Government reforms energy sector in line with Third EU Energy Package

International organizations, including the Energy Community, the European Commission and the World Bank support the government's plan to reform Ukraine's energy market. This is the message from Director of EU Energy Community Janez Kopac is his address to Prime Minister Mykola Azarov and the Head of Committee on Thermal Energy Complex and Ministers of Energy and Coal Industry of Ukraine, the Information-analytical Bulletin of the Cabinet of Ministers of Ukraine informs.

Experts say Ukraine has made commitments to reform the energy market pending the signature of the EU Association Agreement. The existing energy market model was created during the 1990s. It envisions subsidizing natural gas purchases by the population using industry accounts. The approach protected the population from complete impoverishment during the country's economic crisis during the early 1990s. The model is extremely opaque, however, promotes the creation of monopolies and makes investments in reconstruction and development of energy generating and energy transporting facilities unprofitable.

From 2005 to 2012, the dimensions of cross-subsidizing have grown nearly tenfold, increasing to 34 billion UAH. They are expected to reach 39 billion UAH by the end of 2013.

Experts say the current model of the energy market is not conducive to energy conservation and active use of alternative sources of energy.

The National Electricity Regulatory Commission (NERC) says the current model is obsolete and incapable of generating the funds required for subsidies and modernization. The government needs to look for market ways to support insolvent consumers.

NERC reports that the depreciation of equipment in thermal power now exceeds 80%, and the electricity networks by 54%.

The European Business Association (EBA) stresses that the existing electricity market does not satisfy international investors, who want it to become more transparent and understandable.

If the bill approved by both international organizations and the Verkhovna Rada is passed, prices for electricity will no longer be fixed administratively, but by a stock exchange a "day-ahead market." It is envisioned that long term electricity price will be fixed in direct contracts.

A transparent and competitive market system with predictable pricing mechanism will attract investment in the energy sector, which needs it badly.

It is anticipated that after the Law "On principles of functioning of electricity market of Ukraine" is passed, a transparent system will be established to support privileged categories of consumers from the imbalance settlement fund.

The new law will also help improve consumers' payment discipline and at the same time will introduce a mandatory Cabinet of Ministers' financial guarantee for those consumers who can not be disconnected.

Experts note that the new model meets the requirements of the Third EU Energy Package, whose provisions Ukraine will be obliged to implement as a member of the Energy Community (EC).