REMIT introduces a paradigm shift in energy markets

July 8, 2021

According to Alexander Golas, ESP Energy Market & Institutional Regulatory Advisor, EU Regulation on the Integrity and Transparency of Wholesale Energy Markets (REMIT) introduces a paradigm shift in energy markets regulatory oversight. More about implementation of REMIT in Ukraine and related chellanges – in our interview with the expert.

REMIT, the EU Regulation on the Integrity and Transparency of Wholesale Energy Markets, is often mentioned in discussions concerning electricity and gas markets. What do these two concepts – integrity and transparency – mean and how do they differ in the context of energy markets?

It means that markets do not get abused by any particular persons, lobbies, or companies and thus the prices do not get manipulated. Imposed transparency means that no person possessing insider information (i.e. information only available to that person) may utilize this information to their benefit, for example when bidding in the electricity market, placing orders, etc.

Are any of the requirements of REMIT already being met in Ukraine (even though we do not yet have a relevant law implementing the provisions of REMIT)?

Some elements of REMIT are already in place in Ukraine because they were part of the very “old” EU acquis that Ukraine is progressively adopting. For example, some basic elements of transparency were brought in together with the implementation of EU Regulation No 543/2013 on submission and publication of data in electricity markets, which itself also became part of REMIT requirements. But Ukraine is still lacking a considerable portion of REMIT, I’d say, a much bigger part (~90%) than what is already in place.

In many EU countries, REMIT is implemented by Regulators without additional legislative changes. Should Ukraine develop and implement relevant legislation and can the provisions of REMIT be implemented without a new law, by regulating energy markets only by by-laws?

I think there is confusion here. This statement was brought in by the Energy Community in the meaning that some countries simply translated REMIT and introduced it into their national framework this way. It happens this way in the EU countries where EU Regulations are automatically word-by-word adopted into national legislation, without the need of transposing them into some specific laws. This would be ideal for the well-being of the Ukrainian energy markets and customers and also, for the future EU integration process es, too, should it have been done the same way in Ukraine.

Two bills (№4503d and №5322) are being considered by the Verkhovna Rada, as the ones aimed at implementing REMIT. Which of them do you think most fully transposes the provisions of REMIT into Ukrainian legislation? Is there a significant difference (if “yes”, what?) between these bills?

In analyzing the legislation currently being contemplated by the Rada it needs to be stated that the main goal of implementing this legislation should be to increase market integrity and transparency because currently both the electricity and gas markets in Ukraine are subject to manipulation.

The analysis conducted comparing various bills currently in the Verkhovna Rada clearly indicates that bill 5322 achieves that goal to the highest extent. Moreover, it uses the most comprehensive and efficient methodologies for achieving the goal. This happens, for example, through instituting obligatory reporting of all transactions in the wholesale energy market and their analysis by the regulator.

4503d, despite dealing to some extent with REMIT’s implementation, is concentrated on addressing slightly different concerns for developing the energy sector. Thus, it aims at achieving different goals than putting REMIT in its full extent into the Ukrainian market. For example, increasing the market liquidity postulated by it, despite being a positive goal in itself, cannot be established artificially by way of government interventions but can only be introduced with a naturally growing number of investors, players, and traders who enter the market and bring liquidity together with their engaged financial resources put in the market.

But in order for this to happen, no government intervention is necessary, except for creating transparent, clear, and facilitating conditions for their activities. Otherwise, government intervention will last only momentarily (i.e. while government funds are available), without bringing any long-lasting effect. In addition, these measures will introduce some additional burden on energy customers and, crucially, taxpayers.

Should Ukraine implement REMIT as a whole, or may our country (as not an EU member) implement it only in part?

Partial implementation is of course always possible, but it will not bring as many benefits to the Ukrainian economy in general, and specifically to energy markets and energy customers as full implementation. Depending on which parts of REMIT actually, and how they are implemented, it may actually bring more harm (and additional costs) than benefits. Sometimes you are “in or out”.

Name the changes that the implementation of REMIT will bring (“as it is today” – “as it will be after the implementation of REMIT”). Is it only about the responsibilities/powers (including strengthening the supervisory / monitoring capacity of the Regulator), or is the creation of new state (or non-state) bodies also envisaged?

REMIT introduces quite a paradigm shift for market players (whether large or small) which will start behaving in many different ways than they were used to before REMIT. For example, they become obligated to regularly and without delay issue the information concerning their operations and activities. They cannot engage in manipulative behaviors or they risk being sanctioned. Market oversight systems, including IT systems, will allow for quick identification and elimination of such fraudulent behaviors.

Are REMIT requirements universal for electricity and gas markets?

Yes, REMIT applies to both markets and looks at the transactions crossing sectoral borders, and actually, country borders too. For example, in the EU ACER oversees the cross-border market abuses and manipulations. A similar system is in place in the US. Now, NEURC in Ukraine will adopt similar responsibilities and will undertake the surveillance of both gas and electricity markets in Ukraine.

What impact will the introduction of REMIT have on the further development of competitive energy markets in Ukraine and can the positive effect be measured in figures?

Yes, it is expected to result in the growth of the Ukrainian energy market and its increased participation in European markets. It is also expected that it will bring in more investors, more market players, and more volumes traded (and with them – more liquidity and financial resources) to Ukrainian energy markets. So yes, in the long term the success of REMIT implementation will be quantifiable with a growing number of energy market liquidity through an increased number of active market participants and volumes traded.

What is the connection between REMIT and the Third Energy Package that Ukraine has committed to implement?

REMIT is technically speaking a part of the Third Package, but it shifts the implementation of market reforms within the EU to a new level of development by introducing a range of new solutions, especially regulatory oversight of the day-to-day market developments and active prevention of various market abuses, rather than the traditional periodic performance monitoring to which many regulators traditionally used to perform.

Is it possible to integrate Ukraine with ENTSO-E and ENTSO-G without full or partial implementation of REMIT and its further compliance?

Of course, it is possible to participate in EU energy markets (but I stress the word “participate” instead of “integrate”), but only to a very limited extent – i.e. through a handful of quite limited “merchant” power lines, and without full access to the benefits stemming from full integration. Lack of introduction of REMIT practically means that the ENTSO-E integration will be severely hampered, too, as it is unreasonable to expect that except for a handful of relatively insignificant speculators any meaningful market players and investors from the EU would like to engage considerable resources in a relatively risky, badly monitored and manipulated market.

As the title of the document states, REMIT is about wholesale energy markets. How will retail market participants, i.e. end consumers, benefit from the implementation of REMIT?

Apparently, there is limited direct benefit to final customers from increased competition, integrity, transparency, and overall efficiency of energy markets. However, there is a huge indirect benefit though institution of efficient market monitoring and abuse elimination, making price manipulations impossible and punishable by heavy penalties. From that moment on, all market players, whether large or small, belonging to some “groups of interest” or not, will start playing on the same level field. This means they actually start efficiently competing with each other – bringing about the situation where prices are truly established by way of interaction between demand and supply. This happens in the wholesale energy markets. But who is competing in these markets? Amongst others, these are the suppliers whom Ukrainians may choose freely since August 2020 in terms of gas supplies, and from much earlier in terms of their electricity supplies. When the transparent makets fuction, the suppliers may buy relatively cheaper energy on the wholesale markets and pass the benefit to the end customers of electricity and gas. While saying that, I assume that the same level of competition is happening in the energy supply chain and that the suppliers keeping their prices artificially high are phased out from the market by the other suppliers competing with them and offering lower prices to their customers. It is NEURC that should be taking care that such a situation actually happens and that the increased level of competition is also present amongst the suppliers of energy to households.