Since Ukraine gained independence it has failed to enact reform of its energy market, resulting in monopolisation and inefficient use of scarce energy resources.

Energy reform is critical for the Ukrainian economy, as energy constitutes 30 per cent of GDP with turnover of 400bn hryvnia ($17.5bn) a year. Ukraine’s biggest monopolies are concentrated in the energy sector, so wise state regulation, demonopolisation and competitive rules are essential to make the market efficient and to eliminate corruption.

The Ukrainian Parliament and Government have made the first important steps but one of the most significant reforms – a new law to create an independent energy regulator – is still missing.

Energy sector reform is one of Ukraine’s key commitments to the EU and should be implemented urgently.

The first important step towards energy reform was taken in April 2015 when a law on the natural gas market was adopted by the Verkhovna Rada. This law is a fundamental step forward in combating gas market inefficiency.

The European Energy Community positively evaluated the law, as it is fully in line with Directive 2009/73/EC and Regulation (EC) 715/2009. The gas law is designed to eliminate the problem of the differences between Ukrainian and EU energy legislation, allowing for more convenient and clear cooperation.

It aims to implement the main requirements of the EU-Ukraine Association Agreement and fulfils the conditions of the EU’s Third Energy Package. This will be a very significant step towards realisation of the Energy Community commitments in separating the functions of operator, distributor and supplier. Unbundling of the main player in Ukraine’s gas market – the state-owned joint stock company Naftogaz Ukraine – should be the first significant practical step towards increasing competition.

Independence of the energy regulator is a key element of Third Energy Package implementation

But without an independent energy regulator, energy market reform is impossible. According to Ukraine’s international commitments under Directive 2009/72/EC concerning common rules for the internal market in electricity and Directive 2009/73/EC on common rules for the internal market in natural gas, ensuring the independence of the regulator should be a significant step in speeding up implementation the Third Energy Package.

The National Commission for State Regulation of Energy and Public Utilities of Ukraine is a sole regulator of Ukraine’s energy market, involved in the formation and enforcement of a unified state policy for the functioning of electricity markets, natural gas, petroleum and petroleum products in the areas of heating, centralised water supply and drainage, and treatment and disposal of household waste; it is also responsible for licensing of economic activities in the fields of electricity, heating, centralised water supply and drainage in the oil and gas sector in accordance with the applicable legislation.

The independence of the regulator could be ensured through its political, financial, institutional and operational autonomy, which is not the case at present

The new law should assure the political and institutional independence of the energy regulator, meaning the separation of the regulator from any influence of political parties, branches of power, and players in the markets. In addition, the commissioners should be transparently selected by a politically balanced commission comprising highly qualified and professional experts.

The most controversial and problematic case arises with the regulator’s budgeting, to eliminate impact risks through the budget process. At the moment, the regulator has no power to determine the necessary level of financing required for its effective operation. The need to focus on the financial independence of the regulator is a logical requirement. The activities of the regulator should be based on independent budget formation.

Next steps to reform the energy market

The Ukrainian Parliament will have the chance to relaunch the energy regulator by enacting a new law according to European standards. Debate in Parliament on this issue is intense.

The new law is before the Ukrainian Parliament this week. The decisions lawmakers take will be critical in deciding whether Ukraine will move forward with energy reform or be stuck somewhere at the middle, or even go back to the inefficiency and scheming of the previous regime.

Nataliya Katser-Buchkovska is a Member of the Ukrainian Parliament.

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