Ukraine parliament adopts breakthrough reform of electricity market

Ukraine’s parliament voted on April 13 to approve a new law “On the electric energy market” which lays the groundwork for significant liberalization of the nation’s electricity market across the entire production-supply chain. The law eliminates the single state-controlled operator that purchases all the nation’s produced electricity from power generation companies. Instead, power producers will be allowed to sign direct contracts with consumers or traders, at a price that won’t be regulated.

The law also creates separate markets for the current day, the next day and a balancing market. Power distributors will be banned from providing electricity supply services. At the same time, the law allows for vertically integrated electricity companies that may control producers, distributors and suppliers, but it stipulates that holdings ensure no conflict of interest in the operation of such companies.

The law fully liberalizes the electricity market for thermal power plants as of 2H19 and for nuclear and hydro power plants as of 2H20.

Alexander Paraschiy: The adoption of this law is a breakthrough for Ukraine, whose parliament has tried unsuccessfully to introduce a liberalized electricity market for more than a decade. Ukraine was not able to adopt that reform even in 2010-2013, despite heavy lobbying from the nation’s biggest electricity holding DTEK (DTEKUA) and its close ties to then-president Yanukovych.

DTEK, which accounts for a quarter of power generation in Ukraine, will benefit from full implementation of this law in late 2019 as it will be able to charge a higher price for the electricity it produces. That allows us to expect DTEK will significantly improve its ability to generate free cash flow and service its debt as of 2019, which makes it much more likely to smoothly repay its banking loans and Eurobonds, most of which mature in 2023-2024.

The law only sets the basic principles of the new electricity market, and will need to be supplemented by various other regulatory documents to make the new market fully operational. In Ukraine, there is always a risk that such regulations will distort the law’s intent. DTEK has good relations with regulators today and could even make adjustments in its favor.

Electricity market reform was among Ukraine’s key commitments to the European Union. With its adoption, Ukraine is closer to receiving a third and final EUR 600 mln tranche under the EU’s macro-financial assistance program.