Ukraine exchange eyes electricity trading for exports, regional market coupling

LONDON (ICIS)–The Ukrainian energy exchange UEEX is looking to rekindle trading activity on its power and gas platforms after the war and the stringent measures that have been put in place wiped out liquidity.

Speaking to ICIS, Lisse Geert van Vliet, UEEX business developer, said the bourse was working on a project to start electricity trading for exports as interconnecting capacity is set to rise from 30 July. It is also in active talks with neighbouring exchanges such as Romania’s BRM for possible regional market coupling.

There are plans to resurrect some of the larger initiatives that had been discussed before the start of war on 24 February, including the launch of clearing for electricity and natural gas.

Van Vliet said the exchange was evaluating alternative areas such as trading in guarantees of origin for electricity, biofuels and the agricultural market.

SHRINKING MARKETS

Nevertheless, he agrees that relaunching projects in times of war and martial law , which was imposed within hours of Russia invading Ukraine is an uphill struggle on many accounts.

Firstly, there is the physical risk from bombing and shelling to staff and equipment. UEEX’s Kyiv office was bombed within days after the war started and most of the female staff who were allowed to leave are now working from other countries.

Then, there are the constraints linked to martial law, which are meant to help shield the population from the economic fallout of war as well as the impact of record energy prices but have so far had a devastating effect on the liberalised electricity and gas markets.

On gas, nearly all the market was forced to revert to the regulated model after years of successful liberalisation.

Close to nine million consumers were taken over by the incumbent Naftogaz in June after their retail companies could no longer supply them with gas because of rising costs.

This means Naftogaz is selling gas to this category at a capped value of Ukraine Hryvnia 6,368/1000m3 (€16.00/MWh) (without VAT), or four times lower than prices on the domestic free market and 14 times lower than European hub levels.

As the regulated market expanded, the competitive free market shrank, with Naftogaz taking monopoly position in wholesale and retail since it is the only company with enough financial clout to import gas. But even Naftogaz announced a default on its Eurobond on 26 July.

Electricity prices are also capped at UAH 1,440 MWh/day (€38.50/MWh) for consumers with demand up to 250KWh and fixed at UAH1,680/MWh for those consuming more than 250KWh.

COLLAPSING LIQUIDITY

Van Vliet conceded the price caps were needed and justified to protect the population but said they had harmed UEEX trading activity which had started to take off in the months prior to the start of war.

If in February 2022 traded volumes for gas exceeded 100mcm, one of the highest levels recorded on the platform, by March they collapsed to 175,000 cubic meters and have barely recovered since then. The hardest hit were the forward contracts, where there is hardly any liquidity left.

Despite all challenges, UEEX continues to offer balancing and spot trading services for gas, switched to trading products without value added tax (VAT) and updated the methodology for determining the weighted average price for short-term standardised products.

GROWING OPPORTUNITIES

Van Vliet sees growing opportunities for electricity exports, which may not only help producers stay afloat but also bring liquidity back on the electricity market.

Ukraine synchronised with the grids of the European Network of Transmission System Operators for Electricity (ENTSO-E) in March and started commercial flows to neighbouring Romania and Slovakia this summer, six months earlier than the scheduled date.

Although the border capacity was initially offered for 100MW it is set to rise to 250MW from 30 July. There are expectations it would increase to 1.5GW by the end of the year and expand to 10GW within a decade.

Exports offer a lifeline to Ukrainian electricity producers who are struggling to stay afloat and help regional traders to buy significantly cheaper electricity.

For example, the Ukrainian day-ahead baseload price for 29 July out-turned at €71.36/MWh, whereas in neighbouring Romania the equivalent product settled at €494.00/MWh.

This is where van Vliet expects UEEX to make a significant impact, attracting all electricity trading for exports to its platforms and ensuring that any volumes changing hands would do so transparently and at a fair prices to Ukrainian and regional traders.

The next step for Ukraine would be to couple UEEX forward market with regional bourses before integrating the spot electricity and spot and forward gas platforms with neighbouring bourses, he said.