PSO for electricity importers – preliminary overview

The National Energy and Utilities Regulatory Commission (NEURC) has published a draft resolution on "Price caps for the day-ahead market, intraday market, and balancing market." (https://www.nerc.gov.ua/storage/app/uploads/public/650/2bb/7ca/6502bb7ca5d4e442439424.pdf).

The appendices to the justification for the aforementioned resolution include, in particular, a draft Public Service Obligation (PSO) for electricity importers (p. 186) and a contract under which importers will provide services to the transmission system operator, NPC Ukrenergo (p. 192). In this article, we will review and analyze the available information regarding the potential import PSO (hereinafter referred to as the "Draft PSO").

We must include an important disclaimer: as of the time of writing, the PSO for importers exists only as a draft published on the NEURC website. Should this PSO be adopted by the Cabinet of Ministers of Ukraine, its content, provisions, and rules may differ significantly from what is currently publicly available. Therefore, please treat the content of this article solely as an overview of potential changes to the energy market.

1. Entities subject to the PSO for importers

Clause 4 of the Draft PSO establishes that special obligations are imposed on the Transmission System Operator (NPC Ukrenergo) and on business entities importing electricity from European Union countries (hereinafter referred to as "importers").

It should be noted that the scope of importers in the Draft PSO is unlimited. Prior to the publication of the Draft PSO, it was widely believed in the market that the PSO for importers would be imposed only on NPC Ukrenergo and the state-owned electricity trader. From a legal perspective, such a concept involving only two designated participants could have contradicted the principles of non-discrimination and market equality.

2. The essence of the PSO for importers

Under the Draft PSO, electricity importers will provide services to NPC Ukrenergo (the TSO) based on a contract for the provision of balancing reliability services (the "Contract"). The TSO will determine the required (forecasted) volume of electricity imports into the Ukrainian power system, and importers will carry out imports accordingly. The idea behind the PSO is to ensure a stable supply of electricity imports to Ukraine even when such imports are not commercially viable during certain billing periods. For example, if spot market prices in the EU are higher than those on the day-ahead market in Ukraine, importers would not import for economic reasons; however, with this special PSO in place, NPC Ukrenergo would compensate importers to ensure the imports continue. This makes sense, as in the absence of commercial imports, the TSO would be forced to request emergency assistance, which would be more costly for the TSO.

3. Calculation of the cost of services provided by importers

The cost of the balancing reliability service for the billing month is determined for each importer for each European Union country from which electricity is imported, based on Central European Time for the billing month, in accordance with the following formula.

CS_imp = ∑d CS_{d imp} ,

‍

where

‍

CS_{d imp} – is the daily cost of the balancing reliability service for day d when importing electricity from a European Union member state to Ukraine, calculated using the formula:

‍

CS_{d imp} = ∑_j CS _{j imp} ,

‍

where

‍

CS_{j imp} – is the hourly cost of the service for ensuring balance reliability for the relevant settlement day d of the relevant settlement month when importing electricity from a European Union member state to Ukraine, calculated using the following formula:

CS_{𝐣 imp} = max(0; (W_{ij imp} × 𝑘) × (P_{ij EU}^DAM − max(P_{j UA}^DAM; P_UA),

where W_{ij imp} – the volume of electricity imports for each corresponding j-th settlement hour for the i-th cross-section of the corresponding day d of the corresponding settlement month, in accordance with physical transmission right nominations, adjusted for any reduction in physical transmission rights, MWh;

k – the ratio of the forecasted import volume for the corresponding j-th hour for the i-th cross-section, as provided by the transmission system operator, to the total actual volume of electricity imports carried out by all importers for the corresponding j-th hour for the i-th cross-section;

P_{ij EU} ^DAM – the hryvnia equivalent of the day-ahead market price in the country from which electricity is imported via the i-th cross-section, for the corresponding j-th settlement hour of the corresponding day d of the corresponding settlement month, based on the hryvnia exchange rate on the date of the electricity import transactions as published on the National Bank's official website, in hryvnias per MWh;

P_{j UA} ^DAM – the price on the day-ahead market of Ukraine for each corresponding j-th hour of the corresponding day d of the corresponding billing month during which the corresponding import of electrical energy Wij is carried out, in UAH per MWh;

P_{rj UA} – the weighted average selling price of electrical energy imported from European Union countries to Ukraine on the n-th segment of the Ukrainian electricity market and/or the price of electrical energy determined by the electricity supply contract under which the imported electrical energy is supplied, for the corresponding j-th billing hour of the corresponding billing day of the corresponding billing month, in UAH per MWh. Adjustments to the cost of the service for ensuring balancing reliability may be made by the transmission system operator no later than the 9th day of the month following the billing month in the event of adjustments based on the results of the month regarding actual hourly volumes of electricity imports.

Analyzing the above formula for calculating the service to be provided by importers, we can immediately highlight several points that require special attention

‍

1) The above formula includes a coefficient (k), which plays a role in determining the price of the service. It is calculated by taking the ratio of the forecasted import by the TSO to the actual import by all importers. It follows that the cost of the service provided by each participant depends to a certain extent on the actions of all electricity importers in Ukraine.

‍

Let's consider a hypothetical case: if the TSO has allocated 500 MW of cross-border capacity with a neighboring country and then set the required (forecasted) import volume at 100 MWh, and importers begin importing and import the entire volume allowed by the capacity, in this case, importers will receive lower payment for their services under the Agreement. It is far from certain that the payment for these services will cover the price difference between the European and Ukrainian markets. The risk of this is quite high, as importers cannot gather in one place to decide who will import how much—such behavior would certainly not be approved by the Antimonopoly Committee of Ukraine. In our opinion, the value of (k) in its current form requires revision and may lead to a situation where the import PSO effectively fails to function.

2) When calculating the value of  P_{rj UA} the weighted average price for the n-th market segment is calculated (as there are no specific details here, we assume that all market segments provided for by legislation may be taken into account) and/or the price of electricity determined by the electricity supply contract with the consumer, under which imported electricity is supplied. This immediately raises the question of how the TSO will obtain information about prices in electricity supply contracts with consumers and what procedure will regulate the exchange of such information.

‍

3) The PSO Draft also states that the TSO will be able to adjust the cost of the service provided to it until the 9th day of the month following the billing month, in the event that the actual (physical) volume of electricity imported into Ukraine is adjusted.

4. Rights and obligations of importers and the TSO

Next, we will focus on the essential rights and obligations of importers and the TSO as specified in the PSO Draft (we will not duplicate in this article rights and obligations such as the importer's right to receive payment for services and the PSO's obligation to make it – this is understood from the nature of the legal relationship, and we see no point in overloading the article with this information).

A significant obligation of the importer is to conclude an Agreement with the transmission system operator within five business days from the date this Regulation enters into force. At the same time, the TSO has an obligation to conclude Agreements with all interested electricity importers without discrimination.

The TSO is also required, 4 days before the day of import, by 10:00 a.m., to determine and provide importers with information regarding the forecasted hourly volumes of electricity imports required to ensure balance reliability, broken down by European Union countries.

The TSO will also be required to report daily to the NEURC on the implementation of the import PSO and, by the 25th day of the month following the billing month, to publish information on the implementation of the PSO on its website.

5. Financing of the import PSO

According to the PSO Draft, the source of funding for the TSO's expenses for fulfilling special obligations is the transmission system operator's electricity transmission tariff. The PSO Draft also provides that in the event of incurring expenses for the fulfillment of the special obligations provided for by this Regulation, the TSO has the right to request a review of the said tariff in the manner determined by the NEURC.

We believe this is a very interesting provision, and it is highly likely that once the import PSO begins, NPC Ukrenergo will soon petition the NEURC for a tariff increase. We have reached this conclusion because the PSO draft clearly states that "in the event of incurring costs for the performance of the special obligations provided for by this Regulation, the TSO has the right to request a review of the transmission tariff", and with the PSO in operation, NPC Ukrenergo will inevitably incur costs.

6. Agreement on the provision of balancing reliability services

Next, we will review the key interesting provisions of the Model Agreement on the provision of balancing reliability services (the Agreement), which is an annex to the PSO draft. It should be noted immediately that the agreement is a model, and in accordance with Part 4 of Article 179 of the Commercial Code of Ukraine, the parties have the right to mutually agree to change certain terms provided for in the model agreement or to supplement its content.

According to the provisions of the agreement, the billing period is a calendar month.

In accordance with Clause 5 of the Agreement, the service provider (importer) is obligated to provide NPC Ukrenergo with daily information regarding the volume of electricity imports for the previous day and the cumulative total for the calculation of the service cost under the Agreement, using the model form attached to the Agreement.

 Payment procedure for services:

Clause 7 of the Agreement establishes that the TSO shall pay importers for the services provided no later than 3:00 PM on D+2. The cost of services is calculated including value-added tax.

An interesting provision in the agreement (Clause 7) is that if the payment day falls on a holiday, weekend, and/or other non-working day, the corresponding payment shall be made by the customer on the next working day following such holiday, weekend, and/or other non-working day.

For example, payment for services provided by an importer on Thursday and Friday will only be made on Monday.

7. Conclusions

Having reviewed the potential PSO draft for electricity importers, we believe that the idea of incentivizing electricity imports during peak demand periods—rather than relying on the TSO to request emergency assistance—is a sound decision. However, the provisions of the PSO draft reveal a certain imbalance between the rights of the TSO and the importers. The question arises: if the purpose of the PSO is to replace emergency assistance for NPC Ukrenergo, why is the PSO funded through the electricity transmission tariff rather than from the funds allocated for emergency assistance? Furthermore, will NPC Ukrenergo make timely payments for the services provided?

The latter is a highly sensitive issue, as electricity importers are private companies that are unlikely to knowingly accept cash flow gaps or deplete their own funds while waiting for compensation with an uncertain timeline.

Nevertheless, we believe it is best to wait until the PSO for importers is implemented in practice to see whether it is a functional mechanism and whether the objectives for which the PSO was adopted are achieved.

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 the energy laws state, 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.

‍