Electricity and capacity markets

Wholesale market
There is a two-level (wholesale and retail) electricity and capacity market in the Russian Federation at present. According to the wholesale market, buyers and sellers are presented by generation companies, electricity import/export operators, retail companies, grid companies (purchasing electricity to cover transmission losses) and large consumers. Wholesale market entities can act both as sellers and buyers of electric power and capacity. To obtain a wholesale market participant status an organization must comply with requirements set by RF Government Resolution №1172 of 27.12.2010 «Wholesale electricity and capacity market rules» and the Wholesale Market Trading System Accession Contract.
 
Most of the country's generating assets are concentrated in 6 thermal generating companies of the wholesale power market (OGKs), the federal hydroelectric generating company of the wholesale market (OJSC "RusHydro"), 14 territorial generating companies (TGKs) and the state company "Rosenergoatom". State-owned stakes in interregional distribution grid companies (IDGCs) were transferred to OJSC "IDGC Holding". The bulk transmission system is managed by the Federal Grid Company – OJSC “FGC UES” (subsidiary of PJSC "Rossetti", established in 2013 on the basis of JSC "IDGC Holding", Russian Federation is the main shareholder). Dispatching management of the united power system of Russia is under the System Operator (OJSC "SO UPS"). Among the major companies of the industry are: the state-controlled vertically integrated holding company OJSC "RAO Power Systems of the East ", which generates, distributes and sells electricity in the Far East regions, and OJSC "Inter RAO UES" - an electricity export-import operator holding generating assets in Russia and abroad.
 
The wholesale market of electricity and capacity functions in regions consolidated into price zones. The first price zone includes the European part of Russia and the Ural region, the second price zone covers Siberia. According to non-price zones (Arkhangelsk and Kaliningrad regions, Komi Republic, regions of the Far East), it is currently impossible to create market conditions for technological reasons, sale of electricity and capacity is carried out under the special rules. 
 
Main Principles of Wholesale Electricity and Capacity Market Operation  
 
Two commodities are traded in the wholesale market: electricity and capacity. Capacity is a specific commodity, when purchased, it gives the wholesale market participant the right to demand that the capacity seller maintains his generating equipment in a state of availability to generate electricity of a defined quality and in the volume required to meet that participant's needs.
 
The principles of functioning of the wholesale market are determined by the Wholesale electricity and capacity market rules approved by RF Government Resolution №1172 of 27.12.2010.
 
Electricity Market
 
The wholesale market is divided into several segments according to transaction terms and delivery periods: the regulated prices segment (by regulated contracts) and the competitive (unregulated) prices segment (the day ahead market, the balancing market and free contracts).
 
As of 2011 Regulated Contracts (RCs) in wholesale market prices zones may only be used for the supply of electricity and capacity to the population, to consumer groups equated to the population, as well as last-resort suppliers operating in the North Caucasia republics and the Tyva Republic.
 
The Regulated Contract prices (tariffs) to supply electricity and capacity are calculated according to price indexation formulae determined by the relevant federal executive body responsible for state tariff regulation. According to RCs the electricity and capacity supply volumes are calculated within the data of the consolidated forecast of electricity production and supply balance, established by the Federal Antimonopoly Service in a way that supply volumes of each electricity and capacity supplier in the balance under RCs should not exceed 35% of their total electricity (capacity) supply volume to the wholesale market, as it is determined in the balance decision for this supplier.
 
Electricity volumes not covered by RCs are sold at non-regulated prices through Free Contracts (FCs), the Day-Ahead Market (DAM) and the Balancing Market (BM).
 
Under Free Contracts, market participants may choose their own counterparties, prices and supply volumes. 
 
The Day Ahead Market (DAM) constitutes a competitive selection of suppliers’ and consumers’ price bids a day before actual electricity supply is to take place. This selection is carried out by the trading operator (OJSC “Trading System Administrator”), with prices and supply volumes being determined for each hour of the day. Marginal pricing is used at the DAM, meaning that the price is calculated by balancing demand and supply and covers all market participants. The DAM price is determined for each of the roughly 8500 nodes in both price zones. Primarily, the volume of the planned amounts of electricity includes the production volumes covered by bids with the lowest prices, as for the volume of planned electricity consumption it includes the production volumes that the buyers willing to buy at the highest price or included in the spot price accepting bids (reflecting the buyer readiness to purchase the specified volume of electricity at any prevailing in the DAM price).
 
DAM price indices and supply volumes are published daily on the OJSC “TSA” website.
 
Electricity volumes traded under bilateral contracts and at the DAM determine the planned consumption of electricity. However actual consumption inevitably differs from the planned volume. Trade in deviations from planned production/consumption is carried out in real time on the Balancing Market. Each 3 hours before the delivery hour the System Operator (OJSC “SO UPS”) conducts an additional competitive selection of suppliers’ bids with account of forecast consumption in the power system, cost effective plant dispatching and system reliability requirements.
 
Deviations of actual consumption from planned volumes fall into two categories – own initiative and external initiative. An own initiative deviation occurs due to the actions of a market participant (consumer or supplier); an external initiative deviation is the result of the System Operators’ orders. The difference between the actual volume of electricity production from the planned on the DAM downwards (supplier developed a less then graphics - downward deflection) leads to purchase them on the BM amount of electricity equal to the corresponding deviation. In generating the volume, exceeding planned for DAM (deviation upwards), the supplier sells at BM the corresponding deviation. A similar way the volume of buying and selling deviations on the BM are defined for buyers, with the difference that the buyer consumed more than planned by the DAM volume, buys electricity on the BM, if consumed less - sells. The cost of deviations is formed so as to encourage the members for more accurate fulfilment of planned electricity consumption and production schedules, as defined on the DAM and to implement the system operator commands.
 
Thus the BM penalizes market participants that are responsible for the largest deviations of actual consumption and production from planned volumes on their own initiative and rewards participants that adhere to their planned consumption and are accurate in fulfilling the System Operator’s orders. Based on the cost of deviations preliminary claims and liabilities of the BM are established, the difference between them represents the imbalance of the balancing market. A negative imbalance is distributed between participants in proportion to their own initiatives. A positive imbalance is distributed between suppliers in proportion to their execution of external initiatives and consumers that best adhered to their planned consumption. Such an unbalance distribution system is an additional stimulating and disciplining factor for market participants. 
 
Capacity Market 
 
Among the mechanisms of selling capacity on the wholesale market are:
 
  • sale/purchase of capacity selected as a result of competitive capacity selection through capacity sale and purchase contracts concluded based on the results of competitive capacity selection (CCS);
  • sale/purchase of capacity through free capacity sale and purchase contracts, including exchange-traded contracts;
  • sale/purchase of capacity through capacity delivery agreements (CDAs) and contracts for the sale and purchase of new nuclear and hydraulic capacity, similar to CDAs;
  • sale/purchase of capacity of must-run generators;
  • sale/purchase of capacity through regulated contracts (in order to supply the population and equated consumers);
  • sale/purchase of capacity of generating facilities functioning on the basis of renewable energy sources (hereinafter - RES), through capacity delivery agreements concluded based on the results of competitive capacity selection of investment projects on construction RES based generation facilities.
 
Conducted by the System Operator Competitive capacity selection (CCS) is the base of capacity market and determinates which capacity will be paid on the wholesale market.
 
Prior to 2015 year CCS were held annually only for one year in advance (for next year). RF Government resolution №839 of 27.08.2015 approved new rules of CCS and improved guidelines of capacity trading on wholesale market. Starting year 2016 capacity will be selected annually for the year, coming in three calendar years after the year of the CCS. In 2015 CCS for 2016-2019 years took place.
 
CCS conducted in price zones without dividing on free flow zones (FFZ). Indexation effects if CCS developed more than 1 year in advance. Herewith CCS price indexes for period since January 1st year, following year of CCS took place prior January 1st year of supply according to CPI reduced by 1%.
 
In the long-term capacity market, demand volume in the competitive selection of capacity given the dependence of the volume of demand on the price of capacity: at a lower price, buyers are willing to purchase a larger volume of capacity at a higher price – lower. Graph the demand function is a straight line segment passing through two points, the values of which are set separately for each price zone, and for each CCS. The demand volume in the first point is determined according to procedure of the Ministry of Energy on the basis of the forecast peak demand in the price zone and the planned reserve ratio, the price is set at 150 thousand rubles/MW for the CCS 2016 for the first price zone and 210 thousand rubles/MW for the second price zone. The demand volume in the second point increased by 12% relative to the value at the first point, the price for the CCS 2016 is set at 110 thousand rubles/MW for the first price zone and 150 thousand rubles/MW for the second price zone.
 
The competitive capacity selection price corresponds to a maximum of prices in selected applications and the price at which the demand function takes a value equal to the total volume of the selected capacity (including capacity, payable regardless of the results of CCS). The CCS price for each price zone is the same for all the selected generating facilities. Capacity, which has not passed the competitive selection, is not paid.
 
As we approach the year of supply in case of exceeding the adjusted demand for power over the amount payable generating capacity possible corrective competitive capacity selection. A mandatory fee that does not depend on the results of CCS, subject to capacity introduced by CDA and CDA similar agreements with new nuclear power plants and hydropower plants, as well as generating units, whose work is necessary for maintaining the technological operating modes of the power system or thermal energy supply (“must-run generators”).
 
Payment for capacity delivered “must-run generators”, carried out at the price established by the authorized federal agency (or the Government of the Russian Federation) is not higher than the power price in the previous year, the sale as a result of competitive selection of capacity or must-run mode. The decision to classify the generator as “must-run” is adopted prior to the CCS. An exception can only be generating facilities for which after the CCS has been stated about the intention of decommissioning, while the Ministry of Energy was demanded the postponement of the output due to the threat of attack power deficit. Capacity of generators operating in “must-run” mode, and power introduced by the CDA and similar contracts with new nuclear power plants and hydropower plants, during the CCS included in the spot price acceptance part of the offer.
 
Capacity payment is allocated as follows: the financial burden to pay for capacity generating facilities selected on CCS and capacity facilities, receiving payment on the CDA is distributed to all users of the price zone. Capacity of objects related to “must-run” generators to the threat of occurrence of energy supply deficit, is paid by consumers of the corresponding FFZ. Capacity of objects related to “must-run” generators to the threat of occurrence of heat deficit is paid by consumers of the corresponding subject of the Russian Federation.
 
The first capacity delivery agreements (CDAs) signature campaign was completed in December 2010. A thermal generating facility commissioned under a capacity delivery agreements is guaranteed capacity payments for 10 years (20 years for contracts similar to CDAs concluded with NPPs and HPPs), ensuring the compensation of capital expenditures and pre-determined operating costs. The operating and capital costs used to calculate the price of capacity under CDAs are set out in RF Government Resolution № 238 of 13.04.2010.
 
CCS for 2015 was held in September, 2014. The price applications for sale capacity have been filed by 79 participants in regard to 419 power facilities with 1182 power generating units (PGU). Following the results of CCS applications of 49 vendors were selected in regard to 233 stations, selected volume of capacity amounted to 150,106 MW.
 
To “must-run” generators to the threat of occurrence of heat supply deficit was attributed 38 stations, energy supply deficit – 30 stations, district heating and electricity deficit – 20 stations. The total volume of “must-run” generators installed capacity amounts to 29,419 MW.
 
Since 2013 in accordance with the Resolution of the Government of the Russian Federation dated 28 May 2013 № 449 "On the mechanism of promoting the use of renewable energies in the wholesale market of electricity and capacity" conducted a competitive selection of investment projects for the construction of generating facilities operating on renewable energy sources (hereafter – RESPS). RESPS is conducted for 4 years in advance separately for each type of generating units operating on the basis of the use of different types of renewable energy: photovoltaic conversion of solar energy, wind energy and water flows, except the use of such energy on the pumped storage power plants. Benchmarks for entering into operation volumes of renewable energy facilities, and the limiting values of capital expenditures used for the purpose of RESPS are defined by the RF Government Resolution on January 8, 2009 № 1-p. As a result of RES projects selection, agreements for capacity supply from qualified generating facilities, operating on the basis of the use of renewable energy sources (CDA RES) are concluded, the price of which is determined based on the capital cost of construction of the object of renewable energy, taking into account the degree of localization of the object and the size of the profit from the wholesale electricity market (capacity) after the payback period to the end of life. The capacity supply period under agreements of capacity supply of qualified generating facilities, operating based on the use of renewable energy on the wholesale market comes to an end after 15 calendar years from the beginning date of capacity delivery established by the contract.  
 
Following the results of RESPS held in 2013-2014, 76 facilities were selected, the total volume of installed capacity is 1,081 MW. Supply of capacity on the wholesale market of the first object, introduced as part of the CDA RES, began on 1st of April 2015.