New life in old capacity?
One of the key challenges facing the Russian power industry is its substantial inefficient capacity. All market participants would likely agree that the issue needs to be resolved. Where opinions differ is over how exactly that should be done. There are two options – decommissioning and mothballing – and supporters of both can argue their position.
Yury YEROSHIN
– At this time there are around 18 gigawatts of surplus capacity on the energy market. The main argument put forward by those in favor of mothballing old and inefficient units is that power consumption could jump in future, so the extra capacity would be needed. We believe it makes no sense to hold onto inefficient capacity: without question it should be decommissioned. Mothballing leaves us with backward-looking technology, physically outworn and outdated capacity that operates with a low conversion efficiency, when instead we could modernize active units or bring new and advanced technology on line. Consumers would have to cover the cost of maintaining mothballed equipment, so we should be asking them if that’s what they want. Everyone knows there will be reserve capacity, over and above what is actually needed.
As we see it, the competitive mothballing mechanism proposed by the government is not acceptable. Running it after the CCS would mean mixing up two different goods with distinct characteristics in the selection process. So if the energy sector does go the route of paying for mothballed units, the competition should be held before the CCS.
Alexey KUPRESHCHENKOV
– In some cases it’s already obvious that decommissioning is the answer. As a rule, this is true for old equipment that has exhausted its potential, where substantial fresh capital would be required for maintenance and repairs and where that cost would not be covered by revenues.
But there is another class of equipment to consider: relatively new generation facilities that are borderline break-even under current economic conditions.
Under existing rules, equipment that has been mothballed for more than a year is classified as decommissioned. Recommissioning is treated the same as adding new capacity, which means following a whole host of procedures, getting authorizations, and so on. As a result, almost no one uses this mechanism.
The balance could shift in favor of maintaining old equipment once there is a market for long term reserve capacity (competitive mothballing). Everything will depend on the competition rules. The critical issues here are whether mothballed equipment is classified as decommissioned, the timing of the selection process (ideally before the CCS), the mothballing period (preferably 2–3 years), capacity pricing, and the time allotted for bringing mothballed equipment back on line.
Igor RYAPIN
Leading Expert, Energy Institute, National Research University Higher School of Economics
Dominique FACHE
Chairman of the Board of Directors, Russian Technology Foundation (France)
I am in favor of decommissioning old and inefficient generation facilities because I’ve always been a supporter of new technologies. As a member of Russia’s Market Council, I have repeatedly taken a position on this. In my opinion, it’s essential to create a mechanism, what might be called a negative CDA, that gives generation companies an incentive to mothball their least efficient capacity (one unit in Pervouralsk, for example, was using gas turbines made in 1934). Unfortunately, few council members supported this idea.
Those who back mothballing are hoping for future growth in power consumption. But just remember how often Russia’s energy strategy has been re-written: such forecasts have frequently proven incorrect. (This is true not only for Russia – the International Energy Agency has made more than a few mistakes in strategic planning.) Moreover, in developed countries growth in energy consumption has clearly slowed and, furthermore, economic growth in developed economies is inseparable from improved energy efficiency. Where energy consumption is growing is in developing countries that have not yet reached a certain level of technology. So, as I see it, the assertion that energy consumption must rise is questionable.
Alexandra PANINA
member of the Market Council Supervisory Board, Deputy General Director of Inter RAO
There is another issue here: strategic planning, in particular, forecasting demand for electricity. Power consumption in Russia has gone through several phases. In the early 90s of the last century it dropped significantly, after which there was a gradual return to growth. By the mid-2000s the annual growth rate was around 4 percent. Then, after 2008, we saw demand fall again. And now there’s excess capacity in the system, which puts downward pressure on electricity prices: the greater the supply, the lower the price. That means we have to decommission a range of generation facilities, in order to maintain prices at a reasonable level. Right now the government is using various measures (low DAM prices, a modest CCS capacity price, and so on) to encourage decommissioning.
But if power consumption in this country starts growing again, we’ll have to find some way to meet that demand.
Igor MIRONOV
Director, Council of Power Producers
This state of affairs is unacceptable to both suppliers and consumers of electricity. The former face a risk that market prices might fall to a level below their operating costs, which would force them to maintain the highest-cost facilities at their own expense, while the latter have to pay for must-run generation that has not gone through a CCS.
One way to resolve this problem, proposed by SO UPS, is a mothballing mechanism, i.e. taking capacity offline temporarily. In our opinion, this is the optimal choice, but the time frame has to be at least three years. Only genuinely outdated equipment should be decommissioned. Also, don’t forget the issue of must-run capacity in the heating sector, that is, the heating market must be taken into consideration when we look at the broader picture.
It’s important to find a way to maintain generation facilities that might be needed in future and, at the same time, to ensure that the least efficient units are decommissioned, while limiting newly commissioned capacity under CDAs, including million-plus kilowatt nuclear plants. Then, once the necessary changes have been made, we have to set down new rules of the game for the long term and stop revising them year after year. That would allow us to move to a system of long-term planning, both at individual power companies and for the industry as a whole.
01-07-2016 14:12