NEURC and USAID ESP Briefed Local Heat Supply Companies About the Peculiarities of Work in Ukraine`s Electricity Market.

February 23, 2024

The USAID Energy Security Project (ESP) and the National Energy and Utilities Regulatory Commission (NEURC) briefed representatives of district heating companies (DHCs) that operate or plan to operate small and medium-capacity (up to 20 MW) cogeneration units about the specifics of set up, operation, and regulation of Ukraine`s electricity market.

Dmytro Kovalenko, NEURC Commissioner, thanked USAID ESP for its significant work in implementing the provisions of the EU acquis in Ukraine`s energy sector and raising awareness of  energy market participants about the specifics of the industry functioning. In Kovalenko`s opinion, seminar explainers like this are one of the preconditions for the electricity producers, with the help of cogeneration units, to participate in the electricity market and give impetus to the development of distributed generation as a critical element of the state`s energy security.

In its presentation, the NEURC focused on the basic principles of the electricity market, an understanding of which allows potential market participants to maximize the economic benefits of operating cogeneration plants and electricity generation. Distributed generation is a practical way to ensure Ukraine`s energy system resilience and sustainable development. Over the past year, the national energy Regulator has made several important decisions that helped to develop distributed generation (cogeneration) in Ukraine and implement several projects on cogeneration unit installation and its practical use at heat supply companies. These actions ensured the sustainable operation of district heating systems and power supply to local critical infrastructure. In its turn, through ESP, USAID is actively supporting reforms in Ukraine`s energy sector in line with EU best practices, including the modernization of Ukraine`s municipal heating infrastructure and the improvement of energy efficiency.

This winter, under the USAID ESP Small and Medium-Capacity Cogeneration Deployment Project, USAID ESP intends to deliver 91 cogeneration units (CGUs) with a total capacity of about 56.5 MW to 32 municipalities in Ukraine, including 31 district heating companies and two universities. Over 50 cogeneration units have been handed over to local heat supply companies. A cogeneration unit is an autonomous generator that runs on both natural gas and alternative fuels and simultaneously generates heat and electricity for the company`s needs and for powering local critical infrastructure nearby. At the same time, district heating companies will be able to sell excess electricity to the grid, and therefore, need to understand how the electricity market operates in Ukraine and what opportunities they have as participants in this market.

Olena Tyshchenko, USAID ESP Electricity Market Expert, familiarized the seminar participants with the current electricity market design and described the basic principles of operation of various market segments. The expert briefed the participants about the transformation path of Ukraine`s electricity market to the EU, which began with the signing of the Association Agreement with the EU in 2014 and Ukraine`s commitment to implement Directives to harmonize Ukrainian legislation in the energy sector with the EU acquis. Today, the wholesale electricity market has five segments, where producers of various forms of ownership, distribution system operators, transmission system operators, electricity suppliers, consumers, and other market participants conduct electricity purchase and sale transactions.

The bilateral contracts market (BCM) is an unorganized market segment, and the bulk of electricity purchase and sale transactions are carried out here on a long-term basis. All trading transactions within this market segment are carried out on the Ukrainian Energy Exchange (UEEX), regulated by effective legislation, and contain an exception for RES producers, the expert noted.

Electricity is also actively traded in the day-ahead market (DAM) and the intraday market (IDM), which Market Operator JSC operates. The other two segments, the balancing and ancillary services markets, are operated by the transmission system operator Ukrenergo. All counterparties must duly enter all contracted volumes of electricity in the DAM into the MMS (Market Management System) software package administered by Ukrenergo, while the electricity volumes contracted in the DAM and IDM are transferred to the Market Operator in an automatic mode, where each market participant can see them in its persona MMS account.

In the wholesale market, as a rule, the generated electricity is purchased by suppliers to meet the needs of end consumers, distribution system operators, and the transmission system operator Ukrenergo to meet the needs of compensation for process consumption in the power grids, and traders, said Olena Tyshchenko.

All suppliers operate under a license to supply electricity to consumers. Still, some have public service obligations, including universal service providers and the supplier of last resort.

The day-ahead market segment is where non-core volumes of electricity are purchased and sold, which could not be sold in the DAM but can be forecasted for sale in the medium-term prospect. This segment is based on the marginal pricing principle; all purchase or sale bids are unavailable for free viewing by market participants. Market Operator JSC operates this organized market segment with the help of a particular software package, XM TRADE. To participate in the day-ahead market, electricity market participants must ensure the functioning of ESCROW accounts with sufficient funds to support operations in this segment, eliminating the risks of late and/or incomplete payment for purchase and sale transactions. The intraday electricity market is based on the principle of continuous trading, meaning that purchase and sale transactions take place every hour to meet the electricity needs for the current day. This market segment allows market participants to adjust their trading positions and operates on the principle of "every product has a buyer.

Sellers and buyers declare the volumes and prices at which they want to sell/buy electricity, wait for their counterparts, or accept counter-offers that meet their expectations.The balancing market is designed to encourage all market participants to minimize the purchase and sale of electricity in this segment. Electricity producers can participate in this market segment not only as a balance responsible party but also can cooperate with Ukrenergo as Balancing Service Providers by executing commands to the upward or downward balancing of the power system, earning additional income, explains the USAID ESP expert.

In the ancillary services market, TSO Ukrenergo purchases additional services to ensure the Ukrainian power system`s sustainable, reliable, and high-quality operation.

NEURC experts underlined that to become a market participant and sell electricity, a producer must conclude a series of agreements and:

  • to submit to the transmission system operator (TSO) applications on the settlement of electricity imbalances;
  • to conclude agreements with the TSO on the provision of services: electricity transmission, dispatch (operational and technological) control, compensation for reactive electricity flows;
  • to submit an application for participation in the day-ahead and intraday markets to the market operator; and
  • to conclude agreements with the TSO on participation in the balancing market and provision of relevant ancillary services.

In addition, the NEURC experts provided detailed information about licensing electricity production and outlined exhaustive cases when business activities related to electricity production do not require obtaining a license.

The seminar “Opportunities for Operators of Small and Medium-Capacity Cogeneration Units in Ukrainian Electricity Market” is the first of a series of workshops on the specifics of energy markets in Ukraine. The following USAID ESP seminars will focus on the operation of the balancing and ancillary services markets, etc. The workshops will help local district heating companies find ways to develop and improve the efficiency of district heating systems in the energy market.