EU, EBRD urge Ukraine to postpone electricity market liberalization

The EBRD has joined several of Ukraine’s international
partners in their call to postpone the implementation of a new model of the
wholesale electricity market, which was planned to be launched on July 1,
spokesman Anton Usov wrote on May 27. In the EBRD’s view, Ukraine’s legal and
technical infrastructure for the new market model is not ready yet, which will
lead to its malfunctioning with a high degree of probability and therefore
won’t be in the interests of consumers and market players. The postponement of
the market launch should be followed by a clear plan of action that will secure
its normal launch, the EBRD stated. On May 24, the proposal of postponing the
new electricity market was expressed in a joint statement issued by the EU
Delegation to Ukraine and the European Investment Bank.

The new market should start functioning in July 2019,
according to the law “On the Electric Energy Market,” adopted in
April 2017. Under its conditions, power producers will be allowed to sell their
electricity by bilateral contracts with consumers, on a day-ahead market, an
intraday market and a balancing market. This new market model should replace
the existing one, in which power producers are selling their electricity to a
single buyer, the state-controlled company, based on predetermined prices
(either fixed explicitly, or determined by a formula).

Alexander Paraschiy: DTEK Energy
(DTEKUA) should be among the key beneficiaries of the new market launch,
enabling it to become independent in pricing its electricity. Today,
electricity prices for DTEK’s power plants are determined by the so-called
Rotterdam Plus approach. On the one hand, it benefits DTEK by allowing it to
enjoy never seen electricity prices, but on the other hand, the future of such
an approach is dependent on the will of regulator. With the election defeat of
Petro Poroshenko, who is considered to be a supporter of the Rotterdam Plus
approach, the new power brokers are more likely to try cancelling it. A shift
to a liberalized market, therefore, is the best way for DTEK to avoid any risks
surrounding a revision to Rotterdam Plus regulation. If the new market launch
is postponed, the risk is more likely to materialize.

So far, there is no clarity on whether the new market
launch will be delayed, which requires parliament amending the law. It could
happen that the political lobby of DTEK’s owner Rinat Akhmetov will block any
amendment. If the postponement does happen (which could be three to 18 months),
DTEK Energy will face a risk of having lower achieved prices for its produced
electricity (but this risk will not necessarily materialize). Even if the worst
case for DTEK happens (postponement plus cancellation of Rotterdam Plus), this
should be short-lived and is unlikely to undermine DTEK Energy’s fundamentals
heavily.

Keeping in mind the higher risks, we remain bullish on
DTEKUA bonds, which trade at an unfairly high spread to its peers.