Today Energy Club invited Oleksii Dubovskyi, Chairman of the Exchange Committee of Ukrainian Energy Exchange to the conversation. We are interested to know, which Ukrainian energy market segments work now, were succeed the first trades of SE Guaranteed buyer as well as in the center of our attention is the daily work of Ukrainian Energy Exchange, existing directions in its work and what is needed to do in order to join its trades.
— Let’s talk from the very beginning about the electricity market in Ukraine. How successful, in your opinion, was proposed model? Does it work efficiently?
— So far, the market remains burdened by problems, including the accumulation of debts. This year's sharp drop in consumption - and in March the population and industry consumed 11% less electricity than the year before - led to crisis phenomena in the industry.
In the current market model, the majority of electricity is sold through the Guaranteed buyer, certainly slows down the development of competition. But updated PSO, which will come into force in August, partially reduces the role of the Guaranteed buyer in the market and this is a positive factor. After all, these changes are aimed at solving debt problems on green generation. But this is not the ultimate goal. In the future, we expect the transition from the current, commodity PSO to the financial PSO mechanism.
So far, there is a significant influence of different structures on the market. Even now, in order to stabilize the financial situation of electric and energy companies, the government and NEURC are making additional changes to regulatory acts.
One way or another, all existing problems can be solved. Liberalization of the closed, monopolistic electricity market and transition to a competitive and open system is the key to development and economic transformation for many industries. In general, the market has proved to be quite stable, which means we can continue to improve it.
— From segmentation point of view the day-ahead market, intra-day market, balancing market. Does such segmentation correct?
— In addition to these three, there is also bilateral contracts market, which operates on the Ukrainian Energy Exchange. On the developed markets the majority of electricity is sold there, while the short-term segments serve as an additional tool that allows participants to balance their consumption. The balancing market remains penalized, i.e. it is used by participants who could not calculate their consumption correctly.
In general, division into these 4 segments - bilateral contracts, DAM and IDM, balancing market - is correct, but as long as work is not fully coordinated, remains a great advantage towards DAM and IDM.
According to bilateral contracts market, we are working on development of its instruments. For such a long-term wholesale market it is necessary to standardize contracts according to the rules that are understandable to all participants, including foreign traders. Standardization here concerns delivery periods - week, month, quarter, year. Such a system will allow participants to better manage their risks.
— Market players consider that Guaranteed buyer is a «bad trader». In your opinion, is this statement fair?
— Now the situation with the Guaranteed buyer has changed for the better. If earlier the volumes, which were not selected by the Supplier of multiple purposes, were sold by the Guaranteed buyer, often falling out in the balancing market, now the state generation sells its volumes independently.
The Guaranteed buyer also successfully held the first auction for the sale of "green" electricity at UEEX. We hope that this practice will continue and allow Guarranteed buyer to continue to receive more money from the auction through the effective sale of the resource. At the same time, the funds can immediately be used for settlements with RES manufacturers.
But it should be understood that the state created the Guaranteed buyer primarily to fulfill special obligations, and not to compete with other market players in terms of effective trading.
— Let`s talk about Ukrainian Energy Exchange, how does the auctions held?
— Speaking about all directions which are presented on UEEX, it is electronic auctions on electricity and exchange trades on other kinds of energy resources. If some regulatory restrictions are not taken into account, their mechanism is very similar. That is, UEEX conducts trading / auction sessions on applications of the initiators, which are previously accredited at the exchange.
The Exchange places and sends out trading announcements. Participants who are interested in this offer, submit an application for purchase or sale, providing a guaranteed fee to confirm their financial capabilities and guarantees of execution of transactions. Participants must also be accredited to the UEEX. During the trading process, participants compete by offering the best price for each position, or agree to one of the initiator's offers. Thus, during the trading the price is formed by the market method, as a result of comparing supply and demand.
Also in September the Exchange launched a trading system for the daily market of natural gas. Here, the trading technology is different - bilateral continuous auction. That is, sellers' and buyers' bids are compared with each other and transactions are concluded in real time.
— What directions and participants you have?
— The following directions are presented at the Ukrainian Energy Exchange: electricity, natural gas, oil products, liquefied gas, oil and gas condensate, raw materials, untreated timber, etc.
By the end of June, more than 1100 participants had already joined the UEEX. These are the largest companies, the largest players in each direction. These are major producers and consumers of energy resources, such as Naftogaz, Energoatom, DTEK and others, as well as traders, industrial enterprises that buy raw materials and sell their products on the exchange.
— What should be done to join the exchange trades?
— To begin with, it is necessary to read the rules of exchange trade, the terms of lease of exchange places and the regulations of trading by areas.
Then those wishing to become members of the UEEX must submit an application and pass accreditation, then enter into an agreement and obtain a Certificate of Exchange member.
It is also obligatory to be trained to work in the electronic trading system. Then you can participate in the auction.
— Do you cooperate with European exchanges?
— Yes, we work very closely and implement the best European experience in Ukraine.
Last autumn, the Association of European Energy Exchanges Europex decided to accept the Ukrainian Energy Exchange, and in June the membership was officially registered.
Participation in the association gives us great opportunities to share experiences, access to market information, helps to adapt the European regulatory framework in Ukraine.
At the same time, it confirms the recognition of UEEX at the international level, along with Nasdaq, ICE, Nord Pool and other leading exchanges. Since the establishment of UEEX, we have focused on the best global and European technologies and practices to promote the development of the Ukrainian market, increase its transparency, create a healthy competitive environment and liberalize the energy sector. And our membership of Europex confirms the success of these goals.
— You recently announced that you will be introduced to the direction of gas. What's the news here?
— We have been systematically engaged in the gas market for a long time. Trades in this direction has been held since January 2017. Already today, more than 300 participants are trading in the segment of medium- and long-term natural gas trades - both public and private mining companies and traders.
At the end of September, we also launched the Daily Balancing market, thanks to which participating companies now can settle their own imbalances. After the adoption of the relevant amendments to the Law on Public Procurement, the GTS Operator will be able to join the tender.
This will be an important step for the development of the Ukrainian gas market and will provide a large increase in liquidity for the exchange.
This project is implemented in cooperation with the European Bank for Reconstruction and Development, the Energy Community and the Ministry of Energy of Ukraine. This summer, we signed a Memorandum on the Development of the Gas Exchange based on UEEX and have already achieved some success in its implementation.
The development of the gas market is our main priority for the coming year. Our country has great potential. The existing gas transportation system, the presence of an independent GTS operator and a reliable technical base of the Ukrainian Energy Exchange will allow Ukraine to become a full-fledged gas hub for Central and South-Eastern Europe in the future.
— Do you believe in the possibility of fair trading in Ukrgazvydobuvannya's resources?
— This is a matter of legislative regulation, as Naftogaz is a state-owned company accountable to the Cabinet of Ministers UEEX in this case can not influence such decisions. The entry of UGV on the exchange is clearly possible. For example, in Poland, PGNiG, similar to our Naftogaz, was obliged to sell a significant part of the extracted gas on the exchange.
I can say that the sale of UGV resources on the exchange would significantly contribute to the liberalization and growth of market liquidity.
We would see a sharp increase in competition, especially among gas suppliers. Today, competition among them is for part of the service, but this is not enough, in the absence of resources at market prices.
— What will happen to UEEX in 5 years, what are the prospects for development?
— 5 years is a very long time to accurately predict the situation taking into consideration many changing factors. Naturally, we will move in the direction of bringing the trading mechanism closer to EU standards, and plans to standardize contracts in the spot and forward markets. The opening of completely new markets that meet global trends in greening is a priority. For example, it is trade by quotas for CO2 emissions.