Since September 1, 2006 the new rules of the wholesale electricity (capacity) market have been introduced by the corresponding Russian Federation Government Resolution. The new rules (hereinafter referred to as Rules) change the whole system of relations between buyers and sellers of electric power and capacity.
Wholesale suppliers of electric power include generation companies and importers of electric power. The group of buyers includes:
Consumers buying electric power in order to meet their own production needs;
Sales companies (including suppliers of last resort), acting in their own right and buying electric power in order to resale it to end users;
Exporters (export operators) of electric power – organizations, which are buying electric power on the domestic wholesale market in order to export it to foreign energy systems.
According to the Rules, the regulated sector and the free trade sector of the wholesale market will be replaced by the system of regulated contracts to be concluded between buyers and sellers of electric power. These contracts are called regulated, because electricity prices under these contracts are regulated by the Federal Tariff Service (FTS).
In 2006 regulated contracts were concluded for a period from their signing up to the end of the year. Starting from 2007, wholesale buyers and sellers gained the right to conclude long-term regulated contracts (for 1 year or more).
In the process of liberalization, long-term bilateral relations between market participants will help to forecast electricity (capacity) prices both in the middle and in the long term. Predictability of prices is a guarantee of investment attractiveness of the electricity industry.
In 2006 regulated contracts covered all volumes of power and capacity produced and consumed according to the forecasted balance for 2006 presented by the Federal Tariff Service. As of 2007 volumes of electric power (capacity) traded in the wholesale market at regulated prices are substantially reducing, pursuant to Russian Federation Government Resolution ¹205 of April 7, 2007 "On amending certain resolutions of the Russian Federation Government related to the calculation of electricity volumes sold at free (competitive) prices". This Resolution sets forward that as of January 1, 2003 electric power is supplied on the wholesale parts in the following proportions of the basic forecasted volume of electric power:
January 1, 2007 until June 30, 2007 – 90 to 95 percent;
July 1, 2007 until December 31, 2007 – 85 to 90 percent;
January 1, 2008 until June 30, 2008 – 80 to 85 percent;
July 1, 2008 to December 31, 2008 – 70 to 75 percent;
January 1, 2009 until June 30, 2009 – 65 to 70 percent;
July 1, 2009 to December 31, 2009 – 45 to 50 percent;
January 1, 2010 until June 30, 2010 – 35 to 40 percent;
July 1, 2010 to December 31, 2010 – 15 to 20 percent.
As of January 1, 2011 electric power will be sold only at free(competitive) prices.
Regulated contracts allow for a gradual reduction in electricity (capacity) volumes without significantly changing their form. This helps to extend the sphere of free (unregulated) prices. This means that by the time the transition period of restructuring is over, it will become possible to launch a fully competitive wholesale market. This is specified in the Russian legislation on the electric power industry.
Uncontracted electricity volumes will be traded at free unregulated prices. The new market model implies two ways of electricity trading at free prices – free bilateral contracts and a day-ahead market. Under free bilateral contracts market participants have the right to choose contracting parties, prices and supply volumes. The day-ahead market is based on competitive selection of bids submitted by suppliers and buyers a day before the electricity is actually supplied. The competitive selection is held by the commercial operator1. If there are deviations from the day-ahead forecast, participants are obliged to sell excess amounts or buy missing ones in the balancing market.
As a whole, the day ahead market replaces the free trade sector that was previously operating. The only difference between the two is that in the day ahead market participants' bids cover all power produced and consumed, while in the free trade sector suppliers bid for 15% of production, and buyers – for 30% of consumption. It is also important that consumption and production planning held by the System Operator2 is based on the bidding results. Thus, most cost effective generation capacities are loaded in the first place.
In order to reduce risks of price manipulation in the wholesale market, the system that stimulates market participants to make competitive bids has been introduced - according to the rules of trade, the first bids to be accepted are those that suggest the lowest price. The Federal Antimonopoly Service of Russia is working out the procedure of identifying non-competitive behavior (cases of overpricing, attempts of generating companies to withdraw part of their capacities from the marketplace).
Changes in regulated pricing are also aimed at making the electricity industry investment attractive. Starting from 2008, the previously used method of cost-effective expenditures was replaced by another approach: under regulated contracts, tariffs for electric power and capacity delivered by suppliers are set according to the indexation method. Using this method, suppliers' tariffs are calculated depending on those of the previous year, which allows to keep in mind actual inflation rates (but not forecasted ones).
The new wholesale market will also include capacity trading, which will ensure reliable and sustainable electricity supplies. Before the new wholesale market rules were introduced, suppliers received payment only for 85% of installed capacity of their generation equipment, and for buyers payment for this capacity was included in the flat-rate tariff for electricity (capacity). Now there are separate payments for electricity and capacity. When selling capacity, suppliers are obliged to maintain their generation equipment in proper condition in order to be always ready to produce electric power. In other words, these obligations mean that the supplier has to use the equipment in keeping with the schedule provided by the System Operator, observing equipment configuration and its parameters. Besides, generation equipment of each supplier should participate in primary frequency response and etc. Capacity payment depends on fulfillment of his obligations by a supplier. This will stimulate suppliers observe the requirements imposed by the System Operator. All these mechanisms are aimed at increasing reliability of the energy system in conditions of growing electricity demand.
In order to encourage the flow of investments, new capacities (those not included in the forecasted balance for 2007 prepared by the Federal Tariff Service) will be traded in the wholesale market at free unregulated prices. These generation facilities won't be covered by regulated contracts. The same occurs with new consumers – they may conclude regulated contracts only if in 2007 there are technical conditions for their connection to the grid.
In fact, the new wholesale market model is the basis for achieving the target (fully competitive) model: the pricing mechanisms (formation of equilibrium prices) and the procedure of defining electricity (capacity) volumes in balancing and day ahead markets, accounting mechanisms and payments for deviations are the key elements of the market and they will not change in the future.
In the future liberalization of the wholesale electricity (capacity) market will involve creation of "auxiliary" markets, which will support the work of the energy system.
1. Commercial operator is a company, which provides services in the wholesale electricity (capacity) market, as well as ensures financial accounting arrangements regarding payments for electric power supplies and services being rendered to wholesale market participants.
2. System Operator of the Unified Energy System (SO UES): a specialized organization, which is responsible for managing operating schedules of energy facilities. The System Operator has the right to give dispatching commands and orders that are obligatory for all dispatch entities, electricity entities, and electricity consumers with controllable load.
Pursuant to the Russian Federation Government's decision, the Ministry for Industry and Energy is obliged to ensure that draft governmental decisions concerning transformation of the wholesale market regulated sector into the system of long-term regulated contracts are submitted for consideration in a month's time. Before January 1, 2007 the Federal Antimonopoly Service, the Ministry for Industry and Energy, the Ministry for Economic Development, and the Federal Tariff Service should present suggestions regarding the antimonopoly control in the wholesale electricity market to the Russian Federation Government.
In the new model, the regulated sector of the wholesale market is transformed into the system of regulated contracts concluded between wholesale market participants. Both electricity and capacity may be sold under regulated contracts (RCs). Uncontracted volumes of electricity are sold/bought at free prices in the day ahead market (sale and purchase prices are calculated proceeding from bids and free contracts, in which prices are set by parties to the contract). In the day ahead market the whole of production and consumption volumes is taken into account when prices are calculated (even those volumes that are covered by RCs). In contrast to the present model, if electricity volumes claimed by the buyer don't pass competitive selection in the day ahead market, the buyer will be obliged to buy the corresponding amount of electricity in the balancing market. In other words, the buyer doesn't have an opportunity to return to the regulated sector. Besides, the rules of capacity payment will be modified to a large extent.
Regulated contracts may have different duration periods: in 2006 they will be concluded for a period from the day of their signing up to December 31, starting from 2007 – for a period from 1 to 3 years (contract duration depends on the buyer's request and the consumer type). Prices specified in each contract are nothing else but supplier's tariffs for electricity and capacity set by the Federal Tariff Service of the Russian Federation. RCs are concluded under "take or pay" conditions. The supplier is obliged either to deliver the contracted volume of electricity (capacity) or (only for electricity) to buy it in the market (at competitive prices in the day ahead market or under free bilateral contracts). The buyer is obliged to pay for the contracted amount of electricity (capacity) irrespective of his consumption schedule. Those electricity volumes that are bought under RCs but excluded from the day ahead market schedule are sold to buyers at the day ahead market price.
It is important to note that regulated contracts for electricity (capacity) provide a whole range of advantages both for buyers and sellers. As far as buyers are concerned, RCs may help to increase reliability of power supply and avoid unexpected price jumps that are very likely to occur in the free trade sector. Thanks to RCs suppliers may plan their income and investments in the long term. This sort of planning is rather difficult in the free trade sector.
"Attachment" is the process of selection of contractors and electricity volumes sold under RCs. The main principles of "attachment" include observance of the FTS schedule and load restrictions (Pmin, Pmax). Consumers have to follow other rules – never exceed their maximum consumption and consider both typical consumption schedules and system restrictions (convergence of electricity regimes and observance of cost balance, i.e. consumers' payment obligations should correspond to suppliers' requirements).
First of all, we should note that the new wholesale market model doesn't imply division of the wholesale market into sectors. Thus, there is no need to gain a status of a free trade sector participant and the right to participate in the regulated sector separately. All organizations wishing to become market participants will have to pass through the same procedure. The decision of FTS will be the key access requirement. If there is no FTS decision, buyers of electricity (capacity) may become only "partial" participants of the market. This means that they will have an opportunity to buy no less than 85% of electricity (capacity) in the retail market, and the remaining amount – in the wholesale market.
For generation companies – no less than 25 MW of installed capacity (each group of supply points should have no less than 5 MW). For consumers and sales companies – capacity of power receiving equipment should be no less than 25 MVA (for each group of supply points – no less than 2 MVA). In the future we are planning to introduce connected load requirement – since August 1, 2007 connected load of power receiving equipment owned by consumers or power sales (retailing) companies should equal to 1 MVA, since February 1, 2008 – 750 KVA. Besides, the organizations wishing to participate in the market should also meet all technical requirements, including the technical ability to conduct commercial accounting of electric power.
WGCs and TGCs will enter into RCs, but contracted volumes will refer to each power plant. Besides, companies not included the Holding and those AO-Energos that haven't yet finished unbundling by activity type will also become suppliers. Contracting parties under RCs will be selected separately as far as production and consumption volumes of those AO-Energos that haven't yet finished unbundling by activity type are concerned. If it becomes clear that under a contract generation facilities of any AO-Energo become also supply facilities for the same AO-Energo, the contract is not concluded. In this case consumption volumes are covered by the company's own production volumes.
Both retailing companies included in the configuration of the RAO UESR Holding and independent retailing companies may purchase electric power under RCs. Besides, large end consumers (industrial enterprises or utilities that have gained the status of market participants) may also be buyers.
Obviously, new market rules specify some benefits and special requirements for suppliers of last resort. A supplier of last resort is a retailing company that is obliged to conclude a public contract for electricity supplies with any consumer who has applied to it.
When a supplier of last resort becomes a market participant, he doesn't need to meet the requirements regarding technical characteristics of its supply points (using which a supplier is going to participate in the wholesale market) that are obligatory for other market participants. Besides, suppliers of last resort may use those accounting devices that they have already had as of the date the Russian Federation Government Resolution has come into force.
The pace of market liberalization will depend on the pace of reduction of electricity volumes covered by RCs, which will be set annually by the Russian Federation Government along with approval of socio-economic development forecasts (the volumes may be reduced by value of 5-15%). It has already been specified in the draft rules for operation of the wholesale electricity (capacity) market during the transition period that in 2007 electricity volumes covered by RCs will be reduced by 5%.
Yes, buyer and seller may be located in different regions. WGCs have been established according to extraterritorial principle, so that power plants included in their configuration may be situated in different regions. But as far as TGCs are concerned, the territorial principle will prevail – consumers will be mainly chosen from those regions where TGCs are located.
In 2006 and 2007 prices under RCs will be nothing else but the tariff for electricity set for electricity market suppliers by the Federal Tariff Service. But starting from 2008 (or even since 2007 in case of launch of pilot projects) the price under RCs will be calculated according to the price indexation formula. This formula will help parties to the contract not only to calculate the price without the regulator, but also to objectively calculate and forecast prices for the next year.
With the aim of attracting investments, all new capacities (left out of consideration in the forecasted balance for 2007 prepared by the Federal Tariff Service) will be traded in the wholesale market at free unregulated prices. These facilities won't be covered by regulated contracts. This also refers to new consumption facilities – they may be covered by regulated contracts only if in 2007 it was technically possible to connect them to the grid.
Electricity volumes for consumers covered by RCs are calculated taking into account 3% from balanced consumption in order to cover the difference between nodal prices (the cost of load losses and system constraints). The aim is to hedge buyers from nodal price fluctuations that may occur in the day ahead market. For example, if there is no such a hedge, and the consumer can't buy cheap electricity (because of some reasons, for instance, repair works on the grid), having the opportunity to buy expensive electricity only, the difference in nodal prices will lead to the situation in which this buyer will pay for the greater amount of electricity than 3% of his consumption, even if the consumption voiced by him in the day ahead market is equal to his consumption planned under RCs.
Hedging is especially important for those suppliers of last resort that bear social load, because this makes expenses for the purchase of electricity in the day ahead market within the framework of RCs easy to forecast. Besides, predictability of financial results within the framework of RCs for all consumers fully correspond to the principles on which both the system of RCs and the regulated system are based.
The launch of the new wholesale market model leads to major changes in the system of payments in the market. Parties to regulated contracts will pay each other directly. In the day ahead and balancing markets, as before, all payments will be made through ZAO CFR. ATS will monitor observance of all financial requirements and liabilities by the parties to all contracts.
Administrator of Trading System is a not-for-profit partnership company, the main purposes of which are to render trade services in the wholesale electricity (capacity) market, make financial accounting arrangements (regarding payments for electric power supplies and services being rendered to wholesale market entities), ensure equal opportunities for all wholesale market entities, protect electricity suppliers and buyers and increase efficiency of electricity production and consumption.
By mutual agreement parties to RCs may change contracted volumes of electricity supplies and payment schedules (in accordance with established procedure). Unilaterally, a buyer may reduce volumes of electricity purchased, but this reduction should cover all regulated contracts concluded by this buyer. The amount of reduction may vary depending on maximum and minimum volumes of electricity to be bought (sold) at regulated prices (tariffs) set for a certain period of time.
If a wholesale market participant fails to pay for electric power, capacity or services provided in the wholesale market in time, he has to pay a forfeit fee of 1/225 from the refinancing rate of the Central Bank of Russia for each banking day of delay in payment. If a participant fails to meet payment requirements (or in case of improper execution of payment requirements) for electric power and (or) capacity during two payment periods, ATS may divest him of his right to participate in the market.
In order to reduce risks of price manipulation in the wholesale market, we are planning to introduce the system that will stimulate market participants to make competitive bids (based on marginal variable costs of production). The Federal Antimonopoly Service will be empowered to identify non-competitive behavior.
In three months after the Russian Federation Government Resolution on the new wholesale market model comes into force, the Ministry for Industry and Energy, FAS and the Federal Agency for Nuclear Power will present their suggestions regarding organization of competitive capacity trade.
Capacity payment means that a buyer pays for generation adequacy, i.e. he pays for maintenance of those generation capacities that are needed to meet his consumer needs. This helps to increase reliability of electricity supply and reduce risks that may arise for investors in the electricity industry. Capacity payment may also reduce probability of price jumps in the electricity market.
While competitive capacity market is not launched, all capacity will be traded under RCs. Capacity suppliers will have to observe the requirements imposed on their generation equipment. These requirements include the following measures. First of all, the supplier will have to use the equipment in keeping with the schedule provided by the System Operator, observing equipment configuration and its parameters (maximum and minimum hourly capacity levels). Generation equipment of each supplier should participate in primary frequency response and reactive support. Besides, HEPPs should participate in secondary response. If a supplier fails to meet the requirements, his capacity payment will be reduced.
Since 2007 buyers will have to plan their maximum consumption, which will be included in the capacity balance of the FTS of Russia. If planned capacity volumes differ from those that a buyer has actually consumed, he will have to sell the excess amount of capacity or buy the missing one. Moreover, the purchase of missing amounts will cost more than the sale of excess ones.
Capacity suppliers bear corporate responsibility before buyers as far as observance of mandatory requirements imposed on their generating equipment is concerned. If one of suppliers fails to observe the requirements, capacity payment is reduced for all buyers, and the supplier who hasn't observed the requirements has to compensate this reduction for other suppliers as specified by the supplier agreement.
There will be no FTS in the new model. Electricity will be traded at free prices in the day ahead market. In contrast to the FTS, in the day ahead market the whole of planned production and consumption volumes will participate in competitive selection. Total volumes of planned consumption and production, as well as hourly equilibrium nodal prices, will be calculated proceeding from competitive selection. Market participants will pay for the difference between their planned production/consumption schedules and volumes specified in RCs. These amounts of electricity will be sold and bought at equilibrium nodal prices on a hourly basis. Besides, as in the free trade sector, market participants will have the right to conclude free bilateral contracts.
In the new wholesale market retail buyers maintain the right to buy part of their electricity consumption in the wholesale market (as current participants of the free trade sector may do). These participants may become wholesale market entities if they buy a certain part of their scheduled consumption in the retail market at two-rate tariffs. If these participants are entering the wholesale market in the middle of the year, they conclude regulated contracts for certain amounts of electric power (capacity). In such a case, volumes of electric power (capacity) bought under RCs by a sales (retailing) company that provides electricity (capacity) to these consumers in the retail market are reduced by the amount bought by these participants.
One of the main achievements of the balancing market is that now wholesale market participants have objective economic and market stimuli that help them to plan their production/consumption schedules and execute commands voiced by the System Operator. The results achieved in the balancing market give evidence to say so – market participants have started to plan their schedules more carefully, deviations are gradually reducing, and payments for deviations have become more adequate.
The rules of the balancing market won't change significantly. The main change will be as follows: prices in the balancing market will no more depend on tariffs for market participants (with exception of HEPPs and HEPSPPs).
The new market model implies several mechanisms that will stimulate electricity (capacity) suppliers ensure that their generation equipment is working according to the System Operator's command and is able to participate in frequency and load regulation, thus providing consumers with reliable and sustainable power supply. As far as capacity is concerned, electricity (capacity) suppliers will be obliged to maintain their generation equipment in proper condition, so that it is always ready to produce electric power. If suppliers fail to meet these reliability requirements, payment for their capacity will be reduced. This gives them economic stimuli to observe the above-mentioned requirements.
There are several opportunities for such consumers to participate in the new market. The way of their market behavior is governed by two factors – installed capacity of their generation facilities and presence of the FTS decision.
First of all, such consumer may register a separate group of supply points (GSP) in the sphere of generation and participate in the market like other market participants. Secondly, instead of registering a separate GSP in the sphere of generation, he may register a GSP with controllable load in the sphere of consumption (in case of observance of all technical requirements). In this case a market participant gets an opportunity to bid in the balancing market and receive commands to reduce consumption (and financial income in case of their execution) from the System Operator. Finally, a plant with capacity less than 5 MW must be balanced with consumption in the wholesale market.
A group of supply points is identified by the Administrator of Trading System and the System Operator. This group includes one or several supply points, which refer to one node of the computational model and (or) to a technologically integrated (inseparable) energy facility. The group of supply points limits the territory with regard to which only a certain wholesale market participant may purchase and sale electricity (capacity). The group of supply points is used for identification and execution of obligations imposed on the market participant in the sphere of electricity (capacity) supplies and payments for electricity (capacity).
No, this is impossible. According to the rules of the wholesale electricity (capacity) market of the transition period, each group of supply points may be presented in the wholesale market only by one buyer and (or) supplier.
Pursuant to Article 6 of the FL ¹ 36 dated April 1, 2006 it is forbidden to combine competitive and monopolistic activities. There are no exceptions for wholesale consumers – resellers of electric power. There are several ways to execute this law – for example, reorganization in the form of separation, creation of a subsidiary company or cessation of one of the mentioned activities. In the context of this answer wholesale consumers – resellers of electric power – are understood as organizations owning electric grids and purchasing bulk volumes of electricity from power supplying companies in order to resale them to other consumers.
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