1. 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.

2. 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 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.

3. 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

4. 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.

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. Thanks for attention!