New Public Service Obligations (PSO) for electricity importers: how will electricity imports be incentivized?

New Public Service Obligations (PSO) for electricity importers: how will they be incentivized?

The National Energy and Utilities Regulatory Commission (NEURC) website has published information regarding the review of September 12, 2023 – agenda item (number 45) on approving the draft NEURC resolution "On price caps in the day-ahead market, intraday market, and balancing market" (https://www.nerc.gov.ua/news/12-veresnya-2023-roku-vidbudetsya-zasidannya-nkrekp)

According to the justification provided on the NEURC website (https://www.nerc.gov.ua/storage/app/sites/1/Docs/Postanova_obgruntuvannya/2023/veresen/12.09.2023/p45_12-09-2023.pdf) (hereinafter – the Justification), the price cap revision is driven by price fluctuations in electricity markets, in accordance with the Methodology for determining significant price fluctuations and setting price caps in the day-ahead, intraday, and balancing markets, and based on letters from Market Operator JSC and NPC Ukrenergo PrJSC.

An analysis of the newly proposed price caps suggests that the NEURC effectively intends to repeal the previous Resolution No. 1126 "On setting price caps in the day-ahead, intraday, and balancing markets" and adopt a new resolution with similar price caps.

If that were all, we would not have paid much attention to this resolution; however, after a detailed study of the preliminary justification for the agenda item, we discovered something interesting, which we will discuss below.

Indeed, according to the Justification, the Regulator notes that, based on the Forecast Balance of Electricity of the Integrated Power System of Ukraine for 2023 and the first quarter of 2024, approved on May 2, 2023, an electricity deficit is expected. Furthermore, according to the explanatory note to the Forecast Balance, one of the compensatory measures proposed to reduce the projected electricity deficit is the organization of electricity imports.

The Regulator notes that, based on operational monitoring, prices in neighboring countries' markets are generally lower than in Ukraine, which, through market mechanisms, encourages importers.

However, it is noted that there is a trend of rising electricity prices in European markets, which may make importing electricity into Ukraine economically unviable during projected deficits, given the established price caps.

In such a situation, without commercial imports, NPC Ukrenergo will be forced to rely on emergency assistance from neighboring transmission system operators at prices higher than market rates.

The NEURC notes that it has drafted a Cabinet of Ministers of Ukraine resolution "On Approval of the Regulation on Imposing Special Obligations on Electricity Importers to Ensure Public Interests during the Functioning of the Electricity Market under Martial Law" (hereinafter referred to as PSO).

Thus, based on the above, a new PSO for importers is planned, which will involve importers providing special services to NPC Ukrenergo, specifically services to ensure balancing reliability. In turn, NPC Ukrenergo will be obligated to compensate importers for these services.

‍

However, according to the justification, NPC Ukrenergo will be required to notify importers of the necessary import volumes into the Ukrainian power system from neighboring countries.

‍

In our view, the PSO will not function in a way that allows an importer to import any volume and receive additional funds; rather, the importer will be obligated to fulfill "NPC Ukrenergo's orders for additional volumes required by the power system" and sell such electricity across all market segments.

Based on the general logic of the future PSO, it can be concluded that payment for services provided by the importer to NPC Ukrenergo will compensate for the difference between the cost of electricity in neighboring countries, which is higher than in Ukraine, and the cost of electricity in Ukraine, taking into account the established price caps.

We believe the legal and physical nature of this PSO is as close as possible to the dispatch commands issued by NPC Ukrenergo to electricity producers, where the TSO issues commands to increase or decrease load based on power system needs. Effectively, NPC Ukrenergo will issue similar commands to importers to balance the power system and pay for these services.

We see this idea of incentivizing importers as a good alternative to NPC Ukrenergo relying on emergency assistance from neighboring countries' operators, but the devil is always in the details, which unfortunately we do not yet have access to. We are referring to the text of the PSO itself. Key questions regarding this PSO include:

- Which importers will be eligible to provide services to NPC Ukrenergo? (considering certain trends in the electricity market, this could be limited to only one or two state-owned companies, which would naturally be a discriminatory provision)

- What will the formula for determining the Importer's service fees be?

- What will the payment procedure for the Importer be?

- What will the procedure for verifying the required import volumes for Importers be?

- What will the liability of the Importer and NPC UKRENERGO be for failure to fulfill the terms of the agreement?

- Will NPC UKRENERGO be able to pay Importers on time?

- And so on.

We will answer these questions in our upcoming publications on this topic once the relevant PSO drafts and the draft agreement between the Importer and NPC UKRENERGO are made publicly available.

The legal consulting firm FEDOTOV & PARTNERS specializes in providing services to participants in the electricity and natural gas markets. Our experience in supporting energy companies allows us to say that we not only know what is written in energy laws, but we also understand how the energy business works in practice. If you have any legal questions, we are always ready to help and offer you the most optimal solutions to your problems.

‍