New electricity market is ready for launch, regulators say

Ukraine’s power sector regulator announced on June 24
that the regulatory base for the July 1 introduction of a new model of the electricity
market is ready. It includes price caps that will enable the state regulator to
control electricity prices until April 2020, according to the rules of the new
market.

The new rules will enable power producers to sell
electricity under bilateral contracts with consumers, on the day-ahead market,
the intraday market and the balancing market. This new model will replace the
existing one-buyer model, in which all the produced electricity is purchased by
a single state-controlled operator at mostly predetermined prices.

Recall, earlier this month, Ukraine’s Western partners
– including the EU, the EIB and the EBRD –
recommended Ukraine to postpone the launch of the new market for three months
citing a lack of regulatory and infrastructure readiness.

On June 26, President Volodymyr Zelensky filed a draft
bill with parliament aimed at reducing the electricity price in Ukraine, whose
text is not yet available. A week before, Andriy Gerus, the presidential
representative to the Cabinet, announced plans to submit such bill, stating
that it will contain measures to postpone the launch of the new electricity
market by one year and revise the Rotterdam Plus approach to calculate the
prices of electricity produced by thermal power plants.

Alexander Paraschiy: The timely
launch of new market will be mostly beneficial for the private operators of
thermal power plants (TPPs), including DTEK Energy (DTEKUA) and Donbasenergo
(DOEN UK). For more than three years, they were benefiting from high prices for
their electricity due to the introduction of the so-called Rotterdam Plus
pricing formula, which allowed TPPs to cover coal costs as if all the coal was
supplied from Rotterdam. Over the last couple of months, coal prices in
Rotterdam plunged (-44% YTD), meaning that the existing pricing model will
result in a significant drop of TPPs’ power prices no later than January 2020.
That said, keeping the Rotterdam Plus approach won’t help DTEK to ground
current high prices for electricity. However, the new liberalized market will
allow it to keep prices high.

It looks like the new market will start functioning on
July 1: the president’s draft bill that possibly calls for a 12-month delay of
the market certainly won’t be approved by July 1. The risk remains that the
president’s bill will be approved later, however. Another risk is that the new
market won’t function efficiently, which could lead to a revision of the market’s
rules in the near future. So far, we see such risks as being not high, meaning
that the new rules will work to the benefit of companies like DTEK Energy.

Other risk – a more likely one – is that the
regulator will keep price caps on the market for longer time than nine months –
but such a move will rather limit the upside potential for power prices. All in
all, the development looks positive for DTEK Energy, so we are keeping our
bullish view on its Eurobonds.