As part of the Russian electric power industry’s complex shift towards decentralised public regulation, Electricity Law No. 35-FZ*, as a general concept, determined that economic relations in this sector are based on market mechanisms and competition. At the same time, the Law provides for concepts such as energy security, and uninterrupted and secure operation of the electric power sector.
As a result, the Russian electricity and capacity market today is a complex structure that consists of both typical market elements and public regulation mechanisms.
The purpose of this article is to provide general insight into how the Russian electricity and capacity market and its wholesale segment (the “Wholesale Market”) are being organised.
The market’s main participants and their roles will be outlined, and a description will be given of the main methods of selling electricity and capacity on the Wholesale Market. A special focus will be placed on the sale of electricity produced using renewable energy sources (the “Renewables”).
Wholesale Market operation concepts
Russia’s electricity and capacity sector includes a Wholesale Market and retail market.
Different from the Wholesale Market, the retail market resells electricity to the end consumers, generally at publicly regulated tariffs. The Wholesale Market’s participants are large producers and customers of electricity and capacity. The Wholesale Market is regulated by special rules approved by Russian Government Decree No. 1172*, which, among other things, set out the procedure for accessing the Wholesale Market and the Wholesale Market operation concepts.
The main concepts of the Wholesale Market operation include:
- free non-discriminatory access to the Wholesale Market for all electricity sellers and customers;
- free choice by the Wholesale Market’s participants for the method of electricity sale and purchase;
- accounting specifics for certain Wholesale Market participants;
- obligatory purchase of capacity by the Wholesale Market participants when required by the Russian Government.
Main participants on the Wholesale Market and their roles
Pursuant to Electricity Law No. 35-FZ, the Wholesale Market participants are, first of all, suppliers and customers of electricity and capacity. The latter must meet certain established criteria to be qualified as large customers.
The suppliers and customers of electricity and capacity, as a condition to accessing the Wholesale Market, enter into a contract for connection to the trade system of the Wholesale Market, and thus become members of a self-regulating organisation of Wholesale Market participants (the “Market Council”).
The main goals of the Market Council are to maintain a balance of interests among the Wholesale Market participants, and ensure the integral operation of its commercial infrastructure. In pursuing these goals, the Market Council, among other things, keeps a register of the Wholesale Market participants, sets out the Wholesale Market regulations and standard forms of contracts used by its participants, and monitors so that participants comply with these regulations and contracts.
As incentives for the use of Renewables, the Market Council performs functions that include:
- recognising Renewable energy generating facilities as qualified generating facilities, which are eligible for pre-agreed tariffs;
- keeping a register of issued and cancelled certificates so that the volume of electricity generation based on Renewables can be confirmed;
- monitoring whether customers purchasing electricity on the Wholesale Market comply with their obligation to purchase at a set price a certain volume of electricity generated by qualified Renewables-based facilities.
In addition, an important role in the Wholesale Market is played by organisations that provide it with technological and commercial infrastructure. One such infrastructure organisation is a so-called Commercial Operator that is noted specifically for its activities to arrange for trade on the Wholesale Market. In particular, it holds tenders, and registers electricity and capacity sale and purchase contracts made on the Wholesale Market.
Electricity and capacity sales on the Wholesale Market
The existing Wholesale Market consists of a number of segments, each of which has its own terms and conditions of entry into electricity sale and purchase contracts.
For instance, in the regulated contracts segment, electricity is sold at set tariffs, and the Commercial Operator selects, at its discretion, suppliers and customers that are required to enter into a relevant electricity supply contract. This method largely applies where electricity is sold to the general public. This segment also covers the sale of electricity generated with Renewables, in which case tariff rates are based on the localisation level of these generating facilities.
On the day-ahead spot market, electricity sale and purchase contracts are based on the equilibrium price determined by the Commercial Operator, which compares and selects the competitive price bids submitted by suppliers and customers.
Finally, in the non-regulated electricity segment, contracts are made between suppliers and customers by terms negotiated between them (including the price and scope of supply).
A separate part of the Wholesale Market is the capacity market where suppliers provide their customers with a fee-based right (and often an obligation) to enter into future contracts for the purchase and sale of certain volumes of electricity.
The created capacity market facilitates issues such as financing of new generating facilities, compensation for electricity producers’ fixed costs, and ensuring electricity supply reliability and security.
It should be noted that under Russian Government Decree No. 449*, capacity sales constitute an incentive for using Renewables on the Wholesale Market. The recognition of Renewables-based generating facilities as qualified facilities ensures the application of a pre-agreed tariff to cover the operator’s expenses for creating the facilities and its fixed costs for at least 12 years.
As in the case of the electricity sale and purchase market, contracts made on the capacity market may be either regulated or non-regulated. Such contracts include a special category of contract for supply of capacity from qualified Renewables-based generating facilities.
Conclusion
Based on the analysis of the Wholesale Market and its practical application, it can be concluded that the main problem with the existing system is low competition, which, on the one hand, is due to the need for the smooth and reliable operation of the electric power sector and, on the other hand, the relatively small number of electricity and capacity sellers on the Wholesale Market.
Incentives for using Renewables have been seen and noted on the Wholesale Market recently. As this article describes, such incentives include setting special tariffs for both electricity sales and capacity sales.
If you have any questions on the matters referred to in this article, please do not hesitate to contact CMS Russia expert Thomas Heidemann or your regular contact at CMS Russia.
* In Russian
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