Peretok Light: highlights of the Russian and global power sectors for 24–30 September
Market Council amended the protocols for selecting modernization projects by December
Over the last week in September, energy market participants continued their vigorous debate about the modernization programme for the national heat and electricity sector. The primary regulator of the sector, NP Sovet Rynka [Market Council not-for-profit partnership (NPP)], officially rescheduled the modernised and [existing] capacity auctions (CA). The first is now scheduled to be held by 1 December; the second, by 1 March.
First modernisation auction can be held for one rather than three years
But the minor rescheduling now seems to be the least of the problems facing the programme initiators. Consumers (i.e., spokespeople for ironworks) asked the Cabinet about “dragging out” the modernisation auctions: originally, Minenergo [Energy Ministry, EnMin] planned to make the first auction under the programme a “one-shot” and use it to select TES [thermal power station (TPS)] upgrading projects for three years ahead of time, to be brought on stream in 2022–2024. The Russkaya Stal [Russian Steel] Association proposed making the auctions an annual event and adjust its terms in keeping with the market situation. This poses the threat of the rules of the game being changed “in mid-stream” and does not allow placing a long-term order for equipment with machine builders, the generators argue. Vice-premier Dmitry Kozak gave instructions to look into the smelters' proposals, but Minenergo will most likely give the consumers the cold shoulder.
Oil producers join the fight against the grid capacity charge
However, the most pressing issue for industrialists last week was the forthcoming reform of grid tariffs. A 50% tariff hike by Federal Grid Company (FGC) over seven years and the introduction of a charge for unused grid capacity can push up costs for consumers by dozens and even hundreds of billions of roubles (self-estimated). The concerns of energy buyers make all the more sense because they are expected to pay for networks that reserve their own generating capacity, but the authorities have obviously failed to find an alternative solution to the problem of cross subsidization and annual depreciation of networks by 2-3% due to underfunding.
Consumers can only pay for part of TPS modernization in FEFD
For more than a month the energy community could not figure out how TPS modernization would be financed in the Far East. At the end of August, Vyacheslav Kravchenko, deputy head of Minenergo, said that investments in TPS modernization in the price-control zones (apart from facilities in the Far East, the upgrading programme can cover power plants, for example, in Komi and Arkhangelsk Oblast) can total about 150 bln roubles, with the return on investment estimated at about 200 bln roubles, which is far below the ROI expected from the TPS modernization programme in the free-price zones. RusHydro previously announced an investment of 153 bln roubles to upgrade five power stations in the Far-Eastern Federal District (FEFD), with an expected ROI in accordance with the general profitability figures. According to last week's reports, some of the additional measures in the upgrading context (for two TPSs of RusHydro – effectively, new builds) will not be taken into account and therefore paid for at the expense of consumers.
Minenergo proposes extending tariff subsidization in FEFD for investing businesses
Minenergo, which previously argued against extending until 2028 the markup on the energy market prices to level out tariffs in FEFD, backed the idea nonetheless. On 10 September Energy Minister Aleksandr Novak stated in the presence of Russian president Vladimir Putin that the agency would authorize an extension of the markup, but suggested making it differentiated “in order to actually provide conditions for business development, for improving the competitive advantages of our businesses”. Last week sources reported that Minenergo proposes to minimize the load of consumers in the electric power and capacity wholesale market (EPCWM) by cutting off “ineffective” subsidy beneficiaries in the Far East.
Generators propose removing electricity billing “anomaly” of some states
At the same time, the generators formulated for the first time specific recommendations for cancelling “special status” of a number of Russian states where market principles do not apply and energy consumer pricing is “subsidized” – governed by regulated contracts. Previously, all energy producers did was highlight the adverse effect of this factor on the market, and now they have come up with specific proposals for the regulators. For the time being, however, the likelihood of appropriate decisions being made to move the exempt states back into the market is anybody's guess.
Cabinet approves H&U tariff indexation in 2019 in two steps – by 1.7% and 2.4%
Attempts by Minenergo and utility providers (UPs) to persuade the government to “take out of the equation” the VAT increase when ZhKhK [ZhKKh = housing and utility (sector)] tariffs go up next year have not met with success. Energy providers proposed increasing housing and utility tariffs as of 1 January by 1.7% (in an attempt to make up for the VAT hike from 18% to 20%, the extra cash to go to the treasury), and from 1 July by 4%, which corresponds to the inflation rate. The authorities rejected this approach and added up the VAT increase and the annual inflation rate: thus, the July increase (which will affect the financials of UPs next year) will only be 2.4%.