Ukraine’s path towards gas market reform

Why does the Ukraine play a critical role in the energy security of the European Union as well as the other Energy Community Contracting Parties, and what does this mean for the future?  Janez Kopač, Director at Energy Community Secretariat explains ahead of his session at Flame Conference in May. 

The Energy Community, an international organisation bringing together the EU and its neighbouring countries, plays a key role in contributing towards European energy security. One of the Energy Community members or “Contracting Parties” using the terminology of the Energy Community Treaty - Ukraine - is particularly important. It plays a critical role in the energy security of the European Union as well as the other Energy Community Contracting Parties.

The last two years saw the overwhelming focus of the Energy Community’s work directed towards Ukraine. The adoption of the Ukrainian gas law, compliant with the EU’s Third Energy Package, in April 2015 is  one of the best things which happened both to Ukraine and as well as its neighbours.

Ukraine, like all Energy Community members, is supported by a permanent secretariat based in Vienna. Upon Ukraine’s request for assistance in adopting the relevant EU gas legislation, it was the secretariat which produced the first version of the draft gas law, which ended up triggering the overall gas market reform. Ukraine adopted the gas law together with a clear vision where it wants to be in the short to mid- term period, as depicted in its Gas Reform Action Plan, which Ukraine agreed together with the World Bank and the Energy Community Secretariat. The plan covers the entire gas sector and has also some strategic elements.

Immediately after the law’s adoption, Ukraine started developing natural gas market secondary legislation, again with assistance from the Energy Community Secretariat as well as the donors’ community in Ukraine. Implementation and proper application of the secondary acts is a precondition for making the reform functional and for a smooth transition of the heavily regulated and under-invested natural gas sector of Ukraine to a market-based platform which would secure sufficient supplies of natural gas.

Even though some important legal acts are still under review by the competent institutions or are currently in public consultations, Ukraine managed to achieve an impressive record in transposing the EU Third Energy Package. We are already witnessing new sources of gas reaching Ukraine’s market at affordable prices and abolition of regulated prices of domestically produced gas.

The Energy Community Secretariat’s preliminary review revealed the secondary acts’ general conformity with the requirements stipulated by the Third Energy Package, but several non-compliances were also found which may cause a lot of headaches especially for new or independent market players.

A crucial next step is the unbundling of Naftogaz in line with the Third Package. It is the Secretariat’s role to approve the selected unbundling model and conduct a compliance assessment regarding the provisions of the Third Energy Package.  Yet, as the process stands now, the June 2016 unbundling deadline will be missed due to the lack of political will to overcome differences among the different Ukrainian stakeholders. It is also disappointing that the law on regulator, which is necessary to establish a strong regulatory authority capable of enforcing the rules of the game under the Third Energy Package, has not been adopted yet.

The Energy Community will continue steering the reform process. It is here to be a tool or a weapon for Ukraine to ensure it stays on the path of energy reform as a reliable transit route and partner in doing business. It is only a matter of time before Ukraine becomes truly integrated in the European gas market. This will open astonishing opportunities for business and customers on both sides of the border. We expect to see an unbundled TSO – Ukrtransgaz – which will implement transparent and non-discriminatory, market friendly rules on its pipelines, without delay. We expect a boosting gas production, even perhaps for export, and that the regulation of retail prices is replaced by social welfare support mechanisms for vulnerable customers that are neutral towards the energy sector. The focus should be on the market and consumers; the state should withdraw its overwhelming powers to allow for new freedoms.