LAW FIRM DIRECTORY

Practice Areas |

Denis LYSENKO ,
Managing partner, Aequo

Pavlo BYELOUSOV,
Counsel, Aequo

Euro course

Ukraine is committed to integration with the energy markets of Europe. This is stated in the Energy Strategy of 2015 and implemented, in particular, in new sectoral legislation. But the implementation of new mechanisms in the industry is complicated by an ideological gap in understanding the implementation of approaches and principles of the EU and European Energy Community by certain public authorities.

On 18 August, 2017, the Cabinet of Ministers of Ukraine approved the Energy Strategy of Ukraine until 2035 entitled Safety, Energy Efficiency, Competitiveness (ESU-2035). The document, whose aim is to establish strategic guidelines for the development of the energy market in Ukraine, in fact, sets out economic and technological challenges and the reality in which Ukraine has remained since 2014.

 

ENERGY STRATEGY

Among other things, ESU-2035 provides that the above challenges will be partially covered by completing reform of the energy sector in Ukraine by 2025. This includes bringing the national legislation of Ukraine into conformity with the acquis communautaire of the European Union (EU) in the field of competition and energy, as well as conformity of subsequent integration with the EU energy market.

First of all, the tasks of ESU-2035 require radically new approaches from public authorities to regulation and implementation of state policy on the energy market, particularly with regard to the following: the use of basic principles and legislation of the EU in this sector, transparency and the non-discriminatory nature of legal and regulatory mechanisms, establishment and introduction of economically justified tariffs and facilitation of a stimulating investment climate.

The main problem is the ideological gap in understanding the implementation of the above approaches and principles of the EU and the European Energy Community in the energy sector by certain public authorities. They are accustomed to the old methods when the principles and approaches declared in agreements, laws, memoranda, strategies, programs of action and orders of the Cabinet of Ministers of Ukraine depended on the adoption and approval of a number of auxiliary subordinate laws and regulations, but were not mandatory for use.

 

ENERGY COMMUNITY

The goals stated in ESU-2035 and previous strategies of Ukraine correspond in full to the ultimate goal of creation and operation of the Energy Community. This involves the creation of a legal and economic basis for energy products and materials transported through electric and gas networks, reform of energy markets and their integration into the EU’s internal energy market by providing consumers with a real choice, creating new opportunities for competition and business development and increase in cross-border trade, particularly, on the natural gas and electricity markets.

In that context, for Ukraine the signing of the Protocol on Accession to the Energy Community Treaty (ECT) on 24 September, 2010, was a completely logical step. On 1 February, 2011 Ukraine became a full member of the community.

According to the ECT, Ukraine has accepted the obligation to gradually implement the EU’s regulatory and legal framework into national legislation, including the provisions of acquis communautaire in the energy sector, which are a part of the Third Energy Package (TEP).

 

TEP IN THE GAS SECTOR

The reform and implementation of TEP became especially relevant to Ukraine’s natural gas market at the end of 2013 and in 2014. This was due to the significant dependence of the energy balance of Ukraine (in 2015 the share of natural gas was more than 26%) on gas imports from abroad (almost completely from the Russian Federation up to the 3rd quarter of 2014), the significant rise in world gas prices, Russia’s occupation of part of the territory of Ukraine where gas production is carried out (a loss of about 2 billion of m3 per annum), the low energy efficiency of enterprises and consumers, as well as the virtual absence of diversification of natural gas supplies until 2014.

Thus, in connection with the above factors, reform of the gas market was a matter of Ukraine’s energy security and economic survival. Therefore, the gas sector has become a flagship of reforms in our country, including with respect to the implementation of TEP.

Since the adoption of the Law of Ukraine “On the Natural Gas Market” (Law on the gas market), the main provisions of which came into force on 1 October, 2015, Ukraine, with active assistance from the Energy Community Secretariat, has come a long way in implementing the provisions of the ECT and TEP/acquis communautaire in the energy sector into Ukrainian national legislation. We at Aequo Law Firm clearly analyzed and provided information on fulfillment by Ukraine of its obligations under the ECT in the gas sector in the TOP LEAD reference book called Energy of Ukraine in 2017 (page 40).

 

TEP IN THE ENERGY SECTOR

Reform of the electricity market reform took place following reform of the gas market. New Law of Ukraine No. 2019-VIII On the Electricity Market (Law on the electricity market) came into force in June 2017, the provisions of which will be implemented gradually until 2020. Adoption of the Law was the beginning of implementation of the TEP by Ukraine in the electricity sector, the move of retail electricity market participants to a model of bilateral agreements, ensuring reliable and consistent delivery of electricity to end consumers, as well as access to cross-border networks of electricity exchange. In particular, this provides for replacing the electricity supplier with a consumer, which will ultimately have an effect on reducing costs and improving the quality of electricity supply services.

In addition, the adoption of codes on the transmission and distribution system, conditions of access to cross-border networks of electricity exchange, the lack of which resulted in the initiation of special procedures against Ukraine within the framework of the Energy Community (Case ENC 01/12: UA/Electricity), by the National Energy and Utilities Regulatory Commission (NEURC) is expected shortly.

 

ENERGY LEGISLATION

The provision of new energy legislation in Ukraine is of interest. It provides a rule according to which state bodies are obliged not only to apply the provisions of national standards, but to also be guided by the above provisions of the TEP and the principles they are based on.

Thus, Article 2 of the Law on the gas market and Article 2 of the Law on the electricity market oblige the public authorities and courts, when applying the provisions of those laws, to be guided by the law-enforcement practice of the Energy Community and the EU, including the decisions of the European Court, as well as the practice of the European Commission and the Energy Community Secretariat. Therefore, the relevant decisions of public authorities should meet the principles of impartiality, good faith, reasonableness, proportionality, transparency, non-discrimination and timeliness.

Despite the seeming declarative nature, each of those principles is rather meaningful. For example, according to the principle of proportionality, decisions taken by public authorities shall be required and minimally sufficient to achieve the main goal of satisfying the public interest.

Today, the application of provisions of the TEP and ECT by the public authorities is not very common, but still does take place. For example: decision of the Antimonopoly Committee of Ukraine No. 18-r dated 22 January, 2016, where the AMCU was directly guided by and applied the provisions of the ECT and TEP when qualifying the actions of Gazprom PJSC and determining its violations of Ukrainian legislation on the protection of economic competition, and the decision of the Kyiv District Administrative Court dated 13 April, 2016 in case No. 826/594/16, which found non-compliance of NEURC resolutions with acts of EU legislation.

We believe that application of the norms and principles of the ECT and TEP will eventually become the rule for state bodies when they adopt the relevant decisions and form state policy in the energy sector. This will, in its turn, contribute to stimulating the investment climate in Ukraine.