established a unified systematic approach to the process of managing procurement categories and harmonised the company's goals and strategy with the requirements of external partners and market opportunities. As such, the procurement, logistics and marketing functions were consolidated and the supply chain management of many separate segments transformed into a single integrated process. KEY PRINCIPLES OF PROCUREMENT SYSTEM: • efficiency; • fair competition; • service-oriented approach; • proactivity; • transparency; • responsibility. CATEGORY MANAGEMENT COVERS THE ENTIRE PROCUREMENT CYCLE: FROM NEEDS PLANNING AND IDENTIFICATION OF KEY PROCUREMENT SPECIFICATIONS TO THE PURCHASE ITSELF AND LOGISTICS. MAIN TYPES OF GOODS, WORKS AND SERVICES NUMBER OF BIDDERS BIDDERS share of expenses from the total budget for internal procurement of goods, works, services from residents 5 136 procurements 60.9 mln EUR Household and related goods Domestic procurement IT/communication/measuring equipment Open international competitive bidding Construction, reconstruction, repairs/ design works Residents Basic equipment Non-residents Financial/legal/educational services Special machinery and vehicles 6% 6% 9% 15% 9% 10% 4% 5% 53% 41% 22% 20% In 2019, the procurement system of Ukrenergo reached a qualitatively new level of development, in which efficiency and business reputation are top priorities. We have introduced new tools and are improving the procurement procedures taking into account the global best practice. This allows us to ensure that Ukrenergo’s procurement system is 100% ready for CIPS certification and will confirm the transformation of its procurement process into the international-grade supply chain function. MARYNA BEZRUKOVA Member of the Management Board PROCUREMENT PARTICIPANTS It is important for Ukrenergo to support the country's economy, which is directly affected by the purchase of products and services from domestic suppliers. However, given the special nature of and high requirements for the quality of electrical equipment, works and services outlined by the company, as well as the limited supply of certain lots from Ukrainian manufacturers, international suppliers are also invited to promote competition. Also, there was a proactive needs planning form implemented within the procurement management sys- tem – a single directory of unified nomenclatures that ensures a single standard for identification of needs, allowing for significant cost-savings and risk mitigation. 109 54 571518 1496 1447 2019 2018 2017 59 39 87 1516 1496 1469 2019 2018 2017
  27. 27. 55UKRENERGO – SUSTAINABILITY REPORT 201954 5 44 8 34 3 25 PROCUREMENT COST SAVINGS We achieve cost savings using a variety of tools at each stage of procurement: from effective planning and marketing research to communication strategy with business partners and potential counterparties. This allowed to increase the average number of bidders per auction from 2-3 at the beginning of the year up to 3-4 at the year-end and contributed to a greater competition that became a major factor in cost savings. total procurement savings MLNEUR THE INTERNATIONAL TENDER FOR THE RECONSTRUCTION OF SIX SUBSTATIONS OF ZAKHIDNA POWER SYSTEM HAS DEMONSTRATED THE EFFICIENCY OF THE COMMUNICATION STRATEGY WITH BUSINESS PARTNERS AND THE COST- SAVING EFFECTS OF COMPETITION: SAVINGS, MLN EUR Domestic procurement External procurement 2017 49 42 2018 28 2019 PROCUREMENT AT PROZORRO SUPPLIER SELECTION PROCEDURE The effectiveness of the procurement process directly depends on the transparency of relations with suppliers. Ukrenergo uses a supplier database, which is constantly updated with marketing research data and e-procurement system ProZorro. Among the key innovations of the reporting year, as far as the selection of suppliers, there is a new format of pre-procurement communication with business partners. In particular, there are open workshops and presentations on the subject of procurement. Suppliers are informed about the items of the annual procurement plan with regard to the peculiarities. Besides, suppliers are personally invited to tender with reference to the announcement in the e-procurement system ProZorro. Ukrenergo’s procurements at ProZorro 2017 2018 2019 Number of procurements carried out through ProZorro 2185 2431 2611 Number of bids submitted by suppliers 4643 4295 4213 Total amount, for which goods, works and services were delivered, mln EUR 72 75 54 Savings as a result of tenders at ProZorro, mln EUR 5 8 3 Procurementofstate-owned companies at ProZorro in 2019 Total expected value, mln EUR Total savings, mln EUR Savings, % NPC Ukrenergo 57 3 5.5 NJSC Naftogaz of Ukraine 39 2 6.2 NNEGC Energoatom 459 16 3.6 In case of segmentation of suppliers,particular attention is paid to the reputation of business partners due to the high risk of bad faith participants operating in the market. Ukrenergo adheres to the corruption zero tolerance principle, and in this matter, category managers play the main role. They provide a decent representation of the company's interests in relations with business partners while maintaining the company's reputation. September 2019: • presentation of the company's development plans and key investment projects financed via IFI loans during a road show in Ankara (Turkey) in cooperation with the Turkish- Ukrainian Business Association (TUID). October 2019: • representatives of 15 potential bidders visited Zakhidna power system substations planned to be reconstructed; • pre-tender conference with the participation of representatives of interested companies, detailed conditions of international competitive bidding; December 2019: • 29 bids submitted; • 19 bidding companies; • result – cost reduction by 13.3% (from USD 75 mln to USD 65 mln). Meeting of Ukrenergo and CIPS representatives CERTIFICATIONACCORDING TO CIPS STANDARDS For Ukrenergo, an important event in the field of procurement was the start of cooperation with the Chartered Institute of Procurement and Supply (CIPS) as part of the Procurement Excellence CIPS programme. As a result, Ukrenergo and CIPS signed a corresponding memorandum. The programme contemplates a compre­ hensive analysis of procure­­ment pro­ cedures, man­agement performance assessment,com­­pliance of the supply chain management system with the overall business strategy,and risk man­­­ agement of NPC Ukrenergo. Further plans include obtaining certification for compliance with CIPS standards. This will have a positive impact on the cost optimisation and, consequently, will increase operational performance, enhance competitive advantages in the international market by increasing the transparency of procurement. SUPPLY CHAINS 28
  28. 28. 57UKRENERGO – SUSTAINABILITY REPORT 201956 68revenue from sale of illiquid assets THSEUR NUMBER OF SUCCESSFUL AUCTIONS VALUE OF ASSETS SOLD, THS EUR VALUE STRUCTURE OF ILLIQUID ASSETS SOLD, % NUMBER OF BIDDERS PER SUCCESSFUL AUCTION (ON AVERAGE) 36 653 3% 39 680 2019/ 2018SALES AT PROZORRO.SALE 3 4 Value of assets sold scrap metal secondary raw materials PP&E guarantee deposits of disqualified winners and contractual penalties Value determined by experts 0.6 1.4 AVERAGE INCREASE IN AUCTION PRICE SALES OF ILLIQUID ASSETS The new legal framework, which became applicable after the change of Ukrenergo’s incorporation,changed the asset write off and disposal procedures, which, together with the change of management body, temporarily hindered the selling of illiquid assets compared to 2018. At the same time, illiquid assets were sold for almost EUR 680 ths (scrap metal was sold for EUR 587 ths and significant funds were saved on waste disposal). SUPPLY CHAINS 88.2 8.2 3.0 5.25.488.0
  29. 29. KEY ACHIEVEMENT Power System of Ukraine 7The Integrated • Transition of the Ukrainian power • system to the market conditions
  30. 30. 61UKRENERGO – SUSTAINABILITY REPORT 201960 Substations 001 – SS Novodonbaska 002 – SS Cherkaska 003 – SS Alchevska 004 – SS DMZ 005 – SS Smolianka 006 – SS Zaporizka 007 – SS Dobroslavska 008 – SS Peremoh 009 – SS Chaikyne CHPP / TPP 010 – Vuhlehirska TPP, 3600 MW 011 – Zuivska TPP, 12 MW 012 – Luhanska TPP, 1220 MW 013 – Myronivska TPP, 275 MW WPP 014 – Overyanivska WPP, 300 MW 015 – Tylihulska WPP, 500 MW 016 – Ovid-Wind 2 WPP, 51 MW 017 – Orlovska WPP, 100 MW 018 – Prymorska-1 WPP, 100 MW 019 – Prymorska-2 WPP, 100 MW HPP / HPSPP 020 – Serednyodniprovska HPP, 388 MW 021 – Kakhovska HPP, 344.8 MW 022 – Kakhovska HPP-2, 250 MW SPP 023 – Voskhod Solar SPP, 60 MW 024 – Prohresivka SPP, 128 MW 025 – Perove SPP, 107 MW THE INTEGRATED POWER SYSTEM OF UKRAINE Transmission lines (in operation) Generation assets (in operation) Generation assets (planned or under construction) Substations and voltage rating (in operation) Substations and voltage rating (planned or under construction) Topographic elements Transmission lines (planned or under construction) Temporarily disconnected OHL sections 750 kV 500 kV 400 kV 330 kV 330 kV (underground, cable) 220 kV 110 –150 kV NPP CHPP / TPP HPP HPSPP WPP* SPP* HPP WPP SPP 750 kV Cities Borders of Ukraine Borders of power systems (PS) Borders of countries Burshtyn Island Occupied territories in the eastern Ukraine and annexed Crimea Borders of regions Water (seas, rivers, lakes, water reservoirs) 400 kV 380 –400 kV 330 kV 330 kV 220 kV 150 kV 110 kV 500 kV 750 kV 750 kV 500 kV 400 kV 330 kV *RES assets 50 MW or more
  31. 31. 63UKRENERGO – SUSTAINABILITY REPORT 201962 THE INTEGRATED POWER SYSTEM OF UKRAINE STRUCTURE OF INSTALLED CAPACITY IN THE IPS OF UKRAINE IN 2019 Other (biomass and biogas) 26.21 41.38 6.74 11.54 9.11 % 2.82 1.9 0.3 NPP TPP SPP CHP HPP HPSPP WPP The previous and new models of the electricity market ensured stable operation of the power system. At the end of the year, the IPS was characterized by some electricity surplus, an increase in RES share in the production structure, restrictions on imports and a shortage of capacity reserves due to the low activity of certified participants in the ancillary services market. Main tools of ensuring balance and stable operation of the power system were dispatch instructions in accordance with the balancing market mechanisms, and once those were exhausted – instructions for ensuring the operational security of the IPS of Ukraine. VITALII ZAICHENKO Director for Management of the IPS of Ukraine – Chief Dispatcher In 2019, the main part of the IPS of Ukraine operated in parallel with the energy association of the CIS, the Baltic states, and Georgia. The western part of the IPS of Ukraine (Burshtyn TPP Island) operated in parallel with the energy association of states from the ENTSO-E Continental Europe group. The frequency was regulated at 50.00 Hz. From the start of the year and up to the introduction of the new electricity market (1 July), there has been a zero power flow balance at the interconnection of the IPS of Ukraine – the UPS of Russia, the IPS of Belarus, and from 1 July onwards – as per the electricity import schedules approved. INSTALLED CAPACITY OF THE IPS OF UKRAINE The increase in the installed capacity of the power system (by 2.3 GW) is attributed to a three-fold increase in solar generating capacity and a 2.6-fold increase (by 636 MW) in wind generating capacity driven by an active commissioning of all types of generation facilities. In addition, the hydrogenerating capacity grew by 77.5 MW, of which 73.1 MW – through re-rating of the HPP of PrJSC Ukrhydroenergo due to equipment reconstruction,as well as a 4.33 MW capacity increase in small HPPs. Furthermore, the generating capacity of biofuel power plants grew by 1.4 (by 44 MW) in 2019 after new facilities were put into operation. IN 2019, THE POWER SYSTEM OF UKRAINE OPERATED UNDER TWO FUNDAMENTALLY DIFFERENT ELECTRICITY MARKET MODELS: BEFORE 1 JULY – A REGULATED MARKET BASED ON A SINGLE BUYER; AFTER 1 JULY – A NEW MARKET MODEL, WHERE EACH PARTICIPANT MAY PURCHASE ELECTRICITY FROM ANY PRODUCER OR TRADER AND THE GENERATION SCHEDULE IS CONTINGENT UPON THE MARKET SEGMENT DEMAND. Type of power plant Installed capacity, MW 2018 2019 NPP 13835 13835 TPP 21842 21842 HPP 4732 4809 HPSPP 1510 1488 CHP 6100 6091 WPP 389 1025 SPP 1225 3555 Other (biomass and biogas) 99 143 Total 49730 52787
  32. 32. 65UKRENERGO – SUSTAINABILITY REPORT 201964Hungary Slovakia Romania Poland Moldova Russia Belarus Total ELECTRICITY EXPORTS AND IMPORTS BY AREAS, BILLION KWH STRUCTURE OF ELECTRICITY GENERATION IN THE IPS OF UKRAINE IN 2019 % Other (biomass and biogas) 53.9 2.0 0.9 1.1 1.3 0.3 NPP SPP HPSPP Producers in the DSO territory WPP 7.1 4.2 CHP HPP 29.2 TPP2.7 0.9 0.9 0.02 0.6 0.3 0.6 1.4 0.4 0.1 3.9 Export Import 6.5 ENERGY GENERATION In 2019, total energy generation declined by 3.3% or 5.4 billion kWh compared to 2018 due to the overall decrease in electricity consumption. TPP generation decreased by 2.9 billion kWh while RES generation increased by 2.8 billion kWh (two-fold). Type of power plant Electricity generated, billion kWh 2018 2019 NPP 84.4 83.0 TPP 47.8 44.9 CHP 11.0 10.9 HPP 10.4 6.5 HPSPP 1.6 1.3 Producers located in the territory of distribution system operators 1.5 1.8 WPP 1.2 2.0 SPP 1.1 3.0 Other (biomass and biogas) 0.3 0.4 Total 159.3 154.0 Introduction of the new electricity market model cancelled regulatory restrictions and opened opportunities for electricity imports into Ukraine. In particular, it triggered imports into the trade zone of Burshtyn TPP Island from Slovakia, Hungary, Romania, and into the main part of the IPS of Ukraine from Belarus and Russia. At the same time, in November-December, electricity imports from Belarus and Russia were limited to 40-80%, and in some hours to zero in order to ensure operational security in the power system. Import adjustments are caused by a significant reduction in electricity consumption due to abnormally warm weather. The option to adjust imports is envisaged in the existing agreements on the parallel operation with respective transmission system operators. Balance of consumption and generation, billion kWh 2017 2018 2019 Generation 155.4 159.3 154.0 Consumption 149.3 153.1 150.2 Export 5.2 6.2 6.5 Import 0.0 0.0 2.7 Technological flows1 0.05 0.03 0.04 Transmission to temporarily occupied territories 0.5 0.0 0.0 1 The flow is due to the parallel work with the power systems of neighbouring countries THE INTEGRATED POWER SYSTEM OF UKRAINE
  33. 33. 67UKRENERGO – SUSTAINABILITY REPORT 201966 STURCTURE OF ELECTRICITY CONSUMPTION IN UKRAINE Maintenance of the trunk networks ensured a high level of operational readiness of the network and the required amount of electricity transmission from generation to the distribution system networks in accordance with the demand. TRUNK NETWORKS OF NPC UKRENERGO AND THEIR STATUS Group of consumers 2017 2018 2019 Consumption, net share, % 100.0 100.0 100.0 1. Industrial consumers 42.8 42.6 42.6 2. Agricultural consumers 3.1 3.2 3.1 3. Transportation 5.9 5.7 5.5 4. Construction 0.7 0.8 0.8 5. Municipal consumers 12.6 12.7 12.5 6. Other non-industry consumers 5.3 5.6 6.2 7. Population 29.4 29.4 29.3 1 Including 34 substations located on the temporarily occupied territories of Donbas and the Autonomous Republic of Crimea capacity of transformer substations OHL length Voltage rating Transmission line length, km Substations number of substations electric power, MW 750 kV 4403 9 18736 500 kV 375 2 1753 400 kV 339 2 2008 330 kV 12980 88 49598 220 kV 3019 33 9207 110 kV 458 6 376 35 kV 122 – – Total 21697 1401 81678 By the end of 2019,53% of electrical equipment of Ukrenergo’s substations had been in service for more than 25 years, 66% of power transmission lines – for more than 50 years, almost 5% of 220-750 kV transmission lines require full replacement or reconstruction (excluding temporarily occupied territories). The average service life of permanent equipment (autotransformers, limiters, compressors) is 25 years, power transmission lines – 50 years. SCOPE OF REPAIRS Every year, Ukrenergo carries out scheduled capital and current repairs, as well as emergency remedial works, which allow to ensure stable operation of the permanent equipment of the trunk and interstate networks and the power system reliability. These works are carried out both using own resources and engaging contractors. LIVE WORKS THE TOTAL AMOUNT OF TRANSMITTED ELECTRICITY, BILLION KWH 113.8 113.3 MLNEUR THSMWTHSKM repair costs THE INTEGRATED POWER SYSTEM OF UKRAINE the level of operational readiness of the power grid taking into account repair works In April 2019, Ukrenergo began to carry out live works. The technology allows to reduce the OHL interruption time during repairs, to improve the availability (readiness) of the network and prevent the potential disconnection of consumers or generation limitations due to line damaging. 18 April 2019 – for the first time, live works carried out at OHL 330 kV Vinnytska – Ladyzhynska The regulatory framework was developed and devices and equipment were manufactured by a team of specialists from PE Vinnytsiaelectrotechnology. The reliability and properties of protective equipment were tested in a certified laboratory of the subdivision. Electricians were trained in accordance with a special programme at the test and training centre of PE Vinnytsiaelectrotechnology. In October 2019, an emergency repair of OHL 400 kV Burshtyn TPP – Mukachevo was also carried out using this technology. The live works were a success thanks to sharing the experience by colleagues from RTE, the French system operator. 9.3 96.6% 2017 2018 2019 95.22 2 Data for the second half of 2019 are formed in accordance with the instructions to the reporting form № 5 “Report on the actual volume of electricity transmission”, approved by the Resolution of NEURC dated 29.03.2019 № 450 as amended by the Resolution of NEURC dated 24.09.2019 № 2000. Total electricity transmission includes volume of electricity transmitted to distribution system operators, consumers connected to TSO's networks and electricity producers connected to TSO's networks to meet the needs of power plants.
  34. 34. 69UKRENERGO – SUSTAINABILITY REPORT 201968 DISTURBANCES IN THE NETWORK TRANSMISSION RELIABILITY INDICATORS The 67% increase in interruption time (by 9.9 minutes) is due to the imperfect calculation method. In particular, the current instruction on reporting the transmission reliability (continuity) indicators (Resolution of NEURC No. 374 dated 12 June 2018) contemplates the calculation of the AIT value in such a way whereby the decrease in transmission via trunk networks, which is associated with a decline in consumption and energy generation in 2019,causes the average power in the system to decrease and, accordingly, the AIT value to increase, thus having a negative impact on the AIT value. TECHNOLOGICAL LOSSES Technological losses during energy transmission via trunk networks amounted to 3.576 bln kWh. These losses are a part of every electricity network and inevitably arise during transmission and distribution of electricity over long distances. Amount of technological losses also depends on the structure and composition of the generating capacity,operating mode,weather conditions,etc. To reduce technological losses in the reporting period, Ukrenergo took the following measures • optimisation of operating modes of the main electricity network in terms of voltage, transformation ratios and reactive power; • switching off transformers under light-load conditions at substations with two or more transformers, as well as transformers at substations with seasonal load; • reduction of electricity losses for own needs of substations. 2017 2018 2019 Total disturbances 112 75 72 Caused by natural calamities or outside interference 57 33 33 Total disturbances caused by human error and maintenance deficiencies 32 24 10 Caused by other factors 23 18 29 System reliability indicators1 2017 2018 2019 Estimated amount of Energy Not Supplied (ENS) by Ukrenergo, ths kWh 1948.7 1278.5 1779.0 Average Interruption Time (AIT) in Ukrenergo networks, min 9.0 5.93 9.9 Technological loss indicators 2017 2018 2019 Energy transmitted, bln kWh 113.8 113.3 95.2 Technological losses (TL), bln kWh 3.8 3.7 3.6 1 ENS and AIT values are calculated using the methodology approved by NEURC Resolution No. 374 dated 12/06/2018. ABSOLUTE MAXIMUM AND MINIMUM OF POWER CONSUMPTION 28 January 2019, 11:00 AM,-6.1 °C 29 April 2019, 4:00 AM, +12.2 °C MW MW THE INTEGRATED POWER SYSTEM OF UKRAINE IN 2019, DUE TO THE INTRODUCTION OF A NEW MARKET MODEL AND CHANGES IN THE RELATIONSHIP BETWEEN ITS PARTICIPANTS, THERE WERE CHANGES IN METHODS OF CALCULATING KEY PERFORMANCE INDICATORS OF THE POWER SYSTEM, INCLUDING THE TRANSMISSION SYSTEM OPERATOR. THIS AFFECTED THE INDICATORS FOR 2019, AND THIS FACTOR SHOULD BE TAKEN INTO ACCOUNT WHEN COMPARING THE INDICATORS FOR THE PREVIOUS PERIODS.
  35. 35. 71UKRENERGO – SUSTAINABILITY REPORT 201970 KEY ACHIEVEMENTS 8New model • Implementation of the Market Management • System (MMS) software package • Organisation of the work of commercial metering • administrator and settlements administrator • Ensuring the operation of the balancing • and ancillary services markets • of the electricity market
  36. 36. 73UKRENERGO – SUSTAINABILITY REPORT 201972 Ukrenergo has held seminars and trainings for market participants, where par- ticipants discussed the principles underlying the platform operation, training sessions on the registration of bilateral contracts, inputting of commercial me- tering data to the system, imbalance settlements, balancing market transactions, and where the mechanisms of communication and interaction between market participants and TSOs were explained, etc. This allowed market participants to prepare for real market transactions at market launch. 30 JUNE, 11:00 AM FIRST MARKET TRANSACTIONS IN MMS Prior to the introduction of the new market model, amendments were made to the Market Rules and the Transmission Network Code.This required adjustments to MMS, which took place during real market transactions. At the time of transition to the new electricity market model, there were no irregularities in the operation of the energy system. The main problems in the new market model are caused by the governmental decisions made shortly before its launch – the introduction of public service obligations (PSO) to artificially restrain the price of electricity for domestic consumers. As a commodity, the electricity costs much lower for domestic consumers than in any other generation. Compensation of the difference is included in Ukrenergo’s tariff, which does not cover the necessary expenses. As a result, the functioning of the market model was distorted and its participants accumulated considerable debts. THE MARKET LAUNCH, AS EXPECTED, HAS RADICALLY CHANGED THE RELATIONSHIP BETWEEN THE PARTICIPANTS, THE PRICING OF ELECTRICITY AS A COMMODITY, AND HAS BECOME A KIND OF A STRESSOR FOR MARKET PARTICIPANTS AND THE ENERGY INDUSTRY The key event of 2019 for Ukrenergo and the energy industry in general was introduction of the new electricity market model on July 1. The market is introduced in accordance with the Law of Ukraine “On Electri- city Market”.The purpose of the new market is to abolish cross-subsidisation, introduce competition among energy producers, suppliers and traders, and generate an economically feasible cost of electricity for consumers. To launch the new market model, Ukrenergo has adopted the Market Manage- ment System (MMS) to ensure the functioning of the bilateral contracts market, balancing market, ancillary services market and performance of Ukrenergo's functions as a commercial metering administrator and a settlements administrator. The MMS was developed by a consortium of IP Systems Zrt.(Hungary),Smart Technologies Management-Beratungs (Austria) and Siemens AG (Germany). The MMS test platform was presented to potential market participants on 11 December 2018 to learn about algorithms underlying its operation and to run tests. 5 seminars and training sessions for market participants MARKET TRANSACTIONS TAKE PLACE AT THE UKRAINIAN ENERGY EXCHANGE, DIRECTLY BETWEEN MARKET PARTICIPANTS AND ON THE PLATFORM OF SE MARKET OPERATOR, WHERE THE DAY-AHEAD MARKET AND INTRADAY MARKET PREVAIL. THE BILATERAL CONTRACT MARKET, THE BALANCING MARKET AND THE ANCILLARY SERVICES MARKET, PREVAIL ON THE UKRENERGO’S MARKET MANAGEMENT SYSTEM PLATFORM Ukrenergo trainings for market participants, Kyiv NEW FUNCTIONS OF UKRENERGO IN THE MARKET: • commercial metering administrator and central aggregator of commercial metering data; • settlements administrator in the balancing market and ancillary services market (before January 1, this function was performed by SE Energorynok). Ukrenergo has also become a local body for issuing EIC codes (Energy Iden- tification Coding) used within ENTSO-E to identify processes, facilities and market participants, to harmonise data exchange. In the long run, Ukrenergo focuses its efforts on the market within its strate- gic objectives, in particular: • to ensure sustainable operation and development of the balancing market and ancillary services market as the key tools of stable operation of the power system; • to act as commercial metering administrator and settlements administrator, to create a DataHub (a single data platform for commercial electricity metering, centralised registries of commercial metering service providers, points of commercial metering and automated systems); • to introduce a mechanism of joint auctions with ENTSO-E TSOs allowing to allocate the available transmission capacity of cross-border interconnections, to introduce the ITC mechanism to offset the transmission losses during export-import operations under the EU regulations; • to participate in the formation of the legal and regulatory framework to ensure market inclusiveness and customer involvement in the regulation of the ancillary services market. NEW MODEL OF THE ELECTRICITY MARKET ANDRII NEMYROVSKYI Deputy Chairperson of the Management Board
  37. 37. 75UKRENERGO – SUSTAINABILITY REPORT 201974 PrJSCUkrhydroenergo NNEGCEnergoatom COMMERCIAL METERING ADMINISTRATOR (СМA) Commercial metering involves recording of data on the amount of electricity generated,delivered,transmitted,distributed,consumed,imported and exported at a specified time to be used during settlements between market participants. Commercial metering is carried out on the MMS platform, where providers of commercial metering data (metering operators) input the data on a daily basis. Depending on the submission date and purpose,the data is categorised as follows: • Version 1 – ten-day settlements with the SA for imbalances, monthly settlements with TSO for transmission and dispatch services, monthly settlements with DSO for allocation services; • Version 2 – monthly and quarterly reconciliation settlements with the SA for imbalances, adjustment settlements with TSO for transmission and dispatch services, adjustment settlements with DSO for allocation services. Based on the data obtained from MMS, the CMA prepares a report on the re- liability of the commercial metering data submitted, closes the recalculations of the balancing procedure and informs the SA on the readiness of commercial metering data to create reconciliation accounts. 5508 commercial metering points at the year-end 426 providers of commercial metering services at the year-end SETTLEMENTS ADMINISTRATOR (SA) Ukrenergo keeps a registry of market participants,balance responsible parties and balancing service providers. In addition, it administers databases of contracted sale and purchase volumes and actual volumes of electricity delivered/off- taken, exported/imported by market participants; calculates prices and volumes of electricity imbalances, payments for electricity purchased in the balancing market and payments for ancillary services or non-compliance charges. MARKET SEGMENTS The Law of Ukraine “On Electricity Market” envisages mechanisms for a free competitive pricing, whereby the electricity price is contingent upon the de- mand/supply ratio, consumer solvency and other factors. At the same time, it is the market participants who determine the generation/load schedule in the energy system based on the electricity purchase/sale contracts concluded. The new market model has five market segments: • Bilateral Contracts Market (BCM); • Day-Ahead Market (DAM); • Intraday Market (IDM); • Balancing Market (BM); • Ancillary Services Market (ASM). Electricity is purchased and sold between market participants in the first three market segments. The Day-Ahead Market is effectively a pricing segment, in which the weighted average price is being formed. The Intraday Market is the smallest in terms of purchases and sales. At this TPP, market participants buy additional electricity that they could not buy on BCM and DAM. The purpose of BM and ASM is to balance the power consumption and generation in the energy system and, thus, ensure stable and secure operation. At this stage of the wholesale market, IDM is the smallest segment in terms of sales (while BM is the smallest across the EU countries). The electricity market of Ukraine has two trading zones: the main part of the IPS of Ukraine and the Island of Burshtyn TPP (separate energy region synchronised with ENTSO-E since 2002). DAM MARKET SEGMENTS BY END-USER SALES 1% 64% 33% 2% 50% 36% 4% 10% THE IPS OF UKRAINE ISLAND OF BURSHTYN TPP BCM BM IDM Market share of electricity producers, average in 2019 53% 2% 22% 12% 5% PJSCTsentrenergo6% DTEKEnergo Otherproducers PJSCDonbasenergo 1073 market participants at the year-end invoices for power transmission and dispatch management services invoices for balancing energy and imbalances ≈ 22 000 ≈ 50 000 AT THE YEAR-END, THE HIGH CONCENTRA- TION OF ELECTRICITY PRODUCTION CONTINUED: OVER 60% OF ELECTRICITY is generated by state-owned companies (NPPs, large HPPs, and HPSPPs); OVER 20% is private generation of a single TPP owner. NEW MODEL OF THE ELECTRICITY MARKET
  38. 38. 77UKRENERGO – SUSTAINABILITY REPORT 201976 SALES STRUCTURE IN DAM (%) 7.6 14.5 3.9 0.3 18.6 46.3 8.9 To limit the uncontrolled growth of wholesale electricity prices at inception of the market, NEURC has imposed price limits in the DAM and BM. 24.6% decline of weighted average electricity price in DAM 31.4% decline of weighted average electricity price in IDM from EUR 63.39/MWh in July to EUR 43.50/MWh in December from EUR 56.77/MWh in July to EUR 42.80/MWh in December SE Guaranteed Buyer NNEGC Energoatom TPP HPP CHP Traders Other BALANCING MARKET Balancing Market (BM) is one of the primary market segments and balancing tools for Ukrenergo. Electricity is purchased and sold in BM to ensure real-time balance between the production volume, imports, exports and consumption. BM participants are representatives of the generation or dispatchable load, who can change their load and who have joined the agreement on BM participation. Large industrial consumers, who have the opportunity to change their con- sumption by more than 1 MW, can also participate in BM, using demand res- ponse technologies. To provide balancing services to the relevant market participant, it is necessary to enter into an agreement on balancing services provision. UNTIL 30 APRIL 2020, PARTICIPANTS OF BALANCING MARKET – BALANCING SERVICE PROVIDERS SHALL GIVE TO THE TSO 10% OF TOTAL LOAD RESERVE SOLD AND 15% OF TOTAL UNLOAD RESERVE SOLD. THIS CONDITION IS INTRODUCED BY NEURC AS A SAFEGUARD FOR GUARANTEED PROVISION OF THE MINIMUM BALANCING ENERGY NEEDED TO ENSURE OPERATIONAL SECURITY. WEIGHTED AVERAGE PRICE IN BM (July-December 2019, EUR/MWh) Unloading Loading 61.17 41.03 Trade zone “the IPS of Ukraine” Trade zone “Burshtyn TPP Island” 50.53 50.64 Balancing Service Providers submit proposals to the Transmission System Ope- rator on the possibility for increasing/decreasing its load at a specified time by a specified amount. Meanwhile, the TSO shall range the proposals by prices and accept the required volumes and types of power to ensure balance in the energy system. By results of the balancing market for 24 hours, payments are calculated between the TSO and market participants for the balancing energy purchased/ sold; the prices and volumes of electricity imbalances are calculated as well. Key participants of balancing market at the year-end: thermal power (PJSC Tsentrenergo, PrJSC Dniproenergo, PrJSC DTEK Zakhidenergo, LLC DTEK Skhidenergo, PJSC Donbasenergo, Communal Utility “Kyivteploenergo”) and hydro power generation (PrJSC Ukrhydroenergo). At off-peak hours At peak hours BM until 30/11/2019 28.16 - 38.101 60.13 - 81.361 PRICE LIMITS IN BM, EUR/MWH 1 Marginal prices in BM were not lower than 85% of the price limit set in DAM and not higher than 115% of the price limit set in DAM for the settlement period (p. 10.11 of Market Rules). From 1 December 2019, marginal prices in BM should have been not lower than 70% and not higher than 115% of the DAM price for each settlement period (NEURC’s Resolution No. 2485 dated 26 November 2019). BILATERAL CONTRACTS MARKET (BCM) BCM is the largest segment of the wholesale energy market in terms of end- user sales. Key participants of the BCM are electricity producers, SE Guaranteed Buyer (to the extent required to fulfil the PSO before Universal Service Providers (USP)) and electricity suppliers. State-owned generating companies may enter into bilateral contracts only at e-auctions of the Ukrainian Energy Exchange (UEEX) for purposes of market transparency. The conclusion of bilateral pur- chase/sale contracts by private companies is not regulated. Contracts in the BCM may take the form of free arrangements between market participants and PSO contracts. The average price in the BCM in the trading zone of the IPS of Ukraine was 1% lower than in the DAM, while the trading zone of the “island” was 0.5% lower. SHARE OF MARKET PARTICIPANTS IN BCM, % ISLAND OF BURSHTYN TPP THE IPS OF UKRAINE DAY-AHEAD MARKET (DAM) AND INTRADAY MARKET (IDM) Suppliers Producers Traders 58.6 0.5 15.2 25.8 30.2 44.5 23.3 2.1 PRICE LIMITS IN DAM, EUR/MWH Day-time zone 33.13 Night-time zone 70.75 According to SE Market Operator (https://www.oree.com.ua/index.php/web/65), the DAM and IDM display higher stability when compared to inception of the market.The DAM liquidity and the number of offers have increased.At the same time, SE Guaranteed Buyer has the highest share in DAM and, thus, significant influence on the market. The state-owned companies NNEGC Energoatom and PrJSC Ukrhydroenergo, which are bound by PSO to sell 90% and 35%, res- pectively, of produced electricity to Guaranteed Buyer, cannot really compete with producers in this market segment, which is reflected in the DAM pricing. SE Guaranteed Buyer NEW MODEL OF THE ELECTRICITY MARKET

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