Gas

State of compliance

The Natural Gas Market Law of 2015 and the Law on Regulator of 2016 transposed the majority of Third Energy Package provisions relevant for the gas sector. However, relevant primary legal acts (e.g. Law on the Cabinet of Ministers, Law on Pipeline Transport, Law on Oil and Gas, etc.) still have to be amended to enable full implementation of the Natural Gas Market Law, in particular unbundling and certification of the transmission system operator. In spite of the adoption of numerous secondary acts and their continuous amendments, certain Energy Community rules, such as on balancing and deregulation of prices, have not been fully implemented, thus further reducing the state of compliance.
 

  • Unbundling

    Unbundling

    The Natural Gas Market Law transposes the unbundling requirements of Directive 2009/73/EC, allowing for the ownership unbundling as well as the independent system operator model. However, the Law’s provisions linked to the independent system operator model for transmission system owner unbundling are not compliant with Directive 2009/73/EC.

    The law fails to require that appropriate measures be put in place to ensure that the professional interests of the persons responsible for the management of the transmission system owner are taken into account in a manner that ensures that they are capable of acting independently. 

    The law requires unbundling of storage, LNG and distribution system operators if they are part of a vertically integrated undertaking, exempting distribution companies with less than 100.000 connected customers.

    The Natural Gas Market Law fails to ensure that transmission and distribution system operators maintain the confidentiality of commercially sensitive information obtained in the course of carrying out their activities. Certification rules adopted by NUERC are in place and are compliant.

    In practice, Ukraine has clearly failed to unbundle Naftogaz by the deadline stipulated by the gas acquis – 1 June 2016. Ukrtransgaz, a transmission and storage system operator, is still only legally unbundled from Naftogaz.

    On 1 July 2016, the Government of Ukraine adopted a Plan on Unbundling of Naftogaz. The plan foresees the creation of two new entities to operate the transmission and storage systems – Main Gas Pipeline of Ukraine, established in November 2016, and Underground Gas Storage Facilities of Ukraine (still to be established), wholly owned by the state and managed by the Ministry of Energy and Coal Industry. Gas production and supply activities of Naftogaz would be retained under the Ministry of Economic Development and Trade in order to fulfil separation requirements under the ownership unbundling model.

    The actual transfer of assets controlled by Ukrtransgaz (under Naftogaz’s control) to the newly established independent transmission system operator was to take place within 30 days of the arbitration court’s decision on the transit contract between Gazprom and Naftogaz. However, the court’s final verdict in February 2018, which confirmed the validity of the exiting transit contract, has been interpreted by the Ukrainian authorities as an ultimate impediment to unbundling and brought the entire unbundling process to a halt. This is despite the fact that the actual transit pipelines represent only 10% of the total network and that a significant share of total flows is for domestic needs.

    Distribution companies serving less than 100.000 customers are exempt from the unbundling requirements by the Law. Thirteen out of 44 companies fulfil this exemption condition, but only six made use of this exemption. The majority, i.e. 38 companies, completed legal unbundling between distribution and supply activities in 2015. NEURC has the task to assess the consistence of the compliance programmes and their execution with the Third Energy Package, which is subject to an ongoing assessment within the Energy Community DSO Coordination Platform for gas.

  • Third Party Access

    Third Party Access

    The Natural Gas Market Law grants the right to connection and third party access under regulated conditions to all system users. Detailed conditions for granting access to grids and storage systems are determined, in line with the Third Package, by the Gas Distribution, Storage and Transmission Codes adopted by NEURC.

    Procedures for congestion management are in line with Annex I of Regulation (EU) 715/2009. The procedure for allocation of actual gas volumes at entry/exit points has improved, but includes dualities as certain elements of (EU) Regulation 984/2013 are already applied on some interconnectors, while  daily unmeasured quantities still cause limitations at internal points.

    The transmission network code of Ukrtransgaz provides for both long- and short-term capacity allocation. In 2016, all capacities at interconnection points and for the national market were booked on a monthly basis. According to the transmission network code, the auctioning of capacity is only foreseen at interconnection points when the overall amount of requested capacity exceeds the available capacity on a particular interconnection point. Transparency of the capacity allocation process is ensured by publishing the relevant rules, allocation calendar and daily available capacities.

    In case of contractual congestion, Ukrtransgaz offers unused capacity on the primary market on a day-ahead and interruptible basis. In contrast, gas distribution system operators, gas producers, direct consumers and gas storage facility operators do not have the right to re-sell their booked but unused capacities.

    NEURC adopted tariff methodologies for access to transmission, storage and distribution systems, and publishes all information on tariffs and the underlying methodologies. However, transmission tariffs are being calculated dually. An entry-exit transmission tariff methodology is implemented at entry interconnection points (IP) with transmission systems of neighbouring EU Member States and at one IP with Moldova, but they are still not implemented at the entry points from Russia. Moreover, tariffs for internal entry/exit points are still calculated according to an old methodology, and for some points (such as exits from the transmission to the distribution system) no tariff methodology is applied. The entry tariff from production fields is currently zero.

    In addition, the application of the new distribution tariff methodology which was postponed ad infinitum upon a recommendation of the Cabinet of Ministers signaled that NUERC was not acting independently from the Government.

    The majority of the requirements of Directive 2009/73/EC and Regulation 715/2009 related to transparency of transmission system operators have been transposed and implemented. The information being published partly covers the technical information necessary for network users to gain effective access to the system at all relevant points, namely: technical capacity for flows in both directions, contracted firm capacity[1], actual physical flows as well as planned and actual interruptions of both interruptible and firm capacity. Information is still missing on balancing measures and revenues, ex-ante and ex-post supply and demand situations, nominations and re-nominations as well as available firm and interruptible capacities.

    Information on actual physical flows at interconnection points is regularly published on the ENTSOG Transparency Platform, while data for storage capacities, actual injections and withdrawal are published at AGSI (GIE) Platform.

    [1] Only on IPs from EU MSs

  • Wholesale Market

    Wholesale Market

    The wholesale gas market of Ukraine has its regulated (linked to the Public Service Obligation of Naftogaz described in the next section) and unregulated segments, with around 300 active traders in 2017. There is no licensing requirement for participation in the wholesale market. Trading is mainly done directly, by using short-term bilateral contracts. In January 2016, the Ukrainian virtual trading point (VTP) launched its operation, witnessing growing transactions from month to month. Access to the VTP is regulated by the transmission network code and access to the Ukrainian gas transmission network at the same time grants access to the VTP.

    There are two commodity exchanges in Ukraine where trade of natural gas is possible, namely CE UEEX and UGX. The liquidity of these exchanges is very low, but more gas has been traded from year to year, especially at CE UEEX. Ukrainian stakeholders and International Financial Organizations have launched preparatory examinations on how to establish a proper gas exchange with a clearing function.

     The partial implementation of balancing rules, as stipulated in the transmission network code of Ukrtransgaz, did not contribute to increasing liquidity in the wholesale market. To physically balance the network, Ukrtransgaz uses its own storage and linepack resources, whereas gas for balancing service is ensured via a tender procedure, several times per year. Commercial balancing of network users is done only monthly, including a 15% tolerance level. This practically means that network users do not have a need to participate in any trading platform in order to obtain gas for balancing reasons. In addition to this, financial guarantees required for the purpose of balancing are disproportional.

    Amendments to the transmission network code regarding daily balancing and improving requirements towards financial guaranties were approved by NEURC in December 2017, but implementation is pending.

    The Storage Code allows for reserving an undefined part of the storages for network balancing purposes. This is not a market-based solution and will create an obstacle to balancing market development.

  • Retail Market

    Retail Market

    The customer’s right to freely choose and switch a supplier is legally prescribed in the Natural Gas Market Law and Rules on the Supply of Natural Gas in line with Annex I of Directive 2009/73/EC. De facto eligibility in the retail market is limited to non-households customers. To the extent of the Secretariat’s knowledge, 4.396 such non-household customers connected to the gas distribution network changed supplier in 2017, while that was the case only for 12 households in the previous year.

    The Supply Rules, in place since September 2015 and amended in 2016 and 2017, define switching procedures and a concept of supplier of last resort.

    The Law on Natural Gas Market foresees full market opening and a gradual phase out of gas price regulation. For the purpose of general economic interest and protection of vulnerable customers in specific cases and for a defined period, the law allows the imposition of special obligations. The Public Service Decree as amended in March 2017 and then prolonged in August 2018 is not compliant with the principles of non-discrimination, transparency and proportionality of the gas acquis.

    As part of the Public Service Obligation, the Cabinet of Ministers raised the gas prices in two phases aiming at achieving their market level. However, market prices are yet to be achieved. The March 2017 decision on extending the imposition of Public Service Obligations widens the categories of customers under regulated prices and limits domestic production of Naftogaz controlled producers exclusively to the supply of customers under public supply.  This measure effectively prevents the market participation of new wholesale suppliers (other than Naftogaz) and independent retail suppliers (other than Oblgazes) under the PSO scheme, breaching the Gas Directive (Case ECS 02/17). In addition, the mechanism for setting regulated natural gas prices for suppliers and discriminative pricing for some customers still exists.

    The Natural Gas Market Law and by-laws adopted and amended by NEURC are compliant with Annex I of Directive 2009/73/EC regarding the protection of gas consumer rights.

    In addition, the Government of Ukraine in response to gas price reform of 2016 and 2017 is updating the Housing and Utilities Subsidy (HUS) Programme. The HUS programme envisages financial support in the form of subsidies to vulnerable customers. The Government also approves the consumption norms, i.e. setting the standards for certain types of houshold consumers, and links the payment of subsides to the norms. However, low and unrealistic norms hamper market developments, including  switching of the suppliers, installing measuring equipment and discouraging energy efficient behaviour.

    The provisions of the Law on Natural Gas Market related to security of supply go beyond Directive 2004/67/EC and introduce many elements in line with Regulation (EU) 994/2010. According to the Rules on the security of natural gas supply, households customers, as well as district heating companies supplying heat to households, are defined as protected customers in the event of a crisis. Supply standards and measures necessary to ensure their fulfilment for different crises levels are also prescribed by a secondary act, bringing additional security to household customers.

  • Interconnectivity

    Interconnectivity

    The Ukrainian gas transmission system is well interconnected with vast capacity with all neighbours, namely Russia, Belarus, Poland, Slovakia, Hungary, Romania and Moldova. Different communication and cooperation protocols are in place with adjacent transmission system operators. Uktransgaz signed interconnection agreements, or started negotiations, with most of the adjacent transmission system operators, with a view to have all agreements in line with the EU network code on interoperability and data exchange[1], even before having an obligation to implement this code within the framework of the Energy Community as of 1 October 2018.

    Ukrtransgaz signed interconnection agreements with Gaz-System in 2014 and with Eustream in 2015 for the new interconnection points Hermanowice and Budince, while negotiations with Poland are still ongoing regarding the old interconnection point Drozdovice, for which an interconnection agreement is in place since 2006.

    The interconnection agreement on the main transit route to Central Europe, between Ukraine and Slovakia, has not been signed due to unsolved issues related to actual capacity booking partners and shipper codes. Ukrtransgaz and FGSZ signed an interconnection agreement for the two interconnection points at the Hungary-Ukraine border in 2015, but the agreement is still not operational due to the same problem occurring at the Slovak border.

    A similar problem exists on the Trans-Balkan route, connecting Ukraine, Moldova and Romania. On several occassions, Gazprom challenged the right and need to introduce EU rules at Contracting Parties’ interconnection points under long-term transit contracts. This continues to block the conclusion of the interconnection agreement for the Orlovka – Isaccea point on the Ukrainian-Romanian border. In spite of this, the interconnection agreement for the fourth interconnection point between Ukraine and Romania, Tekovo – Mediesu Aurit, is expected to be signed.

    Recently, with technical assistance of the Energy Community Secretariat, Ukrtransgaz started to explore an efficient solution regarding interoperability rules with Moldovatransgaz, targeting a very complex set-up with numerous crossing the same border and supplies of customers organised from the branch pipelines from the territory of the other country.

    Measurement units stipulated by the Transmission Code (in kWh) are in line with Annex I of the Regulation (EU) 715/2009. Installed equipment at interconnection points does not yet meet the gas quality monitoring standards as required by Regulation (EU) 2015/703 yet.

    Ukrtransgaz participates in the ENTSOG body for transmission system operator cooperation in cases of a gas crisis.

    [1] REGULATION (EU) 2015/703 of 30 April 2015 establishing a network code on interoperability and data exchange rules, OJ L113/13, 01.05.2015.