Energy reversal to the Far East – Kommersant
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The Far East, whose importance for the Russian economy is growing rapidly given the geopolitical situation, is close to being included in the all-Russian electricity market. Until now, it was a non-price zone, in which tariffs set by the state were in effect. Now the Ministry of Energy can partially cancel tariffs for local power engineers at the beginning of 2024, and completely liberalize prices by 2028. The goal is to attract investment in the renewal of generation, which is not enough to cover the growing demand within the region and export energy to China. “Kommersant” figured out what the reform of the energy sector of the Far East would lead to and who would become its main beneficiary.
Against the backdrop of the economic turn of the Russian Federation towards Asian countries, the smallest and most worn-out energy system in the country, the Far East, has turned into a region with the fastest growing demand. Over the past three years, electricity consumption there has increased by about 10%, while in the rest of the country – only by 4%.
The forecasts are even more optimistic: regulators expect consumption growth in the region by 6% per year, while the national average is within 2%. Now the anchor consumers of the Far East are JSC Russian Railways, which is expanding the Eastern testing ground, Transneft, miners of coal, gold and diamonds.
This gave the Ministry of Energy new arguments for the accelerated launch of a free energy market in the Far East. The ministry wants to complete the reform of RAO UES of Russia, which took place in the main part of the country in the 2000s, which bypassed the Far Eastern energy system. But regulators are facing serious resistance from big business, which fears a sharp rise in energy prices.
Liquidation of the tariff reserve
The United Energy System (IPS) of the East includes five regions: Yakutia, Amur and Jewish Autonomous Regions, Primorsky and Khabarovsk Territories. The power system operates in isolation from the rest of the country. The capacity of all power plants in the region is 11.2 GW, the volume of consumption is 44.5 billion kWh. For comparison: in the neighboring IPS of Siberia, the volume of demand and generation is five times greater.
Over the years of tariff regulation, the generation of the Far East has become rather dilapidated and every year it fails more and more often. Over the past decade, RusHydro has built only three facilities there: the Yakutskaya GRES-2, the Blagoveshchenskaya CHPP and the CHPP in Sovgavan. Due to low tariffs, which barely cover the cost of fuel, the construction had to be financed from the state budget. For new projects, other sources of funds must be sought, and price liberalization should help with this.
The Ministry of Energy plans to cancel energy tariffs in the IPS of the East gradually. By the end of 2023, they want to create a day-ahead market (DAM) for trading in actually generated kilowatt-hours and a capacity market (the readiness of stations to supply energy). At first, power plants will sell on the market up to 15% of generation and capacity, until 2027 inclusive, part of the capacity is planned to be sold at prices that have already passed competitive power take-offs (CTOs) in Siberia. In 2028, tariffs for power engineers will be almost completely canceled, and the power market of the IPS of the East will be merged with the IPS of Siberia.
To this end, Rosseti plans to build two 220 kV transmission lines from the Amur Region to Siberia by 2028, and then another 500 kV branch. The volume of flow between energy systems will be about 400 MW at the first stage, and then up to 690 MW. The estimated cost of the first two branches, judging by the draft scheme and program for the development of the Russian energy system, is 17.6 billion rubles. (VAT included). Rosseti says that the full cost and sources of financing will be determined in the next investment cycle, which will begin in 2025.
The deadlines set by the Ministry of Energy are not accidental. By 2028, it is planned to complete the construction of almost 3 GW of new TPPs in the Far East and modernize Primorskaya GRES. The facilities will pay for themselves at the expense of a special premium to the price of energy capacity, which will be mainly paid by industrial consumers of the first (European part of the Russian Federation and the Urals) and second (Siberia) price zones.
The launch of the market in the Far East will allow construction to continue after 2028, but at the expense of payments for the capacity of industrial consumers within the boundaries of the enlarged price zone – Siberia and the East. The construction of several HPPs is already planned in the IPS of the East closer to 2030: RusHydro has begun designing the 500 MW Nizhne-Zeyskaya and Selemdzhinskaya stations in the Amur Region, recalls Sergey Sasim from the Higher School of Economics. The implementation of these projects would lead to a significant increase in energy prices for the business of the Far East, the expert notes, and the enlargement of the price zone will shift part of the financial burden on the industry of Siberia, in particular on Rusal.
Who will get
So far, the main beneficiary of the launch of the energy market is RusHydro, which owns 4.8 GW of TPPs and 4.4 GW of HPPs in the region. First of all, HPPs, whose tariffs are currently the lowest due to the lack of fuel costs, will start working. If already this year all RusHydro’s HPPs are fully transferred to the CCM of Siberia with a price of about 350 thousand rubles. per 1 MW, then their annual revenue, according to Kommersant’s estimates, will jump by 122%, to 17.6 billion rubles.
In the DAM segment, hydroelectric power plants will get even more impressive gains, since they will sell electricity at the price of the most expensive TPP. The weighted average tariff for thermal power units in the Far East is approximately 1.9 rubles. for 1 kWh, which is 40–60 times higher than the tariff of local HPPs (30–40 kopecks).
The Federal Antimonopoly Service told Kommersant that for the transition period it was proposed to maintain tariffs for HPPs, and for TPPs that occupy a dominant position, to establish a number of requirements for filing price bids for the DAM. RusHydro declined to comment.
This year, the FAS has increased tariffs for thermal power plants in the Far East by about 50% to cover the cost of coal that is becoming more expensive and to recover losses from previous years (see Kommersant on March 21). As a result, their capacity has become more expensive than CTOs in Siberia. With a complete transition to KOM, the old Far Eastern TPPs in 2023 would lose 17% of their income, reducing revenue to 25.8 billion rubles.
However, power engineers are unlikely to be satisfied with such a scenario. The issue of the price of CTO for the Far East requires discussions in the Ministry of Energy, they say in the Siberian Generating Company (SGK, part of SUEK), which since 2020 owns Primorskaya GRES for 1.47 GW. “Obviously, it should not be lower than the tariffs justified now,” they note there. With the launch of the RSV, electricity prices will also not be lower than the current tariffs, Kommersant’s interlocutors say, expecting more likely to rise in prices. It will not be possible to close the oldest and most expensive thermal power plants due to weak network connections within the region.
An extremely small number of energy suppliers and an undeveloped power grid topology within the IPS of the East do not allow for alternative energy supplies and minimal competition in the region, they say in the “Community of Energy Consumers” (lobby of industrial consumers). “Cheap generation of HPPs will actually cease to influence the price, which will be formed at the level of expensive generation of coal-fired TPPs,” the association continues. “Payment for capacity will increase both for the Far East and for consumers in the European part of the Russian Federation and Siberia due to the spread and growth of non-market surcharges and subsidies.
In the “System Operator” (SO, energy system dispatcher), on the contrary, they talk about the “rather high” technological readiness of the region, meaning for the most part the development of energy trade planning mechanisms. SO notes that there are now significant restrictions on the transmission of electricity to the southern part of the Primorsky Territory, the western part of the Amur Region and the central part of Yakutia. “But the presence of such restrictions does not prevent the launch of market mechanisms,” they say. The available network bandwidth allows redistributing the load between power plants, and after the unification of Siberia and the East, optimization opportunities will increase, they add to CO.
Inter RAO cautiously assumes that with a strong telecommunication with the IPS of Siberia, one can expect “some reduction in prices in the Far East, given the prevailing generation of hydroelectric power plants in Siberia (about 60%)”.
Selection of competitors
While almost the entire generation of the Far East belongs to RusHydro, it is difficult to talk about competition and the struggle for efficiency in the region. The monopoly has few rivals: in the Amur Region, these are ALROSA from the Vilyuiskaya HPP-3 with a capacity of 277.5 MW and Gazprom Energoholding (GEH) from the Svobodnenskaya TPP with a capacity of 160 MW. In Primorsky Krai, half of the consumption is covered by Primorskaya GRES, SGC notes, calling the station “a fairly competitive asset to launch the market.” In 2028, Inter RAO will build a 550 MW Lenskaya TPP in Yakutia (with power output to the Bodaibo energy center), and the GEP will build a 330 MW gas Chulmanskaya TPP.
The FAS does not comment on the possible division and sale of RusHydro’s assets. According to Kommersant’s information, the government discussed a scheme for the transfer of the Neryungri GRES from RusHydro to Gazprom. However, RusHydro did not agree to this deal, after which the idea of building the Chulmanskaya TPP on Chinese AGT-110 gas turbines appeared (see Kommersant dated April 26).
“If the quality of the competitive environment does not improve, then consumers may face monopoly price manipulation and will not feel the increase in the efficiency of the energy system,” Sergei Sasim believes. He considers the development of the market in the Far East a logical step towards the formation of uniform competitive conditions in the country, and the prospects for unification of energy systems are “very good.”
The production of coal-fired thermal power plants in the Far East is very expensive, which creates the preconditions for attracting investors to build more efficient generation and reduce prices in the future, Mr. Sasim specifies. But much will depend on the quality of the work of antimonopoly regulators and the effectiveness of network construction, the expert notes.
Export prospects
The Far East acquires an important role for the development of the energy system also because electricity is supplied from the Amur Region to China, which became its largest importer after the closure of exports to the EU. In 2022, the volume of supplies to China amounted to a record 4.69 billion kWh (about 9% of the total production in the IPS of the East, according to Kommersant’s estimates). This year, the Chinese side again proposed to increase supplies, Kommersant was told at Inter RAO.
Wholesale market rules in the Far East will affect the export price of energy. Now Inter RAO’s margin from sales to China is limited by the regulator: the exporter receives only 5% of the supply. Inter RAO hopes that after the reform they will be able to work on general terms with other consumers and the profitability of supplies will be determined only by the difference between export and purchase prices.
For comparison: in December 2022, the average wholesale price (electricity plus capacity) in the Far East, according to IPEM, was 1.9 rubles. for 1 kWh, and in January 2023 – about 2.8 rubles. Last year, judging by Chinese statistics, China bought energy from the Russian Federation at about $0.05 per 1 kWh, or 3.1 rubles. (according to the average annual exchange rate of the Central Bank of the Russian Federation).
However, the volume of deliveries to China depends primarily on the ability of generators to produce the required amount of electricity, Inter RAO emphasizes. Regina Lyanzberg from Kept notes that now the total transmission capacity of power grids between the Russian Federation and China is no more than 7 billion kWh per year, but the export of the maximum volume is possible only in the medium term when building a new generation in the Far East with a capacity of at least 250-400 MW .
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