As the Russian power market regulator proposed switching to a single rate for electric power and capacity, analysts said such a switch was not now feasible, as the current capacity market model was launched only recently and the revised model could bring additional uncertainties. The amended model could be beneficial for consumers, as it would abolish payments for reserved capacity, but is likely to have a negative impact on power producers’ financial results and lead to increased volatility on the power market, analysts said. They also noted that the consistency of rules was important for the power sector.

At present, electric power and capacity in Russia are sold and paid for separately, with the payments’ covering power producers’ expenditures on the maintenance of power plants. While it took several years to form and liberalize the wholesale power market, the final model of the capacity market was only adopted by the government in March with a ruling that had retroactive effect from January. However, as the government became concerned about higher power prices for end consumers earlier in 2011, it instructed power market regulators to revise the current market model.

The proposals made by Russian non-commercial partnership Sovet Rynka (Market Council), which regulates the country’s retail and wholesale power markets, and by a working group headed by First Deputy Prime Minister Igor Shuvalov, both seek to abolish separate sales of electric power and capacity and promote direct deals between power producers and consumers.

Sovet Rynka said it believed that the conclusion of two-party agreements encompassing supplies of both electric power and capacity should be the main mechanism and the way of trading with the revised model of the power market. The regulator also proposed abolishing tenders for capacity. In order to sell capacity, it is currently necessary to file a bid to the Russian dispatching company System Operator, with bids’ being approved during tenders for capacity and selected suppliers’ receiving guarantees that the supplied capacity would be paid for.

Consumers understand what payments for electric power are, but do not understand what payments for capacity are, the partnership’s director Dmitry Ponomaryov recently told business daily Vedomosti.

The issue on whether it is reasonable or not to switch to a single rate on electric power and capacity is complicated and requires further examination, a spokesperson for the Energy Ministry’s press office said.

Economic Development Minister Elvira Nabiullina recently said in an interview with the Interfax news agency that switching to a single rate was not currently feasible, as this could lead to increased volatility on the power market. The Ministry’s press office declined to provide detailed comments.

The analysts surveyed were quite skeptical about the proposal to switch to a single rate for power and capacity. “A switch to a single rate for electric power and capacity is not reasonable now or in the near future,” said Konstantin Reyli, a senior analyst covering power utilities at investment company Metropol, adding that the existing model was only launched recently. “If a new model is applied, it will create additional uncertainties, both in terms of application and in terms of forecasting cash flows, which will impede the fulfillment of new investment plans,” Reyli said.

Yekaterina Tripoten, an analyst at investment company BCS, said such a switch was reasonable for power consumers, as it implied abolishing payments for reserved capacity, which power consumers have to make now. Meanwhile, the current model, when payments for electric power and capacity are made separately, is profitable for power generating companies, as “payments for power cover power producers’ fuel costs, while payments for capacity – constant costs, including power plants’ reserved capacity,” analysts at BCS said.

Reyli from Metropol agreed that the current system was profitable for power producers. “At present, the two-rate model is profitable for efficient generating companies and is also profitable for less efficient generating companies that cannot move out their capacities,” the analyst said. The analyst also said it was not yet clear what model would be adopted and did not rule out the possibility that the revised model would also be profitable for power producers.

Meanwhile, analysts at BCS believe that the introduction of the revised model would have a negative impact on generating companies’ financial results. For instance, power generating companies could probably be receiving payments for up to 60% of installed capacity, compared to 100% currently. Moreover, year-on-year revenue growth rates of thermal wholesale generating companies are projected to fall to 5%, while hydropower company RusHydro’s revenue from electric power and capacity sales is to decline by 16%, as estimated by analysts at BCS.

The single rate system is more understandable for end consumers, it is more convenient to use it, but with the two-rate system the final price of power is less volatile, Reyli from Metropol said.

Analysts at Alfa-Bank believe that a switch to a single rate for electric power and capacity would lead to higher fluctuations on the market, and price formation in the power sector would become more unpredictable. “We also believe that it is not logical to discard the mechanism of the capacity market, which is already operating quite well and was created in order to smooth price fluctuations on the market,” the analysts said in a report.

Tripoten from BCS agreed that the switch to a single rate would cause excessive volatility on the power market. Power producers are likely to reserve some power capacity and, in peak hours of consumption, the price of capacity is likely to increase as well.

Analysts at investment company Troika dialog welcomed the Economic Development Ministry’s position and added that curbing volatility was among the reasons for introducing separate price formation for electric power and capacity. The Ministry’s position is on the whole positive for power generating companies, as the risk of further changes in the rules, which could lead to uncertainties, is reduced.

Consistency of the rules is positive for the power sector, analysts at BCS agreed, adding that frequent changes of the rules were among the main investment risks for power generating companies. The Economic Development Ministry’s position against the proposed changes supports the stability and permanence of the existing model and reduces the main investment risk, they said.