Chairman of the Exchange Committee UEEX Dubovskyi: We focus on the development of electricity and gas markets
Exclusive interview of Chairman of the Exchange Committee Ukrainian Energy Exchange (UEEX) Oleksii Dubovskyi
- What are the conditions of cooperation for the development of trade in natural gas at UEEX does the memorandum provide?
The purpose of the memorandum is to support the development of the energy exchange in Ukraine in accordance with European standards.The first priority is to work on creating a competitive short-term exchange market for natural gas in Ukraine of the European standard. Working together to build competitive markets with transparent pricing mechanisms should provide a positive effect for Ukrainian consumers and the economy as a whole.
Each side will act within the framework of its functions and competencies, which will help achieve its goals.
- The first meeting within the framework of the memorandum took place on September 3. What was discussed there and what were the results of the meeting?
It was a working meeting at which we with our European partners outlined a work plan for the near future and shared the first achievements in realizing the goals of the memorandum. We agreed to continue working in the format of expert groups in order to hold consultations on certain issues related to the application of European norms and practices in the work of the UEEX.
For our part, we presented a plan for the development of UEEX into an exchange structure in accordance with EC standards and the opportunities that UEEX is ready to provide today. In particular, at the meeting, we announced the launch of a short-term gas market, which will allow the participants to settle the imbalances. The first trades in this direction have already beingheld daily. The EBRD and the Energy Community highly appreciated the steps taken to liberalize the gas market in Ukraine and the role of UEEX in this process.
- In their combined efforts, the EBRD and EC cite support for the launch of the spot market (short-term standardized products) as well as the introduction of clearing, central counterparty and market supervision as a key aspect. What is a rough plan, schedule for their implementation?
It depends on many factors and market participants. For our part, we are doing everything possible to ensure the functioning of the short-term gas market; many companies have already been accredited to bid in this area, including Naftogaz, DTEK, PPC, large traders and gas consumers. Now the participants are actively undergoing training to work in this segment.
Regarding to other announced goals, the UEEX trading platform provides clearing of exchange transactions using escrow (light CCP), but work is already underway to establish a full-fledged central counterparty in Ukraine.
- A little background: how did UEEX manage to take the place, which, as far as we know, was initially assigned to some of the foreign market organizers? Are international exchanges now showing any interest in this project? If so, what exactly?
Yes, initially the international partners had the idea to create a gas exchange in Ukraine and attract foreign donors for this. But the rapid development and growth of UEEX has demonstrated that such an exchange in Ukraine already exists and the main work, in many respects, has already been done.
It was decided to support the development of a competitive and liquid gas market based on the UEEX. Already now our project is finding more and more good responses and support, and yes, international exchanges express an active interest in cooperation with UEEX.
- What investments will the implementation of this project require? What are their sources?
At this stage, we do not feel the need for financial investments from external sources for UEEX, but we are ready to consider options for cooperation that will strengthen our position and bring the achievement of the Memorandum's goal closer.
- How do you assess the process of preparing the Law "On the simplification of attracting investments and the introduction of new financial instruments" (known as # 2284)?
What desiresof UEEX were taken into account, what were left without attention?
As you know, the law has already been signed by the President and will come into force on July 1, 2021. This law was developed by a working group, which, in addition to the deputies, first of all includedrepresentatives of the National Commission on Securities and Stock Market, representatives of the President's Office, EBRD, Ukrainian Energy Exchange and other interested parties and organizations.
The main thing is that thanks to this document, such concepts as derivative, forward, and clearing have finally taken root in Ukrainian legislation.These are exchange instruments that are used all over the world, and thanks to which the energy markets are able to operate more flexibly, which is reflected in the price of energy resources for buyers.This is a signal to investors of the transparency and attractiveness of the market.
- How do you assess the powers received by the National Securities and Stock Market Commission regarding the regulation of commodity exchanges, and the risks of regulating this market?
The risk of double regulation is big. By-laws are needed to clearly separate the powers of the NSSMC and NEURC will need to create and approve a mass of regulatory documents and by-laws. We hope that the National Commission will cope with this a year before the law is enacted. We are in a constructive dialogue with the Commission, offered our help, are ready to present our developments and participate in the process of creating a regulatory framework. Despite the fact that after its adoption, the Ukrainian Energy Exchange will have to go through the compliance procedure and obtain licenses for a number of activities.
- What opportunities does this law gives for UEEX? What are the barriers?
The changes are not critical for us. We were preparing for the law and we do not see big risks for ourselves, we will receive licenses, register the rules and take other steps to implement the law, unfortunately, in the near future it will not help in increasing the liquidity of trading.
An undoubtedly positive fact is the emergence of a legislatively enshrined liquidation netting procedure.
- Commodity exchanges are allowed to provide clearing activities. What plans does UEEX have in this direction?
It should be noted that UEEX still provides clearing services in the understanding of the newly adopted Law - clears the obligations of trading participants, applies collateral, compensation mechanisms, fines and penalties to trading participants. Compliance is applied to exchange participants, depending on the products, one or another “set” of risk management tools is used to reduce the risk of non-fulfillment by trading participants of their obligations under transactions concluded on the exchange.
-Will UEEX create a central counterparty independently or in partnership with someone? Is it possible to work through the SC?
We are working on the development of clearing services and are exploring various options and opportunities for cooperation with international partners. Of course, we are ready to cooperate in this matter with the SC, if we are sure that they will provide a high-quality and effective product.
- What is your assessment of the regulation of the derivatives market by the new law, and what are the UEEX's plans for its implementation? Is it possible to cooperate with other exchanges?
UEEX made a balanced strategic decision to develop spot and derivatives products, providing clearing and settlement of settlements and deliveries. Our advantages are the presence of competence and a strong team, unconditional leadership in the market, equidistance from all participants, transparency and the desire to develop according to European standards.
And on this path, in the near future (until 07/01/2021), we plan to participate in the joint elaboration of the above issues, as well as to determine the legal model of clearing for spot products and deliverable (physical) futures. We will also be ready to cooperate with leading European exchanges and CCP, taking into account the course towards integration with the European energy market and the development of the exchange energy market, laid down in the Energy Strategy of Ukraine for the period up to 2035. It is planned to introduce a system for reporting market participants to NEURC for compliance with the requirements of transparency of wholesale energy markets (REMIT), when NEURC is ready to receive such data.
- Earlier, UEEX and Market Operator signed a memorandum of cooperation on the development of the derivatives market for electricity. Please describe these plansmore detailed. For how long is this perspective calculated? What conditions are necessary for the development of fixed-term contracts for the sale of electricity in Ukraine?
We are currently working on the development of instruments for the energy derivatives market, namely forward contracts. Of course, for the further development of the wholesale market and the introduction of more understandable rules for foreign traders, in particular, standardization of contracts is needed. That is, it can be periods of a week, monthly, quarterly, annual and other contracts. In general, both electricity and gas are standardized products that are traded on exchanges in Europe, so Ukraine needs to follow this path.
In the development of options and futures contracts, as well as the creation of reliable mechanisms for hedging the price risks of market participants. And these plans take a long time to implement and will be adjusted in accordance with the development and needs of the market.
Unfortunately, this market is highly politicized, and it is difficult to talk about specific terms.
- What is your assessment of the first year of the market? What has the new market model brought to the exchange? What is the dynamics of trading in each of the segments?
Liberalization has taken place all over the world, a transition from a closed, monopoly market to an open, competitive electricity market.This is a guarantee of further economic transformations in all sectors of the economy. The work of the market is still, of course, burdened with problems, including the accumulation of debts.
We see our mission in creating a reliable, transparent and efficient mechanism for market energy trading. UEEX also assumed the educational function of creating a trading institute.
The Exchange operates in the segment of the bilateral contracts market, where we see positive dynamics.
Companies began to use more actively the new tools offered by UEEX. Recently, state-owned enterprises have received this opportunity. The participants began to conduct the auction in the mode of trading in coefficients (formula pricing). There is high competition at auctions for state generation. The number of buyers at auctions reaches several dozen, the auctions are held in anonymous mode, last for several hours, ensuring the formation of a reference and transparent price.
- How do you evaluate the latest changes in the PSO on the electricity market, in particular the pricing formula for the resource of Energoatom and Ukrhydroenergo (for sale on commercial segments), as well as the prospects for selling electricity by indicated formula? (Energoatom did not sell anything at the first auction, because it could not reduce the price below 1300/MWh, and the market price is maximum 1200 UAH/MWh. At the same time, Centerenergo sold 1.5 million MWh at such price).
We consider partial release of electricity volumes from PSO as a positive step, because it will help to even out fluctuations in prices in the market and short-term market oversaturation. All the market participants note a positive economic effect from the sale of state generation electricity through the exchange.
Formula has been refined that allowed to Energoatom to enter the trades. On Wednesday, August 19 Energoatom Trading has put up for sale base load electricity with supply period of August 22 – August 31, 2020. It was possible to sell 21600 MWh of electricity. Active participants form the side of buyer were 8 companies. The winners have become 3 participants. The trades was continued many times and were lasted for more than 2 hours in general. The total cost of sold electricity is almost 25 mln UAH.
- Will the exchange have any mechanism to prevent Energoatom from selling below a certain threshold? Previously, the exchange was provided (at least, the Ministry of Energy announced it) a mechanism to limit trading of Energoatom above 5% limit. (Energoatom did not sell 80% of its resource to Guaranteed buyer for several months, but went to BCM with a half, which was not quite legal). Did this mechanism work or did it fail, considering that Energoatom stopped using this scheme?
I do not see the need for such a restriction. Energoatom is a state enterprise, belongs to the sphere of management of the Ministry of Energy and reports to the Cabinet of Ministers of Ukraine, so it is primarily interested in the implementation of legislation. With regard to redistribution of resource sales, I would like to note the following. The consumption of electricity in Ukraine fell sharply in April as compared to March this year. Ukrainian enterprises and population consumed 11% less electricity, which contributed to crisis phenomena in the industry and significantly changed the balance at the electricity market. Therefore, NEURC and the government have made a number of changes in regulatory documents in order to financially stabilize the electricity market.
Energoatom, according to the changes, has the right to sell up to 5% of the projected amount of electricity for the month, the buyers can be market participants, but they should buy electricity solely for their own consumption. According to the results of such auctions SENNEGC Energoatom sold 1.89 million MWh of electricity. At present, Energoatom has already sold most of the volume with delivery by the end of the calendar year.
- Earlier you spoke about UEEX plans to become an operator of holding an auctions for distribution of support quotas for alternative generation. According to UEEX CEO Alexandr Kovalenko words, the exchange expected to receive certification in February. Has the exchange passed such certification? What are the updated plans and terms of this project?
The obvious problem at this stage is an oversupply of alternative generation in Ukraine and accumulation of debts in this area. To solve many problems of green generation "green auctions" were developed. The first one was to be held on April 1 in Prozorro.Sale system. From our side, we were preparing for the start of the auctions and passed the appropriate certification. But the launch of green auctions was postponed to an undefined term due to the lack of regulation.
Now an alternative to green auctions are auctions for the sale of green generation electricity (from alternative energy sources) by the Guaranteed Buyer of electricity (from alternative energy sources) on the exchange, since the company does not sell electricity with maximum efficiency in other market segments. The "Guaranteed Buyer" got such an opportunity after the adoption of Law № 810-IX. As for us, we are fully prepared to hold such auctions.
The right of the Guaranteed Buyer to buy and sell electricity under bilateral contracts is one of the measures developed by the Anti-Crisis Energy Headquarters of the Government. In European countries, it is standard practice to sell green electricity on the exchange. We constantly adopt the experience of our European colleagues and introduce new tools and types of trading for market participants. For example, you can use block positions instead of standard chart types for smooth implementation of green generation at the UEEX.
- If we talk about commercial auctions (auctions NOT for state generation) to sell electricity through UEEX, how has the volume of such auctions and the number of participants changed since the launch in December 2019? Do you consider any regulatory changes necessary to develop this segment?
The growth is noticeable both on the part of initiators and participants of auctions. At the beginning of the market operation, the opportunities for auctions were limited by the Procedure for Electronic Auctions of electricity sales. To expand trading opportunities, commercial sections were introduced. Block positions and trading in coefficients were also introduced for auction participants. Such measures helped companies to increase their activity in the commercial sections. On the other hand, private companies are buyers of the state generation resource.
Thus, at present 274 participants are represented at UEEX in the direction of "Electricity", most of them are private companies, which are both sellers and buyers in different directions of auctions. The number of participants in 2020 increased by 83 companies.
- History of market manipulations. How do you evaluate it, including the role of the regulator? What option would the exchange offer to minimize such manipulations?
Speaking of manipulations, it is necessary to consider and compare all market segments in a complex: DAM and IDM, bilateral contracts market and balancing market.As a regulator of these markets, NEURC has repeatedly spoken about manipulations at DAM. The Antimonopoly Committee also spoke about "air trade".
At the moment, there is a significant increase in the amount of electricity traded on IDM. This may be due to the regulator's close attention to DAM and create preconditions for manipulations. Many market players openly report manipulations at DAM, IDM and the balancing market.
As for minimization, the recipe has long been tested in other markets: selling the largest volume on the bilateral contracts market, a small percentage on the DAM and IDM, using the balancing market as a penalty.
- On the eve of the cancellation of the PSO for natural gas supply to the population, gas sales and specialized associations noted the need to provide gas supply companies with equal access to Ukrgazvydobuvannia's resource. Is there currently a discussion between the Exchange and the NNEGC/UGV on the issue of selling the state production resource through the UEEX in order to provide such access?
We are ready for an open dialogue and such discussions are constantly held, moreover, all market participants insist on getting equal access to the UGV resource. But in this situation, UEEX is not a party that can influence the decision. Such a decision should be made by the owner of NNEGC - the state.
- What impact on the market can have the initiative to sell the UGV resource exclusively through the exchange provided in the draft law № 3958? What, in your opinion, should be the share of the sale of UGV resource on the exchange from the volume released from the PSO (about 8 billion cubic meters)?
Such a decision would have a huge positive effect on the market. It would allow to calibrate participants, to test their survival. At the moment, it is unreal to compete on the market, to fight for the consumer of their services only with a set of services. Only a bunch of “services plus the price of the resource” will work.
As for the Law, let's see, which law will come out of the pen of lawmakers.
- The Verkhovna Rada in the first reading approved the Law № 3176, the adoption of which will enable the GTS Operator of Ukraine, gas distribution network operators and other market participants to purchase natural gas for balancing not at Prozorro, but through the exchange. How will this change affect the market?
It is exactly this model that is targeted in accordance with the EU Regulation No. 312/2014. In fact, when such a system works, the GTS Operator regulates only the residual imbalances that the participants could not close on their own, it should be able to balance the GTS during the gas day:
buy or sell gas to / from the system. But the goal is for the participants to balance on their own, if they have not done this, the GTS Operator "sells" the missing resource to them or "buys" the surplus from them at marginal prices - this is a financial settlement and some kind of penalty measure.
However, two negative factors emerged in our situation - both market players and the GTS Operator that made such purchases through Prozorro system were deprived of the opportunity to purchase gas for balancing on the exchange. At the same time, gas prices for gas balancing services for the participants are determined by a formula linked to the European hub quotes. But often these prices significantly differed from the market prices for the resource in Ukraine. At such moments market participants could create artificial imbalances to buy or sell gas to GTS Operator of Ukraine and benefit from price fluctuations.
Now, when the UEEX base will start a full-fledged daily balancing market, which will be available to the GTS Operator, these problems will be solved. The marginal prices for gas sales and purchases will be linked to the market benchmark. Market participants will get a reliable tool to independently regulate their own imbalances that arise for objective reasons.
Participation of GTS of Ukraine access to exchange trading will also be a key to the liberalization of the industry and will significantly increase the liquidity of the Ukrainian gas market.
Other markets of (oil products, coal, untreated timber, Prozorro etc.)
- What other markets are of interest for the exchange today, what development plans are there?
UEEX is dynamically developing taking into account the trends of the energy markets of Ukraine and the world in general. Gradual transition to clean energy is already a reality, so we believe it is appropriate to focus on the development of those markets that have a tendency to grow, such as electricity and gas. We also plan to launch green electricity trade at UEEX, as mentioned above.
- Share of other markets in the turnover and income of the Exchange?
UEEX is the leader in exchange trading in Ukraine and the only centralized platform where the greatest liquidity and trade in all types of energy resources are concentrated. In the first half of 2020, the UEEX market share for electricity was 63% (including PSO), for natural gas - 10%.
In addition, UEEX presents such energy resources as oil products, liquefied gas, oil, raw materials, etc.Oil productsare one of the basic and key directions of UEEX's activities today. In total, 55.2 thousand tons of oil products were sold in the first half of the year, almost half of the volume falls on gasoline of different brands. The volume of liquefied gas sold amounted to 69 thousand tons, 12% of the total market.
Since 2019 we have opened a new direction - trade in untreated timber. In the first half of 2020, 257.3 thousand cubic meters of timber was sold, which by value was about 1% of total sales at UEEX.
UEEX is also an organized platform that provides access to the Prozorro.Sale system.
In January-June 2020, 279 auctions were opened through the UEEX electronic platform and lots for the amount of UAH 38.4 million were sold.These are such areas as the sale of property, special permits for the use of subsoils, untreated timber.
As for the formation of the Exchange's income, it is a commission from transactions.There are different rates in different directions. For example, if we earn 3% on Prozorro.Sale, on UEEX gas sales we earn 0.05%.