Ukrainian gas bourse prepares large-scale transformation

BUCHAREST (ICIS)–The Ukrainian energy exchange UEEX is preparing large-scale transformations for the upcoming months to build on the gas sector’s recent reform progress, the head of the bourse told ICIS in an interview.

Oleksii Dubovskyi, chairman of the UEEX exchange committee, said the outfit was already equipped to roll out short-term standard products such as intra-day and day-ahead contracts for delivery on the country’s virtual trading point (VTP) using continuous trading technology.

He also expects the gradual introduction of standardised forward products such as months, quarters, seasons or calendar years.

UEEX has seen significant year-on-year growth as the total volume of gas traded on the platform soared to a record 0.7 billion cubic metres (bcm) in the first half of 2020, almost 18 times higher than the same period last year. The number of active participants also rose year on year from 211 to 337 over the same period.

The growth is largely linked to distribution companies which entered the market and snapped up volumes as well as to the incumbent Naftogaz, whose traded volumes accounted for a third of total sales in the first half of 2020.

PROGRESS

Further growth could be triggered by landmark changes in the gas sector.

Firstly, a public service obligation where Naftogaz is expected to sell nearly 8bcm of gas to households annually at a regulated tariff is to be lifted on 1 August. The PSO was due to be removed on 1 July but had been postponed until next month as the government needs to hold a tender for supplier of last resort ahead of scrapping the PSO.

If the PSO is lifted partially according to the latest calendar and more volumes are sold to the local market, UEEX expects liquidity to increase further and the number of participants to rise.

“Much depends on political decisions and government regulations,” Dubovskyi said.

Secondly, the Ukrainian parliament has recently adopted an important financial law, which observers said would help Ukraine to set up viable financial markets and help minimise credit risks.

Dubovskyi said the changes introduced by the financial law 2248 would not have a critical impact on UEEX, noting that the bourse would take steps to implement it, applying for licences and registering new rules.

Even so, Dubovskyi said there were several unknowns regarding the outcome of the financial law 2248 adopted in June.

CONCERNS

A first concern was linked to value added tax (VAT) which is currently applied on volumes traded in the wholesale market.

He said there was uncertainty regarding the obligation to register it not only by companies, but also by the exchange as a central counterparty.

“The sequence of who registers their tax invoices must be observed, but the main risk arises in case a participant doesn’t confirm VAT.”

Dubovskyi said there was also uncertainty with regards to the relationship between UEEX and the gas transmission system operator GTSO.

“According to the gas network code, the central counterparty is an ordinary market participant to which all market-related obligations apply, including those related to financial guarantees as a buyer.

“In order to introduce a central counterparty in spot and derivatives markets, it is first necessary to define from a legal point of view the role of the central counterparty in the wholesale gas market, in the supply and settlement process. It is also needed to establish the electronic interaction and workflow between the central counterparty, GTSO and market participants as well as settle issues related to the electronic administration of VAT on transactions in which the central counterparty is a counterparty.”

REMIT

Dubovskyi said UEEX would take part in a study to determine the best legal clearing model for spot and physical futures.

“We will also be able to cooperate with leading European exchanges, taking into account the course towards integration with the European energy market,”

UEEX is also working with the regulator NERC to meet requirements for transparency in the wholesale market along similar reporting procedures as those outlined by the EU’s regulation on wholesale energy market integrity and transparency (REMIT).

Dubovskyi said the ability of UEEX to introduce new physical and financial products was not linked to the financial law 2284.

“It depends on the rules by which the gas market operates, the problems that exist on the market, the demand of participants for a particular solution, as well as legislative possibilities and how much a particular product, financial instrument or service could be efficient for them.

“From our point of view, the cornerstones are the development of a spot exchange market and then on physical futures to create internal benchmarks.”