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29

Electricity Deregulation Another Step in Market Reforms

Following in the footsteps of its European neighbors, Russia has set up a new spot wholesale power market, where for the first time, electricity can be traded at free market prices. With Russia?s electricity market not due to be fully deregulated until 2006, trade on the new exchange is limited to between 5% and 15% of a generator?s output.

Following in the footsteps of its European neighbors, Russia has set up a new spot wholesale power market, where for the first time, electricity can be traded at free market prices.

With Russia?s electricity market not due to be fully deregulated until 2006, trade on the new exchange is limited to between 5% and 15% of a generator?s output. As a result, the new trading forum has been dubbed the ?5-15? market.

Buyers of electricity are limited to covering no more than 30% of their needs from the deregulated exchange, with the rest coming from Russia?s regulated power market, Forem. In a transitional phase of the deregulation process that is to last until mid-2006, the two markets will continue to operate in tandem. The phased introduction of a free market is intended to allow participants to gain valuable experience ahead of full liberalization, thus helping to avoid any disruptions or price instability that would reflect badly on the planned careful step-by-step breakup and privatization of state power giant UES.

An initial six buyers and seven sellers, including some of Russia?s largest district thermal plants, have signed up to trade on the exchange so far, and these numbers look set to grow quickly. Nuclear power plant operator Rosenergoatom is expected to start participating in the new power exchange, possibly as soon as early 2004. Buyers in the initial sessions,
which commenced Nov. 1, have included large industrial power consumers, as well as regional distributors.

The exchange operator, known as the Trade System
Administrator (TSA), has founding members that include Russia?s largest energy consumers and producers, with UES, Rosenergoatom, and leading oil company Yukos among them.

In the first few days of trading, prices on the exchange averaged around $8.50 per megawatt hour, roughly 5% below regulated prices and a fraction of prevailing wholesale power prices in Western Europe and the US. Part of the reason for free-market prices being this low is the fact that they include no charge to cover the cost of Russia?s ample generating capacity. Prices are expected to increase from the start of 2004, when a new capacity charge is due to be introduced.

Startup of the new exchange was originally scheduled for the beginning of October, but this was delayed until Nov. 1 by a disagreement about long-term bilateral contracts. Russia?s largest industrial power users had wanted the freedom to enter into long-term contracts directly with the lowest cost suppliers, as long as the volumes did not exceed the generators? 15% sellers allowance. However, it was feared that this would undermine the viability of the new exchange and result in higher spot prices. A compromise was worked out whereby large power users can enter into long-term bilateral contracts, but the price will be linked to the spot price benchmark set by the exchange.

This partial deregulation of Russia?s power market represents an important milestone in the ongoing liberalization process. The next few years are likely to see the transformation of the Russian power sector and many new investment opportunities for foreign investors. Planned reforms include the spin-off and privatization of 10 new generation companies from UES, which currently controls around 70% of the market, and the creation of an independent high-voltage transmission system operator. This grid operator is expected to remain in state hands, while five new electricity generating companies that hold thermal power plants are to be privatized by 2006. Hydropower assets are due to remain under state control until at least 2008. Russia?s nuclear power capacity, too, is controlled by a separate state company, and no plans yet exist for its privatization.

Author: Sam Maxwell

Source : Neftegaz.ru