CAPACITY MARKET Fedor Y. Opadchiy Member of the Management Board, Director on Markets Support & Development Conference Regulators Role In Developing Energy. - презентация

1 CAPACITY MARKET Fedor Y. Opadchiy Member of the Management Board, Director on Markets Support & Development Conference Regulators Role In Developing Energy Infrastructure, Investments and Operational Rules for Networks: EU and Russian Experience and Plans 6-7 February 2012

2 2 Capacity – a special commodity Capacity – a special commodity in the wholesale market, which, when on sale, entails an obligation for the maintenance of generating equipment in a state of readiness for electricity production, including through holding necessary repairs of the generating equipment, and also entails the emergence of right to claim its proper performance in accordance with the conditions of signed contracts for capacity sale (supply) Discharge of obligations of capacity sale (supply) and capacity transmission from the supplier to the buyer Discharge of buyers commitment to purchase capacity and accept capacity from the supplier Economic meaning of capacity – charges (fees) for capacity is a source of funding the conditional fixed costs of the supplier to maintain generating equipment in operating condition.

3 3 Required amount of capacity supply UES Consupmtion 2010 MW MW January February March April May June July August September October November December MW Maximum consumption per year Planned capacity reserve Required amount of capacity supply Required amount of capacity supply for each month of the calendar year is defined as the maximum hourly consumption in the year to accommodate the planned reserve ratio. The amount of buying capacity for consumers is determined each month based on the need to pay for the whole amount of capacity, actually delivered by the supplier. Maximum capacity is needed at this point

4 4 Suppliers obligations to sale (supply) capacity are fulfilled in the amount of capacity actually delivered to the wholesale market, taking into account the requirement of readiness of the generating equipment to produce electricity. Amount of actually delivered capacity is equal to the limiting amount of capacity supply minus the amount of capacity short-delivery due to the confirmed unreadiness of the generating equipment to produce electricity. Limiting amount of capacity supply to the wholesale market is determined by the results of certification, including certification on the basis of the results of generation equipment testing. Discharge of suppliers obligations to sale (supply) capacity The generating equipment is declared ready to produce electricity if : 1. Participation in the general primary frequency control is provided 2. Participation in the reactive power control (voltage control) is provided 3. Participation in the secondary frequency & active-power flows control is provided (for hydro power plants) 4. Technical requirements for the communication system that provides communication with the system operator are fulfilled 5. Operation of the generating equipment according to the technological conditions, set by the system operator, is provided Amounts of capacity short-delivery (penalties for «unreadiness») are subject to: having actual capacity limitations; having unplanned/emergency repairs of equipment; registration of non-participation in frequency and /or voltage control; registration of dispatching discipline violation, including non-performance of dispatching schedule; registration of economic «withdrawal» of capacity from the market.

5 5 Discharge of buyers obligations to purchase capacity Discharge of obligations to purchase power are carried out by all the buyers in the amount equal to the product of the ratio of actual capacity availability and scope of the actual peak demand in each month. Amount of actual peak demand for each customer is defined as the monthly average weekday capacity value, which corresponds to the value of maximum actual consumption in any of the 24 hours established by the system operator as the planned peak hours on working days. Ratio of actual capacity availability Cresr_fact in the system (zone) is determined from the ratio of actually delivered to the wholesale market capacity amount to be paid and total peak demand. Depending on the change of the actual peak consumption amount the ratio of actual capacity availability is very different for different time intervals during the year. Cresr_fact_1 Cresr_fact_2 Consumption profile for a year Planned hours of peak demand Hour of maximum actual consumption

6 6 Organization of capacity market Basic mechanisms of capacity market Capacity sold on the basis of the competitive capacity takeoff (CCT) Sale of capacity, selected by CCT Regulated contracts (RC) and free contracts (FCC) of capacity sale Contracts of electricity and/or capacity sale as per tariffs, which are set for electricity and/or capacity by the Federal Tariff Service (only for delivery to the population and equivalent categories of consumers or Sale of capacity, which was contracted under FCC – provided that capacity was selected by CCT Capacity of generating units, which were contracted under the capacity supply contracts (CSC) + capacity of new NPP and HPP Sale of capacity of the thermal power plants under the long-term contracts Sale of capacity of NPP and HPP upon conditions, similar to CSC Capacity of obliged generators Sale of capacity of generating units, which were not selected by CCT, but must continue operating due to technological and other reasons Other mechanisms of capacity market

7 7 Capacity supply contracts (CSC) CSC – commitment of the generating company to commission new generating capacities with the prescribed characteristics within the prescribed time upon condition of a guaranteed payment for the input capacity for a certain period History of CSC: The reform of RAO UESR included the creation of generating companies (OGC/TGC). Controlling shares of generating companies in the repurchase of additional issues have been acquired by new owners. Terms of sale of shares were based on the need to finance investment programs, which were listed and originally approved by the Board of Directors of RAO UESR. Terms and certain parameters of investment programs in were updated, as well as the contractual scheme of CSC was finalized. Long-term contracts of capacity supply for new NPP and HPP were signed in 2012 upon conditions, similar to CSC. Responsibility for investment programs implementation under CSC is provided by special mechanisms to monitor their implementation and by contractual liability of the parties for non- commitments. Market Rules also contain a set of provisions to encourage CSC performance. Planned amount under CSC is about 41,2 GW (30 GW TPP, 11.2 GW NPP+HPP)

8 8 Obliged generation Suspension of decommissioning because of the risks of heating failure is a very important decision, which should be made by the regional government and based on district heating schemes, developed in accordance with the requirements of the Federal Law 190 Procedure of attribution The generator can be attributed to units, which are obliged to supply capacity, if it is not selected by CCT and: for technological reasons decommissioning is suspended (risks of power or heating failure are established) or for price, social or other reasons the decision is made by the Russian Government against the proposal of the Government Commission on Electric Power Development Procedure of payment As per tariffs of the Federal Tariff Service, taking into account the forecast of financial results from the sale of electricity generated by all the generating units of the company: payment is mandatory for all the consumers of the same free power flow zone, if there are risks of power failure Payment is mandatory for all the consumers of the same entity of the Russian Federation, if there are risks of heating failure If the generator is declared as obliged because of the risks of heating failure, the increase of the capacity price for consumers in the region is the direct consequence Overall price level is limited to the forecast of socio- economic development of the Russian Federation The decommissioning of the facility by the decision of the local government body can only be suspended for a term not exceeding three years. Next, the owner must be asked to put the facility on sale, and in the absence of buyers to make repurchase.

9 9 Competitive capacity takeoff (CCT) is held by the system operator in order to provide the Unified Energy System of Russia as a whole and separate free power flow zones with the amount of generating capacity in the wholesale market, which will be sufficient to meet the demand for electricity. CCT shall be based on the identification of cases of limited competition in the areas of free power flow zones in accordance with the established procedure. CCT is held since – for six month from 1 July 2008 In 2009, 2010, 2011 и 2012 CCT was held for the coming year from 2013 CCT will be held for four years in advance Competitive capacity takeoff (CCT) Ratio of capacity amounts to be sold in 2012 with different mechanisms of capacity sale

10 10 Procedures of CCT Basic data CCT (formalized takeoff procedure) CCT price on the free power flow zones for the buyers (preliminary purchase price) Identification of deficiency areas Results of CCT Capacity demand with an allowance of planned reserve ratio Limit amounts of supply between the zones Amounts mandatory for purchase (CCS, new HPP/NPP, perspective technological power reserve) Application of the overall (max and min) size for the capacity price in the zone Price bids of CCT participants Technical parameters of generating equipment in the zone Selling prices of power generators Volume of uncovered demand List of unselected generators Tariffs of «the most expensive» generators

11 11 Stages of CCT CCT procedures are carried out sequentially on five stages: 1 stage Determination of the best capacity price taking into account: minimum cost of capacity; demand satisfaction; supply restrictions between free power flow zones; and without taking into account the combined technological limitations. Determination of the best volume of selected capacities taking into account: the combined technological limitations; the priorities of technical parameters. Setting of volume of selected capacities taking into account the necessity to select the whole generating unit. Setting of volume of selected capacities taking into account the restrictions on the minimum total guaranteed production in free power flow zone (group of zones). Capacity pricing in free power flow zone for the suppliers and consumers with an allowance of «crops». 2 stage3 stage4 stage5 stage

12 12 Minimum technical requirements for the generating equipment to participate in CCT Current regulations provide mechanisms to encourage decommissioning of outdated and inefficient generating equipment, which are assessed at stages of: CCT clearance – suppliers with the generating equipment, which does not conform to the requirements, are not allowed to participate in the CCT procedures selection – priority of CCT selection belongs to the equipment, which is considered more efficient in terms of technical parameters The generating equipment is considered nonconforming to the minimum technical requirements of CCT if: а) technical parameters of the equipment were declared for CTT of 2011 as nonconforming to the minimum values of technical characteristics, excluding the equipment, which was certified in 2010 or 2011 in accordance with the results of testing. б) with the pressure of fresh steam 9 Mpa and less, and upon condition that: for 2012 – the steam turbine of the turbine generating unit was made before 1952; for 2013 – the steam turbine of the turbine generating unit was made before 1956; for 2014 – the steam turbine of the turbine generating unit was made before 1958; for 2015 and subsequent years – the steam turbine of the turbine generating unit was made earlier that 55 years to the year of CCT At the same time there are exceptional situations, when in the steam turbine of the generating unit underwent reconstruction of the wheelspace or replacement of the key elements of the turbogenerator.

13 13 Free power flow zones Definition of the Free Power Flow Zone Free Power Flow Zone – part of the Unified Power System of Russia часть Единой энергетической системы России, within which electric power and capacity, planned for delivery with the use of any generating equipment with definite technical specifications to meet perspective demand cam be freely substituted by the electric power and capacity, pland for delivery with the use of other generating equipment with the similar technological specifications in the same zone of the free power flow under simultaneous observance of the following conditions: - Total technical specifications of the generating equipment within the free power flow zone comply with established by the system operator requirements, necessary to provide the normal operation of the corresponding part of the power system; - Planned total amount of the electric power and capacity supply between free power flow zones do not exceed the limit values, established on the base of constraints determined by system operator. Factors considered on defining free power flow zones List of controlled sections with full use of transfer capacity Statistics of controlled sections blocking on short-term modes planning and Simulation calculation based on the forecast state of the network topology and typical modes with consideration of the forecast load grow

14 14 Free power flow zones CCT Free Electric Power Flow Zones FPFZ code Territory of the Russian federation entities and power regions Numbe r of the FPFZ 1FZSBOE01Siberia1 2FZSBKZ02 South Kuzbas2 3FZSBOM03Omsk3 4FZSBCH04Chita4 5FZSBBU05Buriatia5 6FZSBBB06Altay6 7FZUROE07Ural8 8FZURTU08Tyumen9 9FZURNT09 Northern Tyumen10 FZURPZ11Perm12 11FZURKR12Vyatka13 12FZVLOE13Volga14 13FZVLKZ14Kindery15 14FZVLBS15Balakovo16 15FZYUOE16Caucasus17 16FZYUVG17Volgograd18 17FZYUAS18Caspiy19 18FZYURS19Rostov20 19FZYUKU20Kuban21 20FZYUSK21Sochi22 21FZYUSO22Gelendzhik23 22FZYUDA23Dagestan24 23FZZNOE24Center25 24FZZNVL25Vologda26 25FZZMSK26Moscow27 26FZSZOE27Zapad28 27FZSZKO28Kolskaya29

15 Power demand determination Power demand calculating procedure: Power demand is based on: Cold five-day consumption forecast Target reserve ration Deduction of the retail generation production amount Reserve target coefficient is based on: Standard reserve I all price zones Coefficient of the forecast power under-consumption caused by statistic of the unscheduled maintenance Coefficient considering electric power export Estimated power reserve is based on: Maintenance reserve, aimed to compensate capacity of the generating equipment being on scheduled outage; Operation capacity reserve necessary to compensate emergency power decrease (failure, consumption forecast mistake); Strategic reserve, aimed to compensate power balance disturbance caused by unpredicted deviations of its components from the forecast with consideration of the power facilities construction sluggishness 15

16 Capacity demand calculation in CCT Consumers pay only for a part of the demand volume. 1+2 UPS of Russia PZ 16

17 17 Technical specifications accounting Technical specifications (parameters) of the generating equipment declared by the participant in the price bid, accounted in CCT procedure: On observing the selection procedures in case of prices equality pointed in the price bid for the capacity sale within one price zone, in accordance with the priorities 1-st priority - readiness for peaking operation; 2-d priority – higher specific control range (ratio of the difference between upper and low limits of the PGU control range to PGU installed capacity); 3-d priority – higher generation specific provided amount (ration of the declared generation to PGU installed capacity) ; to define the optimal amount of the generating capacity, covering the demand for capacity in FPFZ with accounting total technological constraints : constraint on the control range for the group of FPFZ within the same price zone; constraint on the electric power generation in the FPFZ.

18 Demands for the integral technological specifications of the generating equipment selected in CCT: Restrictions on control range: Where - capacity generating unit control range declared by the participant NPP, HPP, PP – share of electric power generation of NPP, HPP and other power plants, located in the corresponding price zones, in total electricity production in the previous year D – minimum relative control range in the zone, defined by SO Restriction on the electric power generation amount in the FPFZ whereSg - maximum amount of the CGU provided generation pointed in the bid Pz – maximum permissible amount of the capacity supply in the FPFZ from all neighboring FPFZ; - number of hours for the period (month, year); Sz - minimum permissible value of generation for FPFZ, defined by SO The values of the total required technical parameters of generating equipment are published by SO on a dedicated website as part of the technological information necessary for CCT. 18 Integral technological demands in CCT

19 19 Consideration of the bid price parameters In case of declaration of the consent to bring the bid price parameters in accordance with the requirements of Wholesale Market Rules bid price parameters to CCT are simulated as follows : On setting the price limit for this Free Power Flow Zone (FPFZ): Incase of price excess in the bid respective to maximum price for capacity, the set price equals maximum price. On absence of the price limit for this FPFZ: For PGU of the one supplier (his group) within one FPFZ simulative pricetaking for the value not less than difference between suppliers installed capacity and 15% of the total installed capacity in this FPFZ is set. Mandatory pricetaking is set in FPFZ: for Power Generating Units (PGU) assigned in reference with generating facilities of NPP and HPP of the wholesale markets entities having right in accordance with the wholesale market rules to sign the capacity purchase-and-sale contracts with the new NPP and HPP (only via CCT procedure for 2011 and 2012). For all PGU assigned to wholesale market entity which has not used the right to sign capacity supply contracts. For all PGU assigned to wholesale market entity which exceeds time limit at least of one generating unit commission on CSC for more than 1 year; For HPP of the 2-d price zone.

20 20 Main results of CCT 2012 DemandSupply SelectedNon-selected Demand, uncovered by CCT total including selected at the CCT price Including CSC and new NPP/HPP including 15% of the most expensive At the price Before CCT is banned from decommis sioning Does not conform to the technical requirements 1 PZ PZ Total Amount indicators (MW of apparent power) Price indicators (rubles/MW per month) Free power flow zone «Center» Free power flow zone «Ural»118 Other free power flow zones of the 1 st price zone units of the generating equipment with installed capacity of 253 MW did not apply for CCT 35 units of the generating equipment with installed capacity of 978 MW decommissioned in 2011 Free power flow zone «Siberia» Other free power flow zones of the 2 nd price zone Besides:

21 21 Results of CPT for 2012 Result of the selection to CPT based on technical parameters for 2012: the requirement to comply with restrictions on the relative control range I price zone – 32,2% (standard – 35,7%). not observed II price zone – 61,3% (standard – 38,6%). observed the requirement to comply with restrictions on the amount of electric power generation is observed in all FPFZs The total volume of non-covered under the CPT demand for 2012 is £ 3694 MW: I price zone – 2018 MW (restricted by the power flow in FPFZ (27) «Moscow») II price zone – 1676 MW (restricted by the power flow to II price zone). At that "physical" total surplus of the customer contract demand MW, of which 1562 MW - amount of generating equipment power, which technical specifications do not conform the minimum requirements to participate in CPT in In conducting CPT in MW were selected to meet the requirements of the wholesale market Rules for compulsory selection of GEM and considering technical parameters of the generating equipment selected in the I pricing zone.

22 Perspectives 22 Currently, a draft special procedures for certain auctions of investment projects for construction of generation facilities (new plants) in areas with the necessary technology generation

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