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Policy Papers

  • 03.10.2014

    Improving gas transmission network regulation in Ukraine by implementing Energy Community rules - a tailor made proposal

    (Code:PP_03_2014)

    Gas transit through Ukraine and gas imports by Ukraine are decreasing. The pipeline system is ageing and the current regulatory framework does not meet the European standards. In this context, the current organisation of the Ukrainian gas transmission system is revealing its substantial weaknesses: The high degree of government intervention in determining access conditions and tariffs is scaring off (potential) users and the lack of a sufficient and predictable income stream prevents long-term investments into the infrastructure. One key question when discussing reforming the regulatory framework is how gas transmission tariffs are structured and determined. The tariffs determine the business case for the operator and provide incentives for modernisation and efficient operation.

    To enable efficient usage and investments into the infrastructure we suggest that Ukraine should transpose the ‘entry-exit system’ – which is obligatory in the EU. This will provide an anchor for a credible regulatory framework that will help to encourage investments and continued usage of the transit system. It fulfils the commitments required by its membership in the Energy Community and allows Ukraine to become an integral part of the European energy market in the longer-term. Furthermore, if properly implemented, the ‘entry-exit system’ represents a significant improvement over the current Ukraine situation in all aspects of gas transmission (third party access, transparency, investment incentives, …).

    In all EU member states the implementation of the entry-exit system differs according to national specificities. The Ukrainian gas transmission network will also require very specific provisions to (1) take into account that transit and transmission are interwoven. (2) That too low transit revenues are politically unacceptable, while too high transit tariffs or the risk of political interference in the transit system might encourage the construction of by-pass pipelines by Gazprom. (3) That the system is in need of investment.

    Accordingly, we propose to split Ukraine’s gas transmission system into two market areas that are to be separately privatised. The first market area comprises the entry-points from Russia and is essentially a vehicle for generating predictable transit revenues. It could hence be sold to a financial investor, which would be allowed to recover its acquisition-price through regulated tariffs. The second market area would be a ‘normal’ market area comprising all other parts of the transmission system. An independent system operator will decide on investment and operation. Tariffs, investments and access conditions will have to be approved by an independent regulator. 

    Attached file  (974.7 kb)
    Authors:  Georg Zachmann, Sophia Ruester
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