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Main Principles of Electricity and Capacity Market Functioning.

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Presentation on theme: "Main Principles of Electricity and Capacity Market Functioning."— Presentation transcript:

1 Main Principles of Electricity and Capacity Market Functioning

2 The Importance of the Electricity Industry and the Interrelation of Markets within the Fuel and Energy Complex 2

3 The Importance of the Electricity Industry in the Russian Economy 0,5% – 1,5%* construction, engineering, agriculture; coke, oil products and nuclear materials production 2,0% – 2,6%* transport and communications; gas, water and steam production and distribution; mining operations 4,9% – 6,1%* chemical industry, metallurgy 17,8%* electricity industry * Electricity cost in the final product 3

4 Planned Electricity Consumption Reduction of electricity consumption results from economic slowdown in Russia. 2009 electricity consumption equals that of 2006 Europe and Urals Planned electricity consumption is the entire planned volume of customer purchase determined as a result of competitive day-ahead bid selection 4

5 Planned Electricity Consumption Reduction of electricity consumption results from the economic slowdown in Russia. 2009 electricity consumption equals that of 2006 Siberia Planned electricity consumption is the entire planned volume of customer purchase determined as a result of competitive day-ahead bid selection 5

6 Markets of the Fuel and Energy Complex By 2011, all electricity shall be sold at non- regulated prices, except for electricity sold to the population (at regulated tariffs until 2014) From July 1 till December 31 2009, 50 % of electricity from the FTS balance and consumption volume for 2007 shall be sold at non-regulated prices Increasing marginal gas prices in order to ensure equal profitability of domestic and external markets by 2011 (domestic market gas price = gas price on the European market less logistics and export duties) 6

7 Synchronous Liberalization of Electricity and Gas Markets From 1.01.07From 1.01.08From 1.01.09From 1.07.09From 1.01.10From 1.07.10From 1.01.11 15% 40% 53% 66% 79% 92% European market price 100% From 1.01.07 From 1.07.07 From 1.01.08 From 1.07.08 From 1.01.09 From 1.07.09 From 1.01.10 From 1.07.10 From 1.01.11 25% 30% 50% 60% 80% 15 % 10 % 5 % Supplies at non-regulated prices 100% ELECTRICITY GAS 7

8 The Electricity and Capacity Market Model 8

9 Market Model: a Two-level System Retail Market Wholesale Market Suppliers: generating companies of the wholesale market, electricity importers Suppliers: energy supply companies and suppliers of last resort, generating companies of the retail market Buyers: retail customers, partial participants Electricity and capacity may be sold both separately or as a single product (electricity inclusive of capacity) Buyers: large consumers (total connected capacity of at least 20 MVA and at least 2 MVA in each delivery point cluster), including partial participants (over 85% of planned consumption purchased on the retail market), energy supply companies and suppliers of last resort, electricity exporters Electricity and capacity are sold separately Each participant may act both as a seller and a buyer 9

10 Wholesale Market Model: Entities and Infrastructure Generation 7 WGCs, 14 TGCs RusHydro, OJSC Kontsern Energoatom, OJSC Consumers and retail companies Suppliers of last resort Energy supply companies Consumers – market entities Other generating companies Market entities Technological System Operator Distribution companies Market infrastructure Commercial NP “Market Council” TSA, OJSC CFS, CJSC 10

11 Wholesale Market Model: Regulation STATE NON-STATE Tariff (FTS of Russia) Antimonopoly (FAMS of Russia) WECM rules (NP “Market Council”) Connection Agreement (NP “Market Council”) Regulatory Contract relations 11

12 Wholesale Market Areas ■ ■ PRICE AREAS (areas with a liberalized wholesale market) – European Russia and Urals + Siberia ■ ISOLATED REGIONS ■ NON-PRICE AREAS (areas with a regulated wholesale market) –Kaliningrad and Arkhangelsk Regions, Komi Republic, the Far East 12

13 Wholesale Market Model: Sectors Capacity Market Electricity Market Regulated Contracts (RCs) Electricity and/or capacity sale and purchase contracts between suppliers and buyers where the prices are set according to electricity and/or capacity tariffs set by the FTS Non-regulated Bilateral Contracts (NRBCs) Electricity sale and purchase contracts between suppliers and buyers where the terms and conditions, including prices, are agreed upon by the parties Day-Ahead Market (DAM) System of relations within price areas of the wholesale electricity market between wholesale market participants and FGC UES, which involves supply/consumption of electricity in volumes determined based on the results of competitive selection of day-ahead price bids Balancing Market (BM) Sector for the trade of deviations from planned volumes of electricity supply determined as a result of competitive selection of price bids for system balancing and (or) determined by actual generation/consumption of electricity based on metering data 13

14 Wholesale Market Model: Sectors Electricity Market Capacity Market Regulated Contracts (RCs), including: Capacity contracts for generating equipment of nuclear and hydro power plants (CBCs) Sale and Purchase and Agency Contracts Sales of excessive electricity or capacity by the buyer or purchase of deficient electricity or capacity by the supplier under agency or sale and purchase contracts Non-regulated Electricity and Capacity Sale and Purchase Contracts (NRECCs), including: Stock-Exchange NRECCs Non-regulated sale and purchase electricity and capacity contracts concluded during trading on the exchange organized according to Russian Federation legislation on commodity exchanges and exchange trade, by a commodity exchange, the rules for exchange trade of which contain a procedure for conclusion of non-regulated electricity and capacity sale and purchase contracts through trading on the exchange and determination of prices in such contracts, and other terms for arranging stock-exchange auctions that correspond to the requirements of the Agreement on connection to the trading system of the wholesale market Over-the-Counter NRECCs Non-regulated electricity and capacity sale and purchase contracts concluded in accordance with the Agreement on connection to the trading system of the wholesale market or concluded for volumes of generating equipment capacity not included in the forecast balance for 2007 14

15 Wholesale Market Performance (Price Areas) Electricity Market Turnover, 2009 Sector Sales volume, mln MWh Sector share, RCs527,94 46,9% DAM457,91 40,7% NRBCs85,00 7,6% BM54,20 4,8% Total1125,05100% Sector Sales volume, mln MWh Sector share, % RCs 1 371,9663,5% CBCs 155,657,2% OTC NRECCs 216,7510,0% Stock-exchange NRECCs 1215,6% Agency or sale/purchase 296,1713,7% Total 2 161,53100% Capacity Market Turnover, 2009 15

16 Pricing on the Wholesale Electricity and Capacity Market 16

17 Regulated Contracts Formation of the buyer’s regulated contracts package SupplierSupplier’s tariff Contract volume Contract cost Customer’s consumption Customer’s tariff Generator 1100150 15 000 Generator 220060 12 000 Generator 330040 12 000 Total under RCs:250 39 000 RC package tariff:156250156 Terms of the regulated contracts (prices, volumes, counterparts binding) are defined by the Federal Tariff Service (the FTS of Russia) and the commercial operator (TSA, OJSC) so that the average price of regulated contracts does not exceed the electricity tariff set by the FTS for the relevant region The share of regulated contracts in the electricity generation/consumption balance approved by the FTS for 2007 is gradually decreasing; by 2011 RCs shall cease to exist Terms of the regulated contracts (prices, volumes, counterparts binding) are defined by the Federal Tariff Service (the FTS of Russia) and the commercial operator (TSA, OJSC) so that the average price of regulated contracts does not exceed the electricity tariff set by the FTS for the relevant region The share of regulated contracts in the electricity generation/consumption balance approved by the FTS for 2007 is gradually decreasing; by 2011 RCs shall cease to exist 17

18 Operation of the Competitive Sector of the Wholesale Electricity Market DAM (competitive selection) Trading day (X-1) Operation day (X) Payment upon delivery Bids Trading results (prices, volumes) Supply Bids Consumption Payment Payments Customers Trading results (prices, volumes) Day X-7 UC ( unit commitment ) Bids UC results Balancing market Collection of metering data Payment upon delivery Suppliers Price bid auction Reserve formation 18

19 Unit Commitment Procedure Units (non-block sections), the state of which in the UC optimization calculation is always predetermined “Regime” generators Forced modes State determined based on bids On state is fixed before the optimization calculation in order to ensure system reliability On state is fixed before the optimization calculation on other grounds (e.g., generation of thermal power, equipment condition) On/off state determined based on results of the optimization calculation On/off state is fixed before the optimization calculation NPPs HPPs TPPs: units (non-block sections), IC of at least 150 MWh Based on indicative price bids (for start-ups and electricity generation) of suppliers for all units and “regime” generating units System Operator conducts a Unit Commitment Procedure (UCP) according to electricity generation cost minimization criteria Units (non-block sections) of TPPs, the state of which may be determined based on the results of the UC optimization calculation Generating Equipment at the WECM 19

20 Day-Ahead Market The Day-Ahead Market (DAM) is based on a competitive selection (auction) conducted by TSA (OJSC) of price bids of suppliers and buyers with delivery on the day following the day of the auction Electricity losses and system constraints are considered during competitive selection Based on DAM results the following are determinedfor each node of the computed model for every hour of the next day: ● Planned hourly consumption ● Planned hourly generation ● Equilibrium electricity prices At the DAM marginal pricing is used – the price is determined based on the most expensive electricity supply bid satisfied 20

21 DAM: Marginal Pricing Price Volume Equilibrium volume Equilibrium price Supply (suppliers’ bids) Demand (buyers’ bids) 21

22 DAM: Preventing Manipulation To reduce the risk of price manipulation, the participants are incited to bid competitively – the lowest price bids are satisfied first Administrative measures aimed at manipulation prevention State Corporate procedures for naturally monopolistic entities where the controlling stake belongs to the State Introducing price regulation for specific market entities Introducing bidding constraints Mandatory separation of dominating market entities Infrastructure organizations Deprivation of WECM entity status Terminating admission to the trading system Applying BM imbalance distribution coefficients for metering and billing violations Reducing the value of the generating equipment availability factor Applying penalties 22

23 DAM: Price Volatility On March 29, 2009, against the background of demand reduction, a flow increase over the controlled connection between the Europe and Siberia price areas towards Siberia was observed. A price reduction in the price bids of suppliers was also observed. As a result the auctions accepted the lowest price bids. Equilibrium electricity price index dynamics in Siberia (January – October 2009), rub/MWh On June 3, 2009, in Siberia a sharp decline of the equilibrium price index, owing to a decrease of electricity demand, was observed. As a result the low price bids of generating companies were the closing bids. Nonzero prices were established in Omsk and Altai, but in the rest of Siberia, the price was approaching minimum. On September 13, 2009, impacted by the decrease of electricity consumption due to the absence of an electricity purchase bid from a large customer, the equilibrium price index in Siberia decreased. The DAM prices are characterized by: Cyclical fluctuations (daily, weekly, annual) Price fluctuations caused by unforecastable changes in the demand or supply side High volatility The participant risks: Lower competition as a result of a monopolistic power of a consumer or the generator in some regions Lower system reliability as a result of planning difficulties The DAM prices are characterized by: Cyclical fluctuations (daily, weekly, annual) Price fluctuations caused by unforecastable changes in the demand or supply side High volatility The participant risks: Lower competition as a result of a monopolistic power of a consumer or the generator in some regions Lower system reliability as a result of planning difficulties 23

24 Non-regulated Bilateral Contracts Non-regulated Bilateral Contracts for Electricity Sale and Purchase (NRBCs) are concluded between the supplier and the buyer under the terms and conditions agreed by the parties The NRBCs allow the participants: ● to carry out long-term business planning ● to fix the electricity purchase/sale prices ● to hedge the risks of performing obligations under regulated contracts ● to determine the terms and procedure of payments for electricity Non-regulated contracts allow the participants to reduce financial risks resulting from high volatility of electricity prices on the day-ahead market 24

25 Balancing Market The Balancing Market (BM) is designed to cover the deviations of the actual electricity generation and consumption from those planned At the BM trading is conducted by the System Operator as a competitive selection of the suppliers' bids in conditions of short-term planning of generation and consumption (3 hours ahead) and real-time At the Balancing Market marginal pricing is used with account of losses and system constraints 25

26 Balancing Market: Competitive Selection Volume DAM planned consumption Consumption growth DAM price BM indicator Price 26

27 Capacity Market Competitive Capacity Selection (CCS) for operation the following year: ● Is performed by System Operator on the basis of generators’ bids ● The bid price is set no higher than the FTS tariff Capacity sales at the tariffs of Regulated Contracts: The share – according to the electricity market liberalization process Non-regulated Bilateral Electricity and Capacity Contracts (NRECCs) Stock-exchange The participants sell/buy standard electricity and capacity contracts at the exchange The remaining capacity is sold by the generators at the CCS bid price Over-the-counter For new generation To replace the RCs 27

28 Capacity Market: Mechanisms of Determining the Purchase Price The payment for capacity is conducted as follows The capacity purchase price as a result of the CCS is determined as follows At the end of each year a competitive selection is conducted for capacity admitted to settlements for capacity for the entire following year and a preliminary price of capacity purchase is determined Prices in CCS bids made by generating companies commissioning new entries during the year are adjusted with a subsequent recalculation of the preliminary average weighted capacity price Over-the-Counter NRECCs, new entry NRECCs and stock-exchange NRECCs Actual capacity purchase price calculated by price area Tariff Regulated Contracts Bilateral Contracts for HPP/NPP capacity supply (CBCs) Non-regulated price Exchange NRECCs OTC NRECCs New Entry NRECCs Non-regulated price According to generator bids but no higher than the tariff Sales and Purchase and Agency Contracts 28

29 Capacity Market: Non-regulated Contracts Non-regulated Electricity and Capacity Sale and Purchase Contracts (NRECCs) assume simultaneous supply of electricity and capacity NRECCs are traded on certified stock-exchanges (currently, the MEEX) in the form of contracts standardized by terms, types and volumes of electricity and capacity. In organized NRECC trade, marginal pricing is used. Over-the-counter NRECCs are concluded between suppliers and consumers under the terms agreed upon by the parties. Under agency and sale-and-purchase contracts the following is sold: ● excess energy resulting from purchase under RCs (including CBCs), sold at the weighted average RC price ● excess energy resulting from purchase under non-regulated contracts, sold at the price equal to the weighted average price of the bids for all selected capacity Trade in capacity agency and sale-and-purchase contracts is performed through CFS (CJSC) (a subsidiary of Market Council and TSA) 29

30 Capacity Market: CSCs Capacity Supply Contracts (CSCs): an obligation of the generator to introduce new capacity with specified characteristics within a set period with guaranteed payment for the commissioned capacity for a specified period New system of capacity supply contracts has been designed. These contracts: ● provide supply of capacity via generating facilities ● are included in investment programs of generating companies ● provide payment for such capacity, in general, within 7 years of the facility commissioning date These contracts provide, among other things, the mechanism of control over fulfillment of the investment programs, and the responsibility of the parties for failure to fulfill their obligations 30

31 Capacity Market: Transition to the Target Model Payment for all existing capacity No competition between suppliers No motivation to decrease the costs The customer pays for excess capacity Separate pricing for two related products Marginal revenue from the electricity market does not reduce the cost of the supplier’s capacity – overstating the aggregate cost for the customer No long-term relations No long-term conditions for investments No long-term signals for the customer Competition between suppliers for payment of capacity – partial payment for capacity Motivation to reduce costs Only the capacity needed in the system is paid for – move away from excess capacity Accurate price signals reflecting sufficiency (deficiency) of capacity in the regions Interrelation of the capacity and electricity markets Motivation to reduce aggregate electricity and capacity costs Long-term relations Long-term guarantee of payment for capacity in the future (after its commissioning) Possibility of bilateral relations Long-term regional price signals for industrial growth Transition Model Long-term Capacity Market 31

32 Retail Electricity Market 32

33 Retail Market: Main Principles of Operation Electricity and capacity purchased by suppliers of last resort and retail companies at the wholesale market are sold to end customers Each supplier of last resort (SLR) operates in its special area of operation. One area – one SLR The supplier of last resort concludes a contract with each customer according to the contract form approved by the government The SLR translates the non-regulated wholesale market prices to retail customers: ● Sells the volumes purchased under the RCs at a regulated tariff to retail ● Sells the volumes purchased at non-regulated prices to the end customers also at non- regulated prices The population buys electricity from the SLR only at regulated prices An energy supply company has the right to conclude a contract with a customer under any terms and conditions, as well as to refuse to conclude a contract 33

34 Retail Market: Wholesale Market Price Translation Supply under regulated contracts (tariffs) Liberalized portion Population Customers on the retail market Wholesale market regulated price Wholesale market non- regulated price Wholesale Market Retail Market Supplier of last resort Energy supply company 34

35 Retail Market: Pricing 2009 Retail Price Structure _____ * regulated prices The main factor influencing the price for the end customer is the cost of electricity and capacity purchased at the wholesale market Changes of electricity and capacity cost purchased on the wholesale market may be due to: Price changes under the influence of supply and demand Change of regulated tariffs Change of the share of liberalized volumes Change of electricity and/or capacity consumption volumes The main factor influencing the price for the end customer is the cost of electricity and capacity purchased at the wholesale market Changes of electricity and capacity cost purchased on the wholesale market may be due to: Price changes under the influence of supply and demand Change of regulated tariffs Change of the share of liberalized volumes Change of electricity and/or capacity consumption volumes 35

36 Information Disclosure 36

37 Information Disclosure Government Order #24 of 21.01.2004 established information disclosure standards For all entities of the electricity market ● Financial (accounting) reporting ● Tariffs For network organizations ● Contract terms and conditions ● Return on investment (for RAB) ● Asset flow ● Capital investment ● Network losses and grid state ● Number of applications for technological connection For System Operator ● Contract terms and conditions ● Market simulation model ● Electricity quality and electricity supply reliability ● Dispatcher orders and reasons for deviation from the planned schedule ● Generation and consumption plans (day, month, 1 year, 5 years) ● Repair, hydroregime and system constraints forecasts and schedules 37

38 Information Disclosure Government Order #24 of 21.01.2004 established information disclosure standards For generating companies ● Hazardous emissions ● Hydrologic system use mode and its state (for HPPs) For the commercial operator ● List of wholesale market entities ● Terms and conditions of the connection agreement and of participation in wholesale market trading ● Membership fee for market participants ● Aggregated wholesale market operation results (without detailing transactions of specific participants) ● List of system generators ● Reports on the results of control over System operator actions Information disclosure: ● via mass-media ● via web-sites of disclosing organizations ● at the request of a market participant 38

39 DERIVATIVES MARKET DERIVATIVES MARKET IN POWER SECTOR

40 INSTRUMENTS «MEEX» has built up a work group from energy companies representatives, Russian and foreign brokers, «RTS» clearing center professionals, that analyzed foreign experience of electric power trades, technology of commodity assets trading in Russian exchanges. Contract specification is developed. Month futures contract is selected, based on the average price of electric power index in Center and Ural hubs of the Price zone 1 and Kuzbass hub of the Price zone 2 during certain delivery hours (base-load hours and peak hours). The trading technology is similar to the EEX exchange technology that makes the trading mechanism multipurpose for the Russian and foreign participants.

41 MEEXTRADE ORGANIZER. REGISTRATION OF DEALS, DEVELOPMENT OF TRADE REGULATIONS CLEARING CENTER GUARANTEE OF TRANSACTION FULFILLMENT. FINANCIAL SETTLEMENT OF CONTRACTS DEPOSITARY OF PARTICIPANTS’ CASH ASSETS. MONEY TRANSFERS ACCORDING TO TRADE RESULTS BROKER client TRADE ORGANIZATION

42 PRICE FORMATION  A METHOD OF PRICE FORMATION – CONTINIOUS TWO WAY AUCTION  SUBMISSION OF ORDERS TO THE EXCHANGE SYSTEM. ANONIMOUS ORDERS MARKET PRICE. FIXED PRICE. ADDRESS LIMIT ORDERS: FIXED PRICE.  TRADING HOURS 10:30-23:50 (MOSCOW TIME)  CLEARING – SYSTEM OF THE PARTIES’ OBLIGATIONS DEFINITION UNDER TRANSACTIONS: CLEARING TIME: 14-00, 18-45. VARIATION MARGIN RECALCULATION. SETTLEMENT PRICE DETERMINATION (TWICE A DAY).

43 Thank you for your attention! 39


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