3. New platforms for trading electricity

Since January 1, 2014, the market of a single buyer (the state-owned enterprise "Energorynok") has been transforming into a model of direct agreements. Under this new module of the electricity market, gencos will be able to trade electricity through any of the markets as mentioned above (market of bilateral agreements, day-ahead market, balancing market and retail electricity market), except for certain limitations. Gencos shall sell the electricity to suppliers on the basis of bilateral arrangements regarding the price, volume and terms of electricity supply.

Furthermore, certain groups of customers should be allowed to choose their supplier of electricity. The consumers should be able to conclude agreements with two types of electricity suppliers: guaranteeing suppliers and independent suppliers. The key difference between these is that guaranteeing suppliers are obliged to conclude agreement with any consumer who requests it (in the specified territory).

4. Electricity price

It is envisaged that all producers will sell electricity at the market price under bilateral agreements (pricing on the basis of bilateral agreements between the parties), on the day-ahead market (day-ahead electricity trading) and balancing market (market pricing based on supply/demand).

5. Market of bilateral agreements (key points)

This is the market where gencos (producers of electricity) can sell electricity under commercial contracts directly to end consumers, sales companies or guaranteeing suppliers (traders). Such contracts may be signed for any period of time.

There are certain limitations attributable to this market, effective the first two years:

• Gencos cannot buy electricity on the basis of bilateral agreements; and
• Suppliers cannot buy electricity on the basis of bilateral agreements, except for export operations.

A qualified consumer has the right to buy electricity for its own consumption on the market of bilateral agreements (with certain conditions: the latter received the status of a participant on the market and became the party responsible for the balance). Qualified consumers may not re-sell purchased electricity to other participants on the market. Since January 1, 2015 all household consumers shall be deemed as qualified consumers of electricity.

6. Day-ahead market (key points)

The day-ahead market is the market where gencos (producers of electricity) sell electricity for the next day. The key function of the market is reduction of imbalances of the market participants and prompt planning of electricity generation and consumption.

NERC shall define the bottom limit of obligatory sales of imported electricity on the day-ahead market. The participants on this market submit their offers to the operator, with information on the electricity products they intend to sell (buy), proposed price of sale (purchase) and time period of such sale (purchase). The operator shall define the price of electricity sale/purchase on the next day for each product according to the principle of marginal price-determination and in accordance with the rules of the day-ahead market on the basis of the cumulative offer and cumulative demand for electricity.

7. New market regulations

The activity of electricity market (new model) participants shall be regulated by the following main documents:

• rules of the market, including

• rules determining functioning of the balancing market and ancillary services market, rules of the day-ahead market,

• electrical network code,

• commercial accounting code, and

• other regulations.

The above documents are either not yet elaborated or are in the process of elaboration and, therefore, not yet approved by NERC (should be approved before January 1, 2016).

8. Model contracts will change

The 16 different types of model contracts (between the participants on the market) shall be further approved by NERC (should be approved before January 1, 2016) and further used to formalize arrangements. The specific essentials of such contracts are provided in the Law on Electricity Market. The rights and obligations of market participants in respect of their participation in the bilateral agreements market, day-ahead market and balancing market shall emerge starting July 1, 2017.

9. New challenges for renewables sector

Once the new model of the electricity market is fully functioning (after July 1, 2017), electricity produced from renewables could be sold by respective gencos on the market of bilateral agreements, day-ahead market, and on balancing market at the market price. Such "green" electricity could be sold at a "green" tariff to a guaranteeing buyer, who is obliged to buy it at the "green" tariff up to January 1, 2030 (provided certain conditions are met).

The Law on Electricity Market imposes certain restrictions that are likely to negatively impact the "green" electricity producers. For example, new regulations provides that starting January 1, 2015 obtaining the "green" tariff for electricity generated by gencos using renewables with an installed capacity of more than 5 MW will be possible provided that the projects for construction of electricity generation facilities comply with the Ukraine's Unified Energy System Development Plan (it is expected that the system operator, NEC Ukrenergo, should elaborate it), which is likely to make the situation even more complicated and non-transparent.

One of the conditions for gencos producing electricity from renewables, to have it purchased by a guaranteeing buyer at the "green" tariff, is participation in the balancing group (participants of the balancing group should compensate the value of their imbalances to the guaranteeing buyer).

The liability for imbalance of output electricity (to be applied once the new model will be fully functioning) shall be determined by the application of the respective coefficient, different for each type of renewable source:

• for wind- and solar-sourced electricity - 0 (till 2030);
• for other renewables (as well as other alternative sources of energy, save for blast furnace and coke gas) - 0 (for the 1st year, 0.5 for the second year, and 1 starting the third year).

10. Transitional period

The Law on Electricity Market has been in effect partially since January 1, 2014. Certain provisions are to become effective gradually until the Law comes into force fully on July 1, 2017. Within the expected transitional period from January 1, 2014 to July 1, 2017, the following markets will be functioning:

• wholesale electricity market,
• retail electricity market, and
• ancillary services market.

As mentioned, the full-scale implementation of the market is expected starting July 1, 2017; before that a number of requirements for a liberalized market should be implemented (regulatory, organizational, technological and financial). However, it cannot be fully excluded that the starting date will be postponed.

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Given the significance of the above challenges, companies, especially those doing business in the energy sector (including renewables) should continue to review and evaluate the potential impact of the upcoming changes on their business activities.