Widening the horizons
Russia’s Ministry of Energy has suggested expanding the domestic electricity market to include the non-competitive pricing areas (the so-called non-price zones). There are plans to introduce market-based electricity and capacity pricing in the Komi Republic and Arkhangelsk Region in the nearest future to be later followed by Crimea and the Far East. While in theory, this would benefit consumers, experts say it’s more important that generators get ready to work in the new environment.
Fedor KORNACHEV
power analyst at Raiffeisenbank
– With Russia’s excess capacity, which was clearly demonstrated by the latest competitive capacity selection, lifting restrictions in the power sector (at both the infrastructure and regulatory levels) would be a rather logical step that could help ease the burden on consumers as a whole. I think that expanding the market to include non-price zones would lighten the burden on consumers in these regions and thus change the local electricity business landscape significantly. Both in theory and practice, tough tariff regulation in the non-price zones created barriers to major capacity upgrades and cost-cutting initiatives (which are now one of the priorities for generators operating in the competitive pricing areas).
Declassifying regions as non-price zones can be catastrophic to the bottom line of the local generation companies that have been long operating in a 100 percent regulated environment and are no longer needed because of the availability of more up-to-date and efficient facilities. It's possible that in some regions generators may be forced to discontinue providing heating services in favor of other companies in case they become economically unviable.
Oleg PRICHKO
General Director of Irkutskenergo
– The non-price zones still have regions that are poorly connected with the nation’s energy system, which results in lack of competition between generating companies and prevents market-based pricing from working properly. This is why tariff regulation in non-price zones is still in place. Including a region into a prize zone is viable only after its power links with the “mainland” become well-developed; otherwise the move will have no positive impact, and the regions will run the risk of monopolistic rise in prices, which will bring no benefit to consumers.
The existing mechanisms of antitrust regulation will certainly reduce the potential monopolization risk, but the government policy aimed at expanding the competitive electricity market should be based on the development of transmission networks – and not only those connecting the price and non-price zones, but in some cases even those inside the prize zones and free power transfer zones, where, for example, the low capacity of transmission lines in Eastern and Western Siberia holds back competition.
Anna AMELINA
PhD in Economics, Senior Professor, Energy Sector and Manufacturing Economics Department, MPEI
– I think that integrating some of the regions into price zones will make competition in the wholesale electricity and capacity market more intense, especially if this will be done along with merging the free power transfer zones and gradually lifting the existing restrictions. The transition may be very challenging for a number of isolated regions that have no real connection with the country’s energy system (Magadan, Chukotka, Yakutia, Sakhalin, etc.)
Classifying some of the regions as price zones is unlikely to affect end consumers in the near future, as the Federal Antimonopoly Service (FAS) maintains tough control over prices, preventing them from rising unreasonably high. Neither there are reasons to believe that prices may plunge: the number of consumers and power generating companies in the non-price zones is too small, and objective restrictions are in place.
Vertically integrated companies are likely to be divided in terms of their line of business to comply with the rules of the wholesale electricity and capacity market. As the number of bidders grows, it will become increasingly difficult for these companies to compete with other businesses if no extra investment is made.
Sergey PIKIN
Director of the Energy Development Fund
– I think that making Crimea part of a price zone is a clear and logical step: the newly built power connection between the peninsula and Russia’s energy system has removed significant limitations to power transmission between the regions (which still exist in the Far East, for example). Therefore I believe that the Republic of Crimea will easily integrate into the pricing system that exists in the wholesale electricity and capacity market.
The situation is similar in the Komi Republic and Arkhangelsk Region, which have built a much better power connection with the country’s energy system over the recent years. Why have they been part of non-price zones, anyway? Because they had very poor connection with the energy system. For example, Kaliningrad Region isn’t connected at all, and the Far East is connected in very few places. As for Komi, Arkhangelsk Region and Crimea, their power links have become stronger, making them integrated into Russia’s energy system, so technically the problem has been resolved.
As for the impact on electricity prices, it all depends on the region. For example, Pechorskaya TPP in the Komi Republic is sure to benefit from the changes, while Crimea is a subsidized region, so the question of prices is not particularly relevant for it: if needed, the government will be curbing price growth anyway, through subsidies or other mechanisms. However, if the region switches to purchasing electricity on the wholesale market, the subsidies may be reduced. As for Arkhangelsk Region, the potential impact is not very clear yet.
Dmitry VASILIEV
Head of Department for Electric Power Industry Regulation, FAS
– According to the existing law, trading in electricity is different in price and non-price zones. In the price zones, electricity and capacity prices are primarily determined by demand and supply, so the benefit derived by a market player directly depends on its competitiveness, i.e., on its costs and the ratio between the costs and current market prices.
In the non-price zones, the situation is different. The government fixes tariffs for generating facilities for a year. Therefore, even the least efficient power generation equipment does not face the risk of not being selected or being paid at a rate lower than its tariff.
If the regions classified as non-price zones become part of the price zones, local generating companies will be paid at market prices rather than tariffs as it happens now.
However, we should understand that a tariff once fixed for a power generation facility may turn out to be both higher and lower than the market prices later formed in the new part of the price zone. For example, for some HPPs electricity tariffs are quite low, which makes market-based pricing economically viable, while inefficient power plants will be badly affected by the expansion of price zones.
As for consumers, this requires more careful thought. The outcome may be different depending on the non-price zone and the way it is being integrated: in some cases prices may rise, while in others they may fall. If all inefficient local generating companies join the market (rather than being classified as “must-run” facilities), prices may be driven down by the free market mechanisms (the more cheap electricity is available, the lower the prices are). Otherwise, prices may grow.
Sergey KONDRATIEV
Head of Practice at Department of Economics, Institute for Energy and Finance
– Expanding the price zones above all means adopting common rules across a larger area and making remote regions (currently classified as non-price zones) more attractive and transparent for investors and other stakeholders. However, the move to include them in price zones (except for the Far East perhaps) will not have any major impact because of the small size of their markets (electricity consumption in Arkhangelsk Region and the Komi Republic was 19.5 billion kWh in 2015, which is less than 3 percent of the demand in the first price zone).
The transition to competitive pricing in Arkhangelsk Region and Komi, and later in Crimea and southern Far East may bring some benefits to consumers, but this is more likely to happen in the medium-term. The current electricity prices in Arkhangelsk Region (part of a non-price zone) are 15–20 percent higher than in the neighboring regions that form part of the first price zone, and the transition to market-based pricing may drive prices down. However, as their power connection with the country’s central energy system is weak, Arkhangelsk Region and Komi are likely to still have higher electricity prices than in the neighboring regions after they join the first price zone. In the medium term, as power grids become more extensive, electricity prices in these regions may begin to fall, which may hurt some of the local generators, above all, TGC-2 (Arkhangelskaya CHPP and Severodvinskaya CHPP-1 and CHPP-2).
05-07-2016 12:58
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