Ukraine Energy Digest: February - March 2022

ISSUE
Electricity System Coupling

During the whole month, the Ukrainian energy system shows stable performance. The frequency level in the network is 50 Hz. 
 
Ukraine joined the unified European energy system ENTSO-E one year ahead of the schedule. Before joining, Ukraine invested more than €600 million and undertook a number of technical steps including isolated mode tests that started at 00:00 on February 24, 2022, a few hours before the aggression of the Russian Federation. Since then Ukrainian energy system has been working as a single zone with Moldova – no more “Burshtyn Energy Island”, including during the synchronization with the Continental European Power System with the power system of Ukraine as of 16 March 2022. The synchronous work has been dubbed “trial” but is generally expected to end at the earlier of the martial law regime or when it becomes technically impossible (e.g. due to deterioration of the assets in the Ukrainian system).
 
The coupling of the electricity markets of Ukraine and the EU is the next step to be expected after the technical synchronization, which must be done in the nearest time. Joining the ENTSO-E is crucial for the strengthening of Ukraine`s energy independence and security. Except for this, it shall help increase the amounts of electricity sold and attract European investment in Ukraine's energy sector.

UKRENERGO
STATEMENT

ENTSO-E
STATEMENT

ISSUE

Impact of the russian aggression on the Ukrainian renewables energy sector

The Guaranteed Buyer reports that it has paid 100% of the payments due to renewable energy producers for electric power produced during the 20 days of February 2022. 
 
The russian aggression has severely affected the Ukrainian renewable energy sector. Ukrainian Renewable Energy Association reports that 47% of the capacities of the Ukrainian renewable energy sector are located in the territories where active military actions are taking place.
 
Most Ukrainian wind power plants are located within Zaporizhzhya, Kherson, Mykolaiv, and Odesa regions, 89% of the Ukrainian wind power plants capacity is located within the territory of active military actions. 
 
37% of ground-mounted solar power plants, 35% of roof-mounted solar power plants, and almost 48% of biomass plants are also located within the territories affected by the russian aggression. 
 
As of January 2022, the installed capacity of all renewable energy facilities in Ukraine had reached 9.5 GW, as of January 2022 the amount of funds invested in the sector had reached USD 12 bln. 

CALCULATIONS WITH
ELECTRICITY PRODUCERS

THE MONTH OF WAR.
THE SITUATION IN UKRAINE TODAY

ISSUE
Temporary ban for exportation of natural gas

Market participants are prohibited to export of the natural gas from the Ukrainian territory, including the natural gas stored in gas storages under the “customs warehouse” regime. The prohibition became effective as of 04 March 2022 and comprising a part of the national anti-crisis action plan (NAP) approved by the Ministry of Energy and Coal Industry of Ukraine no. 687 dated 2 November 2015 
 
The Ukrainian gas TSO suspended transportation of the natural gas to the inter-connection points. Any, non-residents storing their gas in Ukrainian storages under the “customs warehouse” regime could not export this gas abroad and may sell it in Ukraine or keep storing the gas in the storages until the ban is lifted. The ban, however, does not restrict the transit of the natural gas owned by Gazprom through the Ukrainian territory.

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ISSUE
Reintroduction of PSO

Special obligations are imposed on gas supply company “Naftogaz Trading” LLC effective from 1 March 2022 until expiration of 6 months that will follow cancellation of the martial law: 
 

- Supply of the natural gas to 12 Ukrainian TPPs until 30 April 2022 at the fixed price of UAH 7,080 inclusive of VAT per 1,000 cubic meters.
- Perform the “supplier of last resort” obligation with respect to the customers critical for the defense sector (list of the customers to be approved by the Ministry of Energy) at the price capped by UAH 32,000 (incl. VAT) per 1,000 cubic meters.

 
The respective PSO regulation was adopted by the Cabinet of Ministers of Ukraine on 6 March 2022 (resolution no. 222). 
 
During the period between 1 March 2022 and 30 April 2022 the “supplier of last resort” shall purchase from the Gas Transmission System Operator at the price of the natural gas last sold by Ukrainian producers at the commodity exchange “Ukrainian energy exchange” which is UAH 15,190.97, VAT including, per 1,000 sq. meters (the price at which the gas has been traded 22 February 2022).

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ISSUE
GTSOU equips gas distribution stations with solar panels to provide backup power supply

Due to significant damage to electricity networks in combat zones, the Gas Transmission System Operator of Ukraine (GTSOU) installs solar panels complexes at gas distribution stations (GDS) to ensure their backup power supply.
 
The project’s primary task is to provide gas distribution stations with additional sources of electricity to continuously perform all their functions and ensure uninterrupted gas transportation to consumers.
 
During the day, the solar panels will provide electricity to the measuring systems and charge the battery. At night, the complex is powered by a battery. The company uses equipment already available in warehouses from suppliers in Ukraine. Specialists of GTSOU carry out installation and commissioning of the equipment.

“We planned to implement this project before the war, as one of the initiatives to optimize the consumption of energy resources. Today, when Ukraine’s power grids are suffering from constant enemy fire, it is necessary for gas distribution stations to have autonomous power supply options to perform their functions”, said Sergiy Makogon, CEO of GTSOU.

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ISSUE
Introduction of differentiated Royalty Rates

The Ukrainian Parliament adopted the Law No. 2139-IX on Introduction of Changes to Tax Code of Ukraine as to Implementation of Differentiated Royalty Rate for Natural Gas Production (the “Law”). Royalty rates on joint ventures and sea shelf drilling remain unchanged (70% and 11% respectively).
 
Under the Law the gas value (other than gas covered by PSO) for the purpose of the royalty calculation shall be the average of:

- the average customs import price for the reporting period as calculated the customs service and provided to the Ministry of Economy of Ukraine by the 10th day of the month following the reporting one, and
- the average amount of quotations for gas in the reporting month at the Title Transfer Facility (TTF), the Dutch trading platform, at information of EEX (The European Energy Exchange), which has been formed for the calendar month preceding the reporting one, which is calculated by the Ministry of Economy of Ukraine for 1000 cubic meters in USD and national currency of Ukraine (exclusive of VAT) at the average official exchange rate of the National Bank of Ukraine for the reporting period.

The figures above will be published by the Ministry of Economy of Ukraine by the 10th day of the month following the reporting one.  
 
Under the Law the following new royalty rates for the natural gas production shall be applicable:
 
For wells up to 5 km drilled before 1 January 2018:

a. 14,5 % - if the price for gas is up to $150/ 1,000 m³;
b. 29% - if the price for gas is $150 - $400/ 1,000 m³;
c. 29% of gas value up to $400/ thou m3 and 65% of gas value in excess of $400/ 1,000 m³ - if the price for gas exceeds $400/ 1,000 m³;

a. 7 % - if the price for gas is up to $150/ 1,000 m³;
b. 14% - if the price for gas is $150 - $400/ 1,000 m³;
c. 14% of gas value up to $400/ 1,000 m3 and 31% of gas value in excess of $400/ 1,000 m³ - if the price for gas exceeds $400/ thou m³;

a. 6% - if the price for gas is up to $150/1,000 m³;
b. 12% - if the price for gas is from $150 up to $400/ 1,000 m³;
c. 12% of gas value up to $400/ 1,000 m³ and 36% of gas value in excess of $400/ 1,000 m³ - if the price for gas exceeds $400/ 1,000 m³;

a. 3% - if the price for gas is up to $150/1,000 m³;
b. 6% - if the price for gas is from $150 up to $400/ 1,000 m³;
c. 6% of gas value up to $400/ thou m³ and 18% of gas value in excess of $400/ 1,000 m³ - if the price for gas exceeds $400/ 1,000 m³.

The Government guarantees that royalty rates under the Law shall remain unchanged for 10 years period (from 1 March 2022 until 1 March 2032). During this period, there should be no increase of royalty rates and no additional coefficients which will result or may result in the increase of the guaranteed royalty rates. However, Ukraine may reduce the royalty rates under the Law enacting the respective legislation in the future. 
 
New royalty rates under the Law apply starting from 1 March 2022. 

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