Ukraine Makes Strides EU Energy Alignment

Ukraine made significant progress in bringing its energy legislation closer in line with EU energy policy, the Energy Community Secretariat said in its annual implementation report published on November 23.

Ukraine joined the Energy Community, which helps aspiring member states conform with EU energy law, in 2010, but has achieved significant progress only in recent years. While Montenegro remains a frontrunner, Ukraine jumped ahead of North Macedonia and Serbia, where progress has stalled, to become the country with the second-highest ranking, according to the Secretariat.

Ukraine achieved its highest rating of 84% in the gas sector, while it scored lowest in infrastructure, with only 8%. Its biggest achievement over the past year was unbundling its gas transmission system, formerly part of state-owned Naftogaz. The system is now controlled by a certified independent operator GTSOU. GTSOU signed a new transit contract with Russia's Gazprom at the end of last year and has also signed connection agreements with all neighbouring transmission system operators (TSOs).

Ukraine also made progress in implementing gas network codes and deregulating prices. Gas supplies to households were liberalised on August 1 and a customer safety net was put in place, involving amendments by the regulator to existing supply switching rules and the selection of Naftogaz as a supplier of last resort.

Two memoranda of understanding were signed by GTSOU, the Secretariat, the Ukrainian Energy Exchange, the European Bank for Reconstruction and Development, the energy regulator and the energy ministry on establishing a gas exchange in line with European market standards. But the work needs to continue, the Secretariat said, noting that legislative changes were needed to allow the TSO to purchase balancing services in a dynamic way.

Ukraine's gas balancing regime is generally up to European code. Neutrality charges have been discussed widely during the past year, the Secretariat said, but their full introduction has been postponed for another year. The main obstacles to defining charges, according to the Secretariat, are accumulated debts for imbalances and the lack of proper reference prices. A functional gas exchange will ultimately enable the balancing code's full implementation. 

"Payment discipline for imbalances, together with a solution for accumulated debts, should be fostered," the Secretariat said. "Interventions to the approved distribution tariffs did not contribute to solving the issue of unauthorised offtakes and should be avoided in the future, respecting the cost-reflectivity principle."

Public-service obligations only remain for gas supplies for district heating companies, although this represents 25% of annual consumption. These supplies remain under regulated prices and are not offered to the market. The Secretariat highlighted the reform of district heating as a key challenge for the upcoming period.

Summarising, the Secretariat described GTSOU's certification as a "major breakthrough." But, it warned that "the market is still dominated by the incumbent Naftogaz and regional utilities on the retail level. Moreover, the lack of a financial stability of district heating remains a major challenge to the gas market," it continued.

Naftogaz’ inability to cut off district heating companies for non-payment had led to unauthorised offtakes. This in turn had forced the transmission system operator to buy gas to balance the system.