The electricity market may become more discriminatory

The electricity market may become more discriminatory

Changes in legislation create conditions for inequality and abuse

Unsplash / Sigmund
28.10.2021 Evgeny Makarchuk

On April 16, 2021, the Decree of the President of the Republic of Belarus No. 153 «On the development of the electric power industry» was signed. Later, on July 6, 2021, the Resolution of the Council of Ministers No. 381 «On measures to implement the Decree of the President of the Republic of Belarus No. 153 dated April 16, 2021» was adopted.

The provisions laid out in the decree could significantly change the functioning of the electricity system and relationship among its parts in the medium and long term. There are two main changes.

The first change is that «1.1. switching stations connected directly or indirectly to the power grids of power supply organizations, power plants of power supply organizations, and the Belarusian nuclear power plant are subject to unified operational dispatch control in the energy industry based on service contracts.»

Previously, the switching stations operated according to their own schedule (they could operate constantly at a nominal load), and the power balance was ensured only at the expense of the facilities of the State Production Association Belenergo. Now they are subject to a single operational dispatch control.

Switching stations are any installations for generating electrical energy that are not part of the Belenergo State Production Association but are connected to their networks.

At first glance, these decisions make sense and appear necessary for the current energy system. After the start-up of the nuclear power plant, periods will occur during which the production of electrical energy will exceed consumption in the power grid. At such times, production should be reduced on all generators in the system where equipment specifications permit.

Therefore, from the point of view of managing the operation of energy systems, ensuring the quality of electricity and the reliability of its supply is the correct measure.

In any energy system with market regulation, all plants, regardless of their form of ownership, are subject to a single operational management. Previously, the dispatcher was obliged to prioritize loading switching stations and the balance of supply and demand was ensured by limiting production at Belenergo’s facilities, which, in fact, discriminated against Belenergo’s stations.

The second change is the following: «2. Grant the right: 2.1. to distribute and (or) within several regions to owners of switching stations connected directly to the power grids of power supply companies using such power grids within one region and of the transmission and distribution of electrical energy produced by these switching stations to their separate subdivisions (branches, representative offices), other structural subdivisions and (or) power supply facilities of the switching station owners (hereinafter referred to as the switching station owner’s facilities).»

In other words, the switching stations will now be able to transmit electricity through Belenergo networks, which means they will be able to produce electricity without geographical correspondence to the point of energy consumption.

It is obvious that the producers of electricity connected to the electricity grids have to cover not only their own costs for generating electricity, but also the costs of the network companies for the transmission and distribution of energy. It is also a general market mechanism where the producing company pays all costs up to the point of sale of electricity (in our case, up to the consumer meter). Previously, these costs fell only to the sources of Belenergo.

This measure is necessary to ensure stable financing for servicing the grid, since with an increase in the share of switching stations in electricity production, the absence of payments from them will reduce the amount of funding for servicing the grids with all the consequences that would result.

The adoption of this act may seem like a positive signal and looks like the first steps in building an electricity market in Belarus. This is the title of an interview with Belarusian Deputy Minister of Energy Olga Prudnikova in the Energy Strategy magazine – «The forming of an electricity market has begun in Belarus.»

However, if you take a closer look at the essence of this decree and consider it in the context of the general regulation of the operation of the energy system, it becomes clear that everything is not so rosy.

First point of the decree

As mentioned above, general operational dispatch control (ODU) is the norm – one of the basic foundations for the functioning of a fair, non-discriminatory electricity market.

However, this norm is not the first in the construction of an electricity market. The general ODU is usually introduced after, or simultaneously with, the creation of an independent dispatching company. This company should not be financially or administratively dependent on any other commercial entity in the electricity market. It helps develop rules of load distribution that are public and accessible to all market participants that consider the operating mode restrictions of the equipment and the economic indicators of their work.

Some types of electricity sources cannot be regulated or have a limited rate of change in power (for example, cogeneration (CHP) or nuclear power). For such sources, special rules are prescribed.

Operational dispatch management was spun off as a separate company back in 1988. Later the organization was named RUE «ODU.» Although this company was financed from Belenergo sources, which does not allow for guaranteeing their independence, it was a legally separate company. Financing from Belenergo did not raise any questions, therefore other market participants simply did not exist. Electricity generation and transmission remained essentially a monopoly of Belenergo.

However, since January 3, 2020, RUE «ODU» has been excluded from the Unified State Register of Legal Entities and Individual Entrepreneurs and all rights and obligations transferred to the State Production Association Belenergo. RUE “ODU” ceased to exist as an independent legal entity and became a structural subdivision then of Belenergo. It should be noted here that the creation of an independent dispatcher is the first step in building an electric energy market and is the most basic principle of its functioning. Without an independent dispatcher, building a market is impossible in principle, since it is impossible to organize non-discriminatory load distribution and, therefore, attract investments. (Investors will not buy or create new capacities if they do not see a guarantee of load distribution on a non-discriminatory basis.) Therefore, until an independent dispatcher is created, no actions can lead to the creation of an electricity market.

In the absence of an independent dispatcher, general operational dispatch management does not lead to the forming of a non-discriminatory market environment. In fact, today the distribution of the load among energy sources will be conducted by one of the energy sources. Obviously, in this configuration the dispatcher company will be interested in the maximum utilization of its own capacities by limiting the generation at switching stations.

This is not possible, and the distribution of the load will continue solely on economic principles, but there are no guarantees for this. In addition, the closed nature of data on station generation or the cost of electricity production will not allow the owners of switching stations to even reveal the discriminatory behavior of the dispatcher and try to protect their rights. Under the guise of introducing general market rules without creating the necessary minimum infrastructure, these actions have the exact opposite results (or intentions).

In addition, this decree foresees not only the extension of general dispatch control at the switching station, but also participation in covering the costs of maintaining the ODU. This practice is also common for an energy system with the electricity market and can be supported at first glance. However, it is important not to forget that a separate independent legal entity has its own balance sheet, which clearly shows the costs and allows for highlighting the costs of the ODU (if the organization provides some other services) and distribute these costs among all market participants. In this case, there is no separate legal entity. The division of the functioning of the energy system by type of action did not happen. Moreover, the financial indicators of the work of the Belenergo remain confidential. Therefore, other participants in the electricity market cannot be sure that the tariff set by MART will compensate for the costs of the ODU. Market participants themselves will not be able to verify this information due to the closed nature of financial data and, in fact, the absence of a separate balance sheet for the organization of ODUs, while Belenergo has an incentive to increase the costs of ODUs (transferring other costs to this unit) to increase the tariff for ODUs. This will allow, on the one hand, to reduce company costs by increasing payments from switching stations while reducing the competitiveness of switching stations and limiting their production based on economic parameters.

Second point of the decree

The second point gives the owners of switching stations the right to transmit electricity through the Belenergo networks. It also looks like a step towards the electricity market. In the market operation of electricity systems, non-discriminatory access to power grids is also a basic rule of operation.

However, in this situation the second part of this paragraph of the decree turns out to be no less significant than the first. This right is received only by housing and communal services companies. (A list of companies is being formed and it looks like it will include regional housing and communal services companies, but not be restricted to them.) Networks can also be used by companies to transfer electricity to their own structural divisions.

Clearly, this point is aimed mainly at switching stations operating on renewable energy sources (RES). It is more profitable to install a switching station on natural gas right next to the place of electricity consumption without transferring it through Belenergo networks. But the efficiency of renewable energy power plants largely depends on the geographical location (especially for wind power) or requires large areas (for solar power plants), which are problematic to identify on business premises or close by in urban settings.

Consequently, this rule provides a legal opportunity to develop RES, but in practice they can only be developed for a limited number of companies. As seen from the text of the decree, it is prohibited to sell electricity to end consumers (or wholesale). You can only transfer to meet one’s own needs. Consequently, the main beneficiaries of the new regulations will be large industrial businesses that will be able to meet the demand for electricity generated. Most of these are large state-owned companies.

A market without a market

It is worth considering one more interesting point. The production of electricity at stations within the framework of construction quotas, according to the decree (ORDER OF THE PRESIDENT OF THE REPUBLIC OF BELARUS No. 357, September 24, 2019), provides for the sale of electricity at a tariff with an increasing coefficient on the tariff for industrial consumers.

In this case, we see that the market mechanism begins to work, but only for special legal entities (belonging to the structure of housing and communal services) that have certain characteristics (significant consumption), which creates significant discrimination in the electricity market. Now a large business can receive electricity at a lower tariff by creating its own renewable energy sources, while small companies cannot afford this due to lower consumption, resulting in higher costs for electricity from renewable energy sources. (Electricity from small plants always costs more than from more powerful ones due to economies of scale.)

This discrimination already goes beyond the electricity market and will possibly affect businesses in other sectors because of the unequal conditions created by legal restrictions on equal access to electricity.

Housing and communal services organizations also were given the right to use services for the transmission of energy through the grids (as mentioned above). They no longer even tried to hide the discriminatory approach, with the sector (or administrative subordination) of businesses granted that right spelled out directly. This right today is not limited to the right to transmit electricity through Belenergo networks. It is essentially the right to make money on electricity production while generating cheaper electricity than in the Belenergo system. Any business that is not part of the housing and communal services structure and does not have consume significant amounts of energy has no right to produce electricity. This is especially important considering the statement that there will be no quotas for the creation of installations using RES for the 2021–2023 period. That is, no organization that specializes in the production of electricity will be able to create new installations for three years.

At the same time, Deputy Minister O.F. Prudnikova refers directly to Art. 5 of the Law on Natural Monopolies, which states that «subjects of natural monopolies are obliged to provide, on equal (non-discriminatory) conditions, access to services related to the spheres of natural monopolies,» understanding that the decree directly contradicts this requirement and outlines a list of legal entities (in the form of subordination (housing and communal services) or through the presence of significant consumption), discriminating against organizations that do not meet such conditions – businesses specializing directly in the production of electricity.

Regarding again the possibility of transporting electricity, it should also be noted that this service will have a certain tariff. This tariff should cover all the costs necessary to maintain the networks properly and develop the network economy. However, how can the total costs be determined if the grid companies are not separated into a separate legal entity with their own balance sheet? The grid facilities are serviced by the subdivisions of Belenergo, which can, within one legal entity, service networks of different voltage levels, produce heat and electricity, and organize the sale of electricity to end consumers. Under these conditions, businesses have an incentive to transfer part of their costs to «transmission of electricity» type of services, which will increase the tariff and increase the business’s revenues by reducing the competitiveness of other energy producers who are their competitors.

It is clear from the essence of this decree that no steps are being taken to form a market, market structures are being abolished (liquidation of RUE «ODU»), and the regulatory framework creates more and more administrative barriers and discriminatory conditions in the electricity market. Most likely, the publication of this decree is the result of large industrial businesses, concerns and holdings, and housing and communal services organizations lobbying in their own interests. Now they have received the right to produce electricity at a lower cost and earnings by reducing costs or by selling it to other consumers.

It cannot be ruled out that some of the participants in the development of this decree really tried to consolidate at least some steps to form a market management of the electric power industry. But only partially shaping the market is impossible. It is impossible to create a slightly discriminatory market. And in our case, in the absence of a basic market infrastructure, no such moves towards a market will create this.

On the contrary, the movement in this direction suggests that soon we will be able to see the issuance of decrees on the allocation of a separate right to transport electricity through the networks of the State Production Association Belenergo, not to entire sectors but to individual organizations, as was the case with the cigarette kiosks, the New Oil Company, GardService LLC, and other organizations that belong to the ideologically alien private sector, however their owners are «our people.»

Материал доступен на русском языке: Рынок электроэнергетики может стать более дискриминационным

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