The blackout: how to stop the decline of investment in power generation

Today, the average age of the Russian power plant of 32.5 years, and the applicable rules of the market it will only grow

All of 2016 the Russian power industry was in the area of attention, including due to the unprecedented (300%) growth of capitalization of several companies. But is it all good? In the past year the problems in the sector continued to worsen. On the part of the system call is to dwell.

Power to the load

In 2016, the consumption of electricity in Russia grew by 1.7%, these results, the industry did not show in 2012. However, the reason for the growth, unfortunately, not in a sharp increase in the consumption industries, and the extreme temperatures in summer and winter and an extra day in a leap year. In the absence of a clear trend in consumption growth one of the main industry remains the problem of overcapacity.

By the fall of 2016 in the power system was forced to 14.6 GW of generation (the power is not in demand in present market, but are not subject to decommissioning for technical reasons), after the annexation of the Crimean power system to the pricing zone of the wholesale electricity market to this volume is added another 428 MW. The overabundance creates a significant additional burden on consumers, according to our estimates, at around 40 billion rubles. Recall that more than 20% of the capacity paid by customers at the market price, and in eight to ten times more expensive.

At the same time in 2016, for the first time since the beginning of the program of capacity supply agreements (DPM — a contract under which the utility agrees to construct new facilities in exchange for long-term rates, ensuring return on investment), the amount of the withdrawal of equipment from operation close to the volume of new inputs. There was a clear trend in the retirement of old inefficient capacity. The results of the selection power for the year 2020, conducted in the fall of 2016, it appears that about 4000 MW have not filed applications and another 800 MW has been selected. These facilities also become candidates for disposal.

The gradual retirement of inefficient power plants solves the problem of excess capacity and beneficial to consumers because it decreases the amount of the overpayment.

It is important to understand that the problem of overcapacity is not that capacity exceeds demand (in the market it only stimulates lower prices for consumers), and that the excess is mainly due to outdated and inefficient capacities, which, however, are paid by consumers. Today average age of Russian power plants is 32.5 years, and it will only increase, because investment in the sector decreased for the fourth year in a row, with 867 billion RUB in 2013 up to 697 billion rubles in 2016.

To reassure investors

To prevent the decline in investment, and therefore slowing the “rejuvenation” of the assets is impossible. The problem of attracting investments is priority for the power system. While there is no significant growth of consumption, there is more time for maneuver and decision-making. It is essential to determine the mechanism, which would allow to attract investors and to guarantee the return of invested capital.

Existing mechanisms have several disadvantages: competitive capacity selection (KOM) is not able to stimulate new investments, the payment for it only compensates for conditionally fixed costs and the PDM mechanism is not competitive, then there are the projects built under contracts that do not compete among themselves as necessary for generating, receiving high payments without any competition.

The system is clearly not enough transparency. Consumers want to clearly understand what exactly they are paying. How much for the reliability of power supply and how much for electricity. Discussion on the validity of the size of an obligatory for the consumer the payment will stop as soon as it will be introduced competitive mechanism. There is a need to ensure system reliability in a particular node of the grid, and there is a station applying for an increased payment and the status is forced, it is necessary to organize a competitive selection process, and perhaps some investor interested in construction in the same site new facilities with more modest demands for payment for power. It is very difficult to understand the real cost of electricity for consumers in a particular node of the grid, and it interferes with the organization of the free market.

The same competitive approach should be applied to projects of modernization and construction of new facilities. The consumer wants to choose the “cheap” option and pay for power, realizing that it was the optimal system solution.

Of course, you will need a transition period in which frameworks will remain the above problems, but the market community desired signal, even in the long term, that system will change. It is important to increase the share of competitive pricing in the sector and increase the transparency of prices for consumers, and to generate the right signals for investment in the sector. However, in the Russian power industry, everything happens exactly the opposite. By decision of the government continues to increase cross-subsidies. This year added to it the funds collected “RusHydro” with consumers to distribute in the Far East in order to reduce tariffs. This will add to the “crossroads” of about 10-12 billion rubles.annually.

Transformations in the sector continues, however, further development of and transition to the target model is not possible without operational decisions accumulated in the sector problems. The most important tasks for governments and regulators of the sector in 2017 is a solution to the problem of equipment modernization, improvement and implementation of new market mechanisms, transformation of the heat market and the decline in cross-subsidization. Jobs enough for all, but there are fears that the government will not want to make drastic steps in an election year and time will be wasted.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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