Monitoring Report 03/2019

May 7, 2019 Monitoring Reports, Publication

Executive summary

The most pressing energy policy issues at the beginning of the second quarter are the organisation of future gas transit and the introduction of the electricity wholesale market.
A functioning electricity wholesale market can determine (1) what new power plant capacities are really needed (optimal investment) and (2) which power plants should be operated when (optimal dispatch). An efficient market will allow to reduce excess reliance on dirty power plants and makes the integration of variable renewables into the system cheaper. The market – as it is currently prepared – will however fail these expectations.
One issue are debts. Already today, consumers owe suppliers around UAH 33 bln. Covering this historic debt from public budget will be very expensive and not solve the problem. Increasing electricity prices due to deregulation and increasing cost will result in a quick accrual of new debt – as it is unlikely that Oblenergos can be forced to pay their supply bills. But without solvent counterparties, a free market cannot function. Another issue is market power. Given the low number of generation companies, individual market participants might reduce production of efficient plants to increase prices. Finally, a convincing master plan on how the different parts of the electricity market interact is missing.
We hence suggest to take a step back and address these three issues systematically before the market is opened. Clear and realistic rules on cutting supplies should prevent the accrual of new debts. Market power needs to be mitigated by allowing competition from independent producers and from market-based imports. And high-level political coordination of the market opening process should be re-established, to ensure consistency of the rules and transparency of price-formation. In the end, only a functioning wholesale market will provide predictable price signals to attract investments into the gear needed to accommodate high shares of renewables such as flexible plants or storage.

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