The draft Resolution was submitted by the Ministry of Industry and Energy pursuant to Article 6 of the Federal Law of March 26, 2003 No.36-FZ On Aspects of the Functioning of the Electric Power Industry in the Transitional Period and on Introducing Amendments to Some Legislative Acts of the Russian Federation and Annulment of Some Legislative Acts of the Russian Federation in Connection with the Adoption of the Federal Law On the Electric Power Industry and pursuant to Section 8 of the Resolution of the Government of the Russian Federation No.529 of August 31, 2006 On Introducing Amendments to the Resolutions of the Government of the Russian Federation Establishing the Procedure of the Functioning of the Wholesale Electricity (Capacity) Market.
Background: The Federal Law of March 26, 2003 No.36-FZ On Aspects of the Functioning of the Electric Power Industry in the Transitional Period and on Introducing Amendments to Some Legislative Acts of the Russian Federation and Annulment of Some Legislative Acts of the Russian Federation in Connection with the Adoption of the Federal Law On the Electric Power Industry envisages a gradual transition, by decision of the Russian Government, to the sale of electricity and capacity at free (unregulated) prices, and the Government Resolution No.529 of August 31, 2006 instructs the Russian Ministry of Industry and Energy, in conjunction with the Ministry of Economic Development and Rosatom, to submit to the Government proposals on organising competitive trade in capacity and competitive selection of price offers for supplying electricity in the short term and in the long term with due account of the specific features of trade in capacity in the wholesale market of nuclear energy plants and generating companies that ensure systemic reliability.
The Resolution approves the changes introduced in the Rules of the Wholesale Market of Electricity (Capacity) in the Transitional Period approved by Government Resolution No.643 of October 27, 2003 (hereinafter the Rules). The amendments being introduced into the Rules stipulate the introduction of a competitive mechanism of trade in capacity in the wholesale market of electricity (capacity) including competitive selection of capacity one year in advance.
The main aim of introducing the mechanism of trade in capacity at free (unregulated) prices is to create favourable conditions for attracting investments in the electric power industry required to provide the United Energy Systems (UES) of Russia in the short-, medium- and long-term perspective with the quantity of active generating capacity that would ensure energy supplies and generating capacity required for all the consumers in the country.
Background: World experience of electricity markets offers examples of trade in two commodities - electricity and capacity (the United States, South America, and Great Britain prior to the introduction of the bilateral agreement system) or in one commodity, electricity (the countries of Europe, Australia). Single-commodity markets are successful if there is a surplus of generating capacity and a well-organised system of bilateral relations among market participants. The markets in which electricity and capacity are traded make it possible to avoid price spikes and the level of electricity prices is lower than in the single-commodity markets. Such markets are more attractive for investment in the building of new generating facilities, which contributes to reliable and uninterrupted supplies to consumers in the long term.
At present the Russian wholesale market of electricity (capacity) has trade in two commodities: electricity and capacity. As of today trade in capacity is at regulated prices (tariffs) approved under regulated agreements.
The amendments introduced into the Rules determine the mechanisms of the purchase (sale) of capacity at free (unregulated) prices and establish that the share of capacity sold in the wholesale market at unregulated prices will grow at the same annual rate as the share of electrical energy sold at unregulated prices.
Trade in capacity at free (unregulated) prices under the Rules is conducted in accordance with a free capacity purchase and sale contract concluded through the mechanisms of exchange trade in which the price is agreed by the parties and (or) from the results of competitive selection of capacity before the beginning of every year in order to create the capacity that ensures reliable and uninterrupted supply of electricity in the wholesale market in the corresponding calendar year. Such capacity is formed by generating capacity and the volume of power consumption included in the forecast balance for the corresponding calendar year. The Rules establish the procedure and principles of such competitive selection of capacity for the following year as well as the procedure for determining the cost of the capacity sold and bought from the results of the tender.
The Rules also establish the obligations of suppliers whose capacity has been selected by capacity tender and (or) sold under free contracts to supply the corresponding amount of capacity and comply with the declared deadlines for the introduction and the parameters of the generating equipment as well as to maintain the generating capacity in a condition of readiness to produce electricity, including compliance with the requirements to maintain the set parameters of the functioning of the energy system. Moreover, quotas are set for buyers of electricity in the wholesale market proceeding from the volume of consumption of electricity at peak-load hours.
The competitive mechanisms of annual capacity trade in advance under the Rules ensure suppliers guaranteed payment for capacity entered in the forecast balance, including payment for the capacity of the new generating facilities put into operation after 2007. In addition, the use of such mechanisms with regard to the volume of capacity that increases in accordance with the determined pace of liberalisation will make it possible to prepare the participants in the wholesale market and infrastructure organisations of the wholesale market for long-term competitive mechanisms of trade in capacity and establish a system of bilateral relations between suppliers and buyers as well as sending price signals to attract investments in the construction of new electricity generating facilities.
The Resolution also introduces amendments to the Rules of the Functioning of Retail Electricity Markets in the Transitional Period of Reform of the Electric Power Industry approved by Government Resolution No.530 of August 31, 2006 allowing to include in the price of electrical energy and capacity supplied to retail markets the unregulated price of capacity formed in the wholesale market of electricity (capacity). Unregulated prices for electricity and capacity in the wholesale market are determined by the maximum levels of unregulated prices for electricity and (or) capacity guaranteed to be delivered by suppliers to buyers in the retail market. In setting the maximum level of unregulated prices for electricity and (or) capacity in the retail market the prices of free capacity purchase and sale contracts concluded through exchange trade and the prices formed from the results of selection of capacity by tender are used as the basis. Such a pricing mechanism, first, will stimulate the guaranteed suppliers to conclude free contracts through an organised trading floor, which would guarantee the transparency of the capacity purchase and sale deals, and second, ensure the formation of unregulated prices in the retail markets that reflect the wholesale price of capacity.
In addition, the Resolution introduces amendments to the Basic Principles of Pricing of Electrical and Heat Energy approved by Government Resolution No.109 of February 26, 2004 in order to harmonise them with the Rules approved by the Draft.
Simultaneously, the Resolution instructs the Ministry of Energy to develop, jointly with the Ministry of Economic Development, the Federal Customs Service, the Federal Antimonopoly Service and the State Corporation Rosatom, and submit to the Government of the Russian Federation a draft legal act of the Government on the organisation of long-term competitive selection of price offers for the sale of capacity that ensure the implementation of the general scheme of the location of electricity facilities and jointly with the relevant federal executive bodies, to develop and approve a number of regulatory acts elaborating the provisions of the Rules as well as issue other instructions.
The adoption of this Resolution does not involve federal budget outlays.