Ukraine’s Gas Market: A Thorny Way to Liberalisation
On April 9th 2015, the Ukrainian parliament took a long-awaited step towards a competitive and secure energy plan in Ukraine. By an overwhelming majority of votes, the Parliament adopted a new gas market law.
It might not be immediately clear for larger European audiences why the adoption of a single law, or the implementation of a single EU directive, suddenly deserves so much attention. However, one should not forget the very special place of natural gas in Ukraine’s political agenda.
The significance of this law for the Ukrainian energy sector and ultimately for the entire Ukrainian economy can hardly be overestimated. In fact, the European Commission has welcomed the new legislation as a powerful component of energy reforms in Ukraine. According to Janez Kopač, Director of the Energy Community Secretariat, the newly adopted Ukrainian law is compliant with the EU’s Third Energy Package.
New rules, new agenda
The gas market law pursues two noteworthy objectives. Firstly, it is aimed at ensuring proper market functioning, meaning equal conditions for market players and non-discriminatory access to storage and transportation of natural gas. The second important objective is the implementation of EU laws in Ukraine and, ultimately, the establishment of a legal framework that enables integration of Ukrainian and EU energy markets.
Gas market liberalisation is made possible through the adoption of complex requirements of corporate unbundling with regard to storage, transportation, and supply of natural gas. The new law takes a tremendous step towards de-monopolization of the Ukrainian gas market by eliminating the vertically integrated corporate structures that control different levels of Ukraine’s gas industry. In addition, the establishment of equal access for undertakings to the market is very beneficial for consumers. For instance, consumers are newly empowered by the right to choose and change their gas supplier. The latter is truly revolutionary for Ukraine where the gas supply market has been fiercely monopolized, which, in turn, has provoked numerous instances of the abuse of a supplier’s dominant position which have hurt consumers. Fortunately, the gas market law pays special attention to consumer protection.
The objective of the implementation of the EU law in Ukraine has a strong geopolitical dimension. It is an important tool for solidifying Ukraine’s commitment to further integration with the EU. The adoption of this law shortly after the European Commission had presented its strategy for the establishment of a Resilient Energy Union in the EU is a very positive signal. To be sure, the energy-driven relationship between Ukraine and the EU already has a complicated history. Since Ukraine joined the Energy Community while still being represented by the now infamous ex-President Yanukovych, there have been many ups and downs in this relationship. With the legislative implementation of the Third Energy Package Directive, Ukraine has demonstrated a strong commitment to real integration with the EU in the field of energy for the common goal of achieving competitive, secure, affordable, and sustainable energy. It is quite symbolic that Ukraine implemented its first comprehensive energy directive at a time when the ‘Energy Union’ banner was put up in the Schuman square in Brussels. There is hope that the success story of implementing the EU energy law will be an example for other legislative initiatives in the Parliament of Ukraine.
Beyond market liberalisation
The legal framework established by the adopted law has a lot of added value apart from the gas market liberalisation as such. Particularly, the ability of the government to intervene in the market will now be put within specific legal boundaries. The exercise of additional and exceptional powers by the state in case of emergency will now be subject to compliance with the requirements of the gas market law. The law introduces a special mechanism of the ‘national plan of action’ in case of emergency in the gas supply. Clear-cut regulation of previously exceptional state powers brings certainty and security to the market. The clarity of regulation is a vital legal disincentive for the abuse of power by the government.
Finally, a very significant meaning that even partial implementation of the Third Energy Package has in Ukraine is its importance in the fight for what might be called the ‘de-oligarchisation’ of Ukraine. New conditions of market transparency and, most importantly, guarantees of non-discriminatory market access have hit hard the unconditional control of Ukrainian oligarchs over strategic shares of the energy sector pie. There is hope that the liberalisation of energy markets will make a meaningful contribution to the prospects of transforming energy oligarchs into law-abiding big businesses challenged by legally equal competitors.
A steep and thorny path to the gas market
To add a bit of context to this discussion, it should be clarified that the adoption of this law is only the conception of a functioning gas market in Ukraine. For this market to actually be born, much more than simply a law is needed. First of all, the law itself requires adoption of numerous regulations, guidelines, and reporting mechanisms from the Cabinet of Ministers as well as from other state agencies such as the National Commission for State Energy and Public Utilities Regulation. But even more importantly, apart from implementing new rules by state agencies, the reaction of the market itself is vital in this regard. The Ukrainian gas market will be fully functional only once we see actual changes in market shares and a real unbundling of vertical structures.
As with any other law on market liberalisation, this piece of legislation creates a legal framework for such liberalisation and shows political will to this end; the Parliament of Ukraine has done its part. Now the ball is in the hands of the executive branch, and, ultimately, the incentive should shift to the market itself.
Maksym Popovych works as a parliamentary assistant and advisor at the Parliament of Ukraine. He deals with the legislative work in the field of energy and the implementation of EU energy law in Ukraine. He holds an LLM in European and International Business Law from Leiden University in the Netherlands. Our thanks to New Eastern Europe, a Natural Gas Europe Media Partner