Despite the great importance of the energy market for Ukrainian economy, producers, traders and large consumers do not have proper instruments to mitigate price volatility or to hedge their contracts. At the same time best international practice shows visible and well-functioning derivatives in the energy trading. Such instruments have evidenced advantages like risk mitigation and reliable price formation, they also support markets liquidity. The European Energy Exchange (EEX) has wide selection of different derivatives which cover from day to year contracts. Hungarian Derivative Energy Exchange (HUDEX) proposes long and short-term products and so on with other energy exchanges over the world. Such derivatives may include standard electricity futures and options, gas futures and options. The EEX also introduced various price indices in both electricity and gas markets.
The price indices provide up-to-date picture on the specific market prices and become a real benchmarking of gas and electricity prices for various stakeholders. Such price indices usually are established by exchange and supports increase transparency in the energy markets and strengthen the market participants’ confidence in the trading process. There are many such examples in EU and USA (above mentioned EEX has Phelix, Elix, Egix indices). The indices provide regular tracking of prices and gives understanding of comparative price structures, levels, trends and dynamics. Usually behind each index there is a strong methodology, which is tested and improved over the time. Over the years Ukraine was lacking civilized energy trading with proper price formation, so rare examples of price indices were not transparent. This is why some companies uses formula “hub minus” as a benchmark instead of Ukrainian price indices.
In 2020 the Parliament of Ukraine has adopted the Law of Ukraine # 738 -IX consisting of 2 laws – Law on capital market and organized commodity markets and Law on Commodity Exchange. Among other, the first Law introduces definition of derivatives, types and requirements of and set characteristic / principles of organized commodity trading. Thus, Ukrainian energy market participants got possibility to use new instruments and adopt new business practice.
The purpose of this Scope of Work is to perform a study of using derivatives and hedging in the energy market of Ukraine. Additional goal is to analyze the factors influencing demand to use derivatives and hedging by energy market participants. The study also should consist analysis of current price formation practice, risk management solutions available for Ukrainian energy market and establishment of trustworthy price indices.
The energy market for the purpose of this study includes gas and electricity markets (including all segments). The relevant sections of study to be divided between gas and electricity markets.
The objectives of the study are to provide important information for:
- Ukrainian authorities on use of derivatives, hedging practice and price indices, advantages and related risks, and implementation of recommendations;
- Energy producers, traders and large consumers on how they can use derivatives and price indices in its planning and forecasting of its production, trading activity, hedging, etc.
Scope of Work
The study should cover desk research and survey on derivatives and hedging practice, drafting of recommendations and presentation of study results during online workshop. These tasks to be performed via following activities:
I. Desk research “Energy Derivatives best practice”:
The following aspects to be analyzed within desk research:
a) general assessment of current Ukrainian energy market including volumes, structure and segments, trading practice, products and instruments;
b) Government of Ukraine influence on the energy market (e.g., PSO or state support);
c) price formation on energy markets (Ukrainian practice and best international practice);
d) key risks (bottlenecks, difficulties, barriers to use), risk management solutions and hedging instruments available in Ukraine and review of best international practice;
e) derivatives review including types of derivatives, derivatives available for energy markets, prerequisites for launching of such derivatives, advantages etc. The review to cover Ukrainian practice and best international practice. Specific examples of derivatives use in energy markets of 3-5 relevant countries to be described (not limited to types, specific and description of each type of derivative or instruments, volumes, trading and settlement practice, etc.);
f) price indexes review. This task to covers review of various energy price indices as a best practice (including methodology, practical use). Up to 5 price indices coming from different countries and exchanges to be reviewed
g) the possible impact to energy market from launching of derivatives to be also assessed.
II. Survey “Use of derivatives in Ukrainian energy market”
The ultimate goal of survey to understand knowledge, practicality and feasibility of derivative use and hedging at Ukrainian energy market. Survey to be conducted via qualitative and quantitative research.
The survey and questionaries should be based on desk research and cover up to 100 participants (currently, gas and electricity TSOs have more than 2000 registered participants). While selecting the participants the target audience to be taken into account. The target audience of the survey is energy producers (e.g. electricity generations, oil and gas productions), key energy market participants (e.g., TSO, state authorities), traders, large consumers (consumption more than 100 000,00 Mh annually in electricity market and equally in gas market), trading platforms operators, municipalities and budget entities, business association, opinion leaders etc.
The qualitative research to be performed only as in-depth interview and to cover smaller group (up to 25 participants) of target audience. The interview should allow to conclude a deeper analysis of who uses and who does not use derivatives, risk management solutions, hedging practice and why, evaluate a demand for such instruments.
Based on desk review and survey, the recommendations on development derivatives and hedging use to be formalized. Such recommendation may include not limited to legal and regulatory aspects, organization of energy market structure, practical implementation and popularization of derivatives use.
As a next step, the recommendation on establishment and introduction of price indexes in Ukrainian energy markets to be formalized. The recommendation should include road map for the GoU, trading platforms and market participants. The recommendation should also elaborate on the correlation between formula “hub minus” and proposed price indices.
All recommendation to be set our clearly and provide exact steps for its implementation (such as road map, implementation plan etc.).
The results of activities I and II and recommendation to be presented at online workshop. The workshop to gather relevant stakeholders (list of participants, agenda, format to be agreed with ESP).
During execution of the tasks, the following to be considered:
- the workplan, methodology of desk review and survey (including questionary, questions for in-depth interview, target audience), workshop agenda to be approved with ESP;
- during the desk review, the respective literature, articles and other open sources to be reviewed and list of such sources to be disclosed in the reports;
- special attention to e) and f) aspects is highly required within desk review;
- activities I and II and recommendation to be set out in separate reports, the final report to include all of them. The reports and presentation materials, workshop materials to be aligned with ESP;
- review of best international practice should include 2-3 relevant countries if other is not clearly stated;
- survey and interviews to be done with management positions (either top management or senior managers responsible for energy resources procurement and planning).
Deliverables and Due Dates
The expected results are presentation of representative and unbiased findings on using derivatives and price indices in the energy market of Ukraine based on best practice and current legal environment. Proposed recommendation on improvements of legal and regulatory environment, perception of energy market participants on derivatives use.
The Deliverables under this Scope of Work should be in Word, Power Point and Excel formats and submitted electronically to the ESP in English and Ukrainian.
The organization should be available to start implementing activities under this Scope of Work within maximum 15 days after the award notice or within one week from the kickoff meeting, whichever sooner. In case there are any changes in the composition of the proposed personnel indicated in the application form, the organization must agree with them with the ESP before the award.
SUBMISSION OF PROPOSALS
All proposals are due on July 07, 2021 by no later than 14:00 local time in Ukraine. Proposals must be submitted via e-mail at the address [email protected] in the following formats: Adobe Acrobat and Microsoft Word and/or Excel.
All proposals must fully respond to the Technical Specifications enclosed as Attachment A and must include quotes in the format provided in the Attachment B – Table 1 – Detailed Budget. Proposals received after the above-stated due date and time will not be considered for this procurement.
QUESTIONS AND CLARIFICATIONS
All questions or clarifications regarding this RFP must be in writing and submitted, in English, to [email protected] on June 23, 2021 no later than 14:00 local time in Ukraine. Questions and requests for clarification, and the responses thereto, will be circulated to all RFP recipients.
Only written answers from ESP Procurement Office of Tetra Tech will be considered official and carry weight in the RFP process and subsequent evaluation. Any answers received outside the official channel, whether received verbally or in writing, from employees or representatives of Tetra Tech, or any other party, will not be considered official responses regarding this RFP.