Gas

State of compliance

The basic set-up of the gas market in Ukraine was defined by the Natural Gas Market Law of 2015 and the Law on Regulator of 2016 where the majority of Third Energy Package provisions relevant for the gas sector were transposed. However, a number of 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 with respect to 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 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 NEURC 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 18 September 2019, the Government of Ukraine adopted a new Resolution, which changed the existing ownership unbundling model defined on 1 July 2016 to an independent system operator. The new Resolution may unlock the long pending unbundling process and foster needed market reforms.

    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 already in 2015. NEURC has the task to assess the consistency of the compliance programmes and their execution in line 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 in 2015 and continuously amended by NEURC.

    Procedures for congestion management are not 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. Since 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.

    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 in 2015 and continuously amended by NEURC.

    Procedures for congestion management are not 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. Since 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.

    NEURC adopted tariff methodologies for access to transmission, storage and distribution systems, and publishes all information on tariffs and the underlying methodologies. However, there were many difficulties related to the calculation of applied tariffs.

    The previous duality in the transmission tariffs – interconnection points calculated according to one methodology, internal points according to another – was overcome at the beginning of 2019.

    In addition, the application of the new distribution tariff methodology is facing numerous difficulties - from postponement ad infinitum upon a recommendation of the Cabinet of Ministers (which signaled that NEURC does not act independently from the Government) to the Court decisions dragging the newly settled tariffs back to outdated solutions. Besides, allowed loses are defined by governmental acts, not under the jurisdiction of NEURC, as other distribution tariff elements.

    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 capacity1, actual physical flows as well as planned and actual interruptions. 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. 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, where Naftogaz started to trade in 2019. Ukrainian stakeholders and International Financial Organizations have undertaken preparatory examinations on how to establish a proper gas exchange with a clearing function. It is up to the Ukrainian policy makers to decide on the next steps towards establishment of a fully functional gas exchange.

    To physically balance the network, Ukrtransgaz uses its own storage and linepack resources, whereas gas for balancing services is ensured via a tender procedure, several times per year. Commercial balancing of network users on a daily basis was introduced from 1 March 2019, following a resolved dispute  between NEURC and Uktransgaz on implementing amendments to the transmission network code which was pending since December 2017. The dispute was mediated at the Energy Community Secretariat Dispute Resolution and Negotiation Centre.

     

     

     

     

  • 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-household customers. To the extent of the Secretariat’s knowledge, several thousand of non-household customers connected to the gas distribution network change supplier annually, while that is the case only for a few households. The Supply Rules, in place since September 2015 and amended last time in April 2019, define switching procedures and a concept of supplier of last resort. However, the supplier of last resort is nominated by a governmental decision and not chosen via a tender procedure as prescribed by the Rules.

    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 twice in 2018 is not compliant with the principles of non-discrimination, transparency and proportionality of the gas acquis. It should expire as of 1 May 2020.

    As part of the Public Service Obligation, the Cabinet of Ministers raised gas prices in two phases since 2016 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, although certain reflection of market prices have been introduced in June 2019, 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 household 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, household 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 is negotiating them, with adjacent transmission system operators, with a view to have all agreements in line with the EU network code on interoperability and data exchange1. An obligation to implement this code within the framework of the Energy Community, due as of 1 October 2018, is not reflected within the national transmission code appropriately. Nevertheless, all five Uktransgaz’s interoperability agreements in place are in line with Chapter II of Regulation 2015/703. The agreements include the principle of an operational balancing account, rules ensuring controllable, accurate, predictable and efficient gas flows across the interconnection points as well as the rules for steering the gas across the interconnection points and minimizing deviations due to the matching process, including lesser rule principles. The provisions setting the applicable rules in case of flow changes due to Emergency Plans and Preventive Action Plans are missing.

    For the interconnection points at the Polish border, interconnection agreements are in place since 2006 for the old interconnection point Drozdovice and since 2012 (updated in 2017) for the new interconnection point Hermanowice. Ukrtransgaz and Gaz-System are continuously negotiating adjustment of the interconnection agreements to include new transmission products and possibilities (PMI GAS_14).

    The interconnection agreement on the main transit route to Central Europe, between Ukraine and Slovakia, i.e. for the interconnection point Uzgorod – Velke Kapushany, has not been signed due to unsolved issues related to actual capacity booking partners and shipper codes. However, Eustream and Uktransgaz signed in 2014 an interconnection agreement for the new interconnection point Budince, where booking partners and shipper codes do not cause any problems.

    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 occasions, 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 all Orlovka – Isaccea points on the Ukrainian-Romanian border. In spite of this, Ukrtransgaz and Transgaz signed an interconnection agreement for the Orlovka – Isaccea 1 in 2016 (updated in 2018), after expiration of the transit contract. The fourth interconnection point between Ukraine and Romania, Tekovo – Mediesu Aurit, free from any transit contract, has been a subject of negotiations which surprisingly slowed down in 2018, instead of expected finalization.

    Ukrtransgaz and both Moldavian transmission system operators - Moldovatransgaz and Tiraspoltransgaz - have explored an efficient solution regarding interoperability rules targeting a very complex set-up with numerous crossings at the common border and supplies to the customers in Moldova and Ukraine from the territory of the other country. The technical assistance of the Energy Community Secretariat in 2018 triggered the process, while bilateral negotiations continued in 2019.

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

    Ukrtransgaz participates already for several years in the ENTSOG body for transmission system operator cooperation in case 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.