National Association of Regulatory Utility Commissioners Energy Regulatory

National Association of Regulatory Utility Commissioners Energy Regulatory Partnership Program with The National Commission for Energy State Regulation of Ukraine The Fifth Visit in the Framework of Partnership Program NERC of Ukraine News in the Field of Regulation Sergey Titenko NERC Chairman 21 -25. 05. 2012 Kiev

Change of NERC Status and Structure

Establishment and Legal Foundation § National Energy Regulation Commission implemented its activity in 08. 12. 1994 – 23. 11. 2011 it is central executive body with special status Chairman and five Commission Members Maximum staff – 412 people § On 23. 11. 2011 according to the order of the President of Ukraine of 23. 11. 2011 #1059 the National Commission for Energy State Regulation of Ukraine (NERC) was set up it is a state joint body reporting to the President and the Parliament of Ukraine Chairman and six Commission Members Maximum staff – 412 people NERC authority state regulation of natural monopolies and economic agents activity that are working at adjacent markets of electricity and oil and gas complex 3

The Main Tasks of NERC § Electricity market reform – transfer to the market of bilateral contracts and balancing market § Reform of natural gas market according to the law of Ukraine “On natural gas market functioning” § Improving tariff regulation of natural monopolies. Transfer to incentive regulation of electricity and gas distribution companies taking into consideration service quality indicators § Development and promotion of renewable energy 4

Electricity Market Reform 5

Simplified Model of Existing Wholesale Electricity Market of Ukraine Wholesale electricity market System operator/ Transmission company Generators § “Single buyer” market operator § § According to the model of “single buyer” wholesale electricity market is operating in Ukraine since 1996 Competitive sector on the base of TPP price bids is about 41%. NPP, HPP, WPP and CHP operate according to regulated tariff Supply companies on regulated tariff/distribution and supply companies on non-regulated tariff Electricity Retail market Services Customers Settlement

The Existing Market Model Drawbacks § Limited competition at generation market § Limited competition at supply market § Non-market pricing § Lack of market operation forecast, non-favorable investment climate; 7

Simplified Electricity Market Target Model According to the Proposal of Draft Law “On Principles of Functioning of Electricity Market of Ukraine” Bilateral contracts market Day ahead market Balancing market Ancillary services market Generators Market operator System operator/Balancing market operator Supply companies Electricity Retail market Customers Services Settlement

Additionally it is Envisioned by the Proposals to the Draft Law: § To strengthen protection of rights of customers information support; § To provide non-discriminatory access to electricity network; § To regulate the procedure of providing permits for construction of generating capacities and conducting tenders for construction of new generating capacities; § To organize monitoring of power supply security. 9

Natural Gas Market Reforms 10

Targets of Reforms § To increase efficiency of companies in the field § To develop competition § To increase investments into the field § To provide free choice of suppliers by the customers 11

Natural Gas Market Changes The law of Ukraine “On principles of natural gas market functioning” was enacted from 24 July 2010 that defines: § NERC authority in the field of natural gas market entities activity § Principles of free gas trade, customers rights of protection and their selection of natural gas supplier § Obligation of unbundling natural gas transportation, distribution and supply § Principles and approaches to provide fair and transparent access to Unified gas transportation system of Ukraine and underground gas storage § Responsibility of natural gas market members in case of violation of rules of providing activity at natural gas market and conditions of agreements

Enacted Regulations Orders Tariff calculation methods Normal agreements Mechanism of cost allocation § natural gas retail prices setting for households; § natural gas pricing, calculation and setting prices for economic agents involved in its production; § access to Unified gas transportation system of Ukraine; § gas transportation and supply via distribution pipelines § gas transportation by major pipelines § gas injection, storage and extraction from underground storage § gas transportation by major pipelines; § natural gas supply according to regulated tariff; § natural gas storage (injection, storage and extraction); § natural gas distribution (by distribution pipelines); § natural gas purchase and sale (among owners and suppliers) § algorithm of funds distribution, that are received at current accounts with a special requirement to be used by natural gas suppliers of last resort § about defining the rate of qualification of natural gas consumers

Improvement of Natural Monopolies Tariff Regulation 14

The Main Principles of Incentive Regulation (According to the Law of Ukraine “On Natural Monopolies”): § Minimum interference – transfer to long-term regulation § Incentive of investments – setting fair return on investments § Taking into consideration quality indicators in tariff formation methodology and introducing provided services quality standards § Improving customer service quality 15

Scheduled Implementation Stages Preparation period: § § § Introduction of corresponding amendments in legislation as for giving NERC authority to define regulated asset base and regulatory depreciation Development of legal framework (methodology of tariffs calculation on the basis of multiannual incentive regulation) Assessment of fair cost of company assets used in regulated activity – regulated assets base First regulatory period (3 years) § Introduction of rate of return on invested capital § Revenue accrual base – the fair assets costs § Benchmarking of distribution companies § Preparation to implement the system of financial incentives to improve service quality The following regulatory periods (4 - 5 years) § Service quality indicators § Individual tasks on reduction of inefficient costs according to the benchmarking results

Renewable Energy Development 17

Current Incentives Mechanisms of Alternative Energy Development § Setting “green” tariff for electricity generated from alternative resources § WEM obligation at legislative level to buy the whole volume of electricity generated from alternative sources of energy, and opportunity to sell according to direct contracts (prototype of “green” certificates) with consumers or oblenergo) § Obligation of transmission and distribution companies to connect generators of electricity on alternative sources to the network § Tax and customs incentives § Incentive credits § State subsidies

Growth Dynamics of Alternative Energy Facilities Installed Capacity in 2009 -2012 19

“Green” Tariff Value § Minimum fixed values of “green” tariff were set by NERC Decree #857 of 23. 07. 2009: Minimum fixed value of “green” tariff, UAH cop. /k. Wh Electricity generated from wind Installed capacity up to 600 k. W Installed capacity from 600 k. W to 2000 k. W Installed capacity above 2000 k. W 70, 15 81, 84 122, 77 Electricity generated from biomass 134, 46 Electricity generated from solar Ground facilities Facilities installed on roofs with capacity above 100 k. W Facilities installed on roofs with capacity below 100 k. W 505, 09 484, 05 463, 00 Electricity generated from small HPPs 84, 18 20

Thank you! 21