A SINGLE NEMO WILL ALLOW UKRAINE TO FULFILL ITS OBLIGATIONS TO THE EU AS SOON AS POSSIBLE AND PREVENT THE APPEARANCE OF DEBTS ON THE DAM AND IDM

30.06.2023

In 2019, through the reform of the electricity market, Ukraine created a national legal monopoly - a state-owned enterprise, which is now a joint-stock company "Market Operator" to organize the purchase and sale of electricity according to European rules in the B2B segment on the terms of spot trade. Four years ago, on June 30, Ukrainian companies contracted electrical energy on the day-ahead and intraday markets under market conditions for the first time, where the price was formed on the basis of demand and supply. On the same day, a daily system of financial settlements between sellers and buyers, based on ESCROW accounts, started operating, making the spot market the only debt-free segment of the Ukrainian electricity market.

The day-ahead market - DAM - is an indicator for the entire electricity market of Ukraine. It accepts 20% of Ukraine's electricity consumption.

Today, the Ukrainian DAM and IDM are 4 years old. The electricity spot market has become mature. He survived the formative period, the pandemic period, which actually made it possible to prepare all business processes to work in remote mode and conduct trades and payments uninterruptedly in the first days of a full-scale military attack by russia. The DAM and IDM did not succumb to panic and stayed in uncertainty caused by the new aggressive phase of the war against Ukraine. JSC "Market Operator" remained in touch 24/7 and ensured stable and transparent operation of the spot market.

JSC "Market Operator" is ready to take on the most difficult challenges related to the development of the Ukrainian energy industry. The business considers our main advantage to be transparent 24/7 operation, prompt daily payments between those who sold and those who bought electricity, market pricing, high-quality communication and detailed analytics on the operation of the day-ahead and intraday market.

We strive to be one step ahead of others. From the first day of work, we demonstrate European work standards, what is confirmed by certificates of compliance of processes in the company with international ISO quality standards.

We went through the path of corporatization and offered new IT solutions for business: we introduced new trade products - block, flexible and connected block orders (bids), automated and digitized all business processes. Being the owner of the qualified provider of electronic trust services of the accredited key certification center of the electricity market, JSC "Market Operator" is the only energy company in Ukraine authorized to issue qualified electronic signatures.

Our IT specialists have developed and patented the ETS/UA software complex - a platform for conducting electronic auctions for the purchase and sale of electric energy under bilateral contracts. With its help, the transition to the registration of acts of purchase and sale of electric energy on the DAM and IDM, as well as acts of acceptance and transfer of provided services were carried out in electronic form.

Our ambitious task is to carry out netting on the DAM and IDM with subsequent transition to clearing on other commodity markets as well, collection and aggregation of data according to REMIT international standards, trade in certificates of origin of electricity, etc.

A new challenge for JSC "Market Operator" is the unification of the spot electricity market of Ukraine with the global market of the European Union. It is related to the adaptation of Commission Regulation (EU) 2015/1222, which was implemented by the Council of Ministers of the Energy Community on December 15, 2022. According to this document, Ukraine, as a country of the Energy Community, and the EU countries are obliged to unify the electricity spot trade by 2024.

Ukrainian DAM and IDM are understandable for Europeans, as JSC "Market Operator" has been working according to the principle of the European exchange since the first day. During these four years, the company demonstrated resilience to unforeseen situations and provided 24/7 uninterrupted work of the DAM and IDM.

Ukraine informed the Secretariat of the Energy Community that the state has a natural monopoly on the organization of electricity trading on the spot market. And JSC "Market Operator", which has been developing the DAM and IDM in Ukraine since 2019, has undertaken a bold and responsible mission to effectively implement market coupling. This difficult task requires solving many issues related to the fact that Ukraine is not yet a member of the EU. We are working hard on this together with the Secretariat of the Energy Community, the USAID Energy Security Project in Ukraine, our European colleagues, the Ministry of Energy of Ukraine, and the NEURC.

On December 16, 2022, JSC "Market Operator" received consent from all European market operators and transmission system operators to become an observer in the NEMO Committee. This European structure manages the united European DAM. Work in the NEMO Committee allowed us to find answers to the questions we worried about and to start technical preparation for market coupling with the EU countries.

We consider a single NEMO to be the optimal model for now and in the nearest future. It is important for Ukraine to fulfill its obligations to Europe and successfully implement joint trade in electrical energy. Therefore, the task of a single NEMO, as opposed to competitive, is not to make a profit, but to conduct high-quality trades. The function of NEMO is the connection of the Ukrainian DAM and IDM with the European ones, what is the comparison of applications for the purchase and sale of electricity for different trade zones and the simultaneous distribution of interzonal bandwidth together with the operator of the transmission system. These are complex mathematical algorithms aimed to be handled by professionals.

The conjuncture of the Ukrainian market corresponds to the countries operating a single NEMO. The most important task of the Ukrainian NEMO is to launch market coupling and fulfill the obligations of Ukraine to the EU.

We are sympathetic to proposals for the existence of several nominated market operators in Ukraine to be eligible to work in the unified spot market of Europe. However, all European countries have passed the path from a monopoly to a competitive NEMO, and the situation on the Ukrainian DAM currently corresponds to countries operating a single NEMO. Here are the arguments to be thought about by all market players.

1.There is no financial market for derivative contracts in Ukraine, and only the countries with a developed market for derivative instruments, having ensured the physical supply of electric energy through the DAM and the price fixed under the contract, can ensure a sufficient liquidity market for DAM in order to introduce conditional competition between NEMOs for the price difference.

Since there is a small amount of liquidity on the spot market in Ukraine, the implementation of a competitive model will increase the cost of NEMO services and may cause the appearance of debts on the DAM, because the purchase and sale of electric energy legally goes through the involved NEMOs. Therefore, in this case, the opportunity to buy electric energy on one of the NEMOs platform and not pay for it arrives. As a result, the NEMO, which was not paid off, would not be able to pay off the NEMO, to which the electricity was sold, that will create debts on the DAM. Similar cases have already occurred on the balancing market when the electricity was purchased without the intention of paying for it.

2. The liquidity on the forward market with a delivery period of more than 1 month is almost non-existent. In the countries with insufficient financial market liquidity level, consumers use forward contracts that ensure the supply of electric energy to hedge the price risk at the price determined at the time of conclusion of the contract. The consequence of this is the relatively small volumes of trade on the DAM, used exclusively to reduce the imbalance of electric energy, which determines the appointment of a single NEMO and approves its tariff.

3. A unique advantage of the Ukrainian market is also the fact that non-household consumers almost do not fix the price of the contract for the supply of electricity, but tie it to the price of the DAM. Thus, the confidentiality of information regarding the activities of the DAM and IDM participants is an extremely important component of the market operator's activity. The distribution of such information allows unscrupulous participants to use electricity market manipulation, which will directly affect the price of energy for all non-household consumers. Such market manipulations will undermine Ukraine's economy, which is especially unacceptable in wartime conditions. So essential volume of trading on the DAM of European countries such as Germany and France is caused by the fact that consumers hedge the price risk through financial derivative contracts. Therefore, in such countries, the existence of competitive NEMOs is justified.

4. Unfortunately, counterparty defaults occur in Ukraine. NPC Ukrenergo repeatedly suffered from this in the balancing market. Since there is no effective market for ensuring the fulfillment of obligations in Ukraine, we cannot allow unscrupulous participants to be given the opportunity to create their own NEMO - to buy electricity and not pay off, thereby causing additional debts on the market.

5. A single NEMO, as opposed to competitive, does not aim to make a profit, so it provides all information free of charge. Moreover, any additional income received by the "Market Operator" only reduces the tariff for future periods. The competition between NEMOs, inherently, is exclusively in the graphical interface and service packages, necessarily part of which is the access to information, which monopoly NEMOs have in the public domain.

Having analyzed the work of various NEMOs of the EU countries, even from the open sources, it can be concluded that a monopoly exists in one or another form in Europe - it is a separately registered state operator of the market, or other operators actually occupied a monopoly or oligopoly position on the market. Moreover, it is precisely the single nominated operator of the market for the implementation of coupling operations that is a rather widespread phenomenon among countries just entering the European DAM and IDM. This is confirmed by the example of North Macedonia, which recently launched market coupling with the EU, choosing the model of a single NEMO. This country is not a member of the EU, but is a Contracting Party of the Energy Community, just like Ukraine. NEMO, which is delaying the connection of its DAM with it, has the support of the Regulatory Authority and all other electricity stakeholders, and has started its work within the EU Single Electricity Market in a very short time. And in this way it fulfills its obligations to the EU.

All neighboring countries bordering Ukraine, except Poland, chose the model of a single nominated market operator. Therefore, the competition is reduced only to the presence of several interfaces for submitting applications to purchase and sale of electricity and various packages of closed access to information, which a single NEMO has in the public domain.

Choosing a single nominated market operator or granting the right to trade with Europe to several exchanges is only a part of our tasks on the way to market coupling. And this is not the most difficult thing that we need to do. Although it is important to consider that the DAM and IDM is currently the only debt-free segment of the electric energy market of our country, and JSC "Market Operator" is a non-commercial structure with a fixed profit.

As a priority, Ukraine needs to settle issues related to tax and customs legislation. And we know how to solve problems with import excise tax, the customs clearance of electricity and VAT. Our findings are already being processed by the central executive authorities. We hope that our vision of how to effectively implement market coupling with Europe will be supported by the Ukrainian parliament and will contribute to Ukraine's fulfillment of its obligations to the EU.