Long-term Capacity Market Sergey Kapyrin Senior Specialist International Department NP Market Council Long-term Capacity Market EU-RUSSIA ENERGY DIALOGUE Joint meeting of the Subgroup on Investments MOSCOW, September 16, 2010.

Legal Framework of the Long-Term Capacity Market  1. RF Government decrees and orders: Russian Federation Government Decree No. 89 of February 24, 2010 on Certain Issues of Organizing Long-Term Competitive Capacity Selection on Wholesale Electricity (Capacity) Market. Russian Federation Government Decree No. 238 of April 13, 2010 on Determining the Price Parameters for Capacity Trading on the Wholesale Electricity (Capacity) Market of the transitional period. Russian Federation Government Order No. 1334-r of August 11, 2010 on Approving the List of Generating Units That Will Be Used to Supply Capacity Under Capacity Supply Contracts. 2. Decrees of Federal Executive Authorities (Ministry for Energy, Federal Tariff Service, Federal Antimonopoly Service). 3. Wholesale Electricity (Capacity) Market Manuals (must be approved by the Supervisory Board of NP “Market Council”). 4. Other NP “Market Council” documents: Standard forms for Capacity Supply Contracts and supply contracts for capacity selected as a result of Competitive Capacity Selection. 5. System Operator Documents.

Long-term Capacity Market Tasks   Ensure long-term reliability – energy system shortage prevention Minimize total cost of electricity and capacity for customers Build as efficient a generation structure as possible Create regional price signals to develop generation, consumption and grids Improve investment attractiveness of the industry by creating long-term guarantees to suppliers Spur investments in construction and upgrades of fixed assets

Economic mechanisms of capacity trading   Buyers can buy capacity and sellers can sell capacity using the following mechanisms: Competitive Capacity Selection; Capacity Supply Contracts; Capacity Supply Contracts for New NPPs/HPPs; Free Bilateral Contracts; Capacity supplied in forced mode.

Competitive Capacity Selection Concluding CSCs and contracts with new NPPs and HPPs Constructing new and maintaining existing capacity 4 years CCS for 4 years ahead Supply and payment period - 1 year For the first years: competitive selection is held less than 4 years in advance for 2011– before 1 October 2010 for 2012, 2013, 2014 and 2015 – before 1 June 2011 Under annual competitive selection for 4 years ahead: System Operator determines (taking into account customers’ bids) the demand forecast and structure, the volume of required reserves and sets the demand curve Suppliers submit price bids, thus establishing a supply price As a result of a competitive selection the following are determined: generation facilities, the capacity of which is needed in the year of supply capacity sale prices based on competitive selection results capacity purchase price based on competitive selection results by FFZ and suppliers’ capacity supply obligations are established

Competitive Capacity Selection under a Price Cap During the competitive selection process: Suppliers submit offers with prices that do not exceed the capacity price cap, thus setting the supply curve (offers with prices exceeding the price cap are not considered) The capacity of generating units, the technical parameters of which ensure power system operation, is selected Demand Price Price Cap Competitive Selection price Capacity was not selected – it will not be paid for unless it is considered a “must-run” generator Volumes of mandatory investment projects (CSC, new NPP and HPP) are given a priority Volume volume of selected capacity 6

Characteristics of Competitive Selection without Price Caps Characteristics of holding a competitive selection without price caps: A supplier that has a significant generation share in a FFZ can submit a price bid for a volume of capacity that does not exceed 15% (10% in the 2nd price zone) of the capacity in the FFZ; for the remaining volume a “price-accepting” bid is submitted 15% of the bids with the highest prices (10% in the 2nd price zone) are not included in the calculation of the marginal price of competitive selection Capacity of generating units, the technical parameters of which ensure power system operation, is selected, BUT the selection price is determined without taking these technical parameters into account Determining the price not accounting for technical parameters Selection accounting for technical parameters Demand Price Payment at the bid or tariff, whichever is lower Marginal price of competitive selection Priority is given to CSCs, new NPPs and HPPs Price-accepting bids 15% of the highest price bids Payment at marginal price Not selected Volume 7 Volume

Selection of new capacity on CSC terms Capacity volume selected If an Insufficient Capacity Volume is Selected during Competitive Selection Supply of competitive selection does not meet demand Price DEMAND Competitive selection price Selection of new capacity on CSC terms Accounting for CSCs Capacity volume selected Volume In respect of investment projects selected during additional selection, contracts similar to CSCs are concluded where the price corresponds to the price in the bid (but not higher than the capacity price in CSCs for the respective type of generating unit) 8

Payment for Capacity based on the Results of Competitive Selection – in the Year of Supply Power plants paid for at competitive selection price Price determined based on the results of competitive selection SELECTED Decommissioning is temporarily impossible for technological reasons (heat supply, hydraulic units, insufficient transmission capacity, etc.) Existing power plants based on competitive selection results Participant’s choice of : Electricity tariff + capacity tariff OR Electricity at market prices without payment for capacity Power plants supplying capacity in forced mode NOT selected Other power plants No payment for capacity 9 9

Long-term Capacity Market - Macroeconomic Effect Improved investment climate in the Russian electric power industry long-term price market parameters and payment levels on CSC facilities are created transition to a system of long-term capacity purchase and sale contracts (CSCs and contracts based on competitive capacity selection results) creating regional price signals, as well as levels and terms of payments providing incentives to upgrade existing capacity Improved attractiveness of the market pricing mechanism for customers introducing new qualitative and price criterion into the system of generation capacity selection and ,as a result, decreasing the number of inefficient power plants emerging possibility of long-term capacity price forecasting and managing the costs of electricity consumption 10

Thanks for attention!