Drawbacks of the current market or why we need a new electricity market

“Donbasenergo” tariff for March 2017 amounted to 89,076.56 hryvnias per 1 MW*h, for April – to 96,126.37 hryvnias per 1 MW*h, while the average tariff of heat and power plants is approximately 2,000 hryvnias. Why is that so? I’ll try to explain in two parts.
Part 1
“The order of formation of the projected wholesale market price of electric energy” dated 03.03.2016 established Rotterdam+ formula for heat and power plants. Much has been written about the formula, I do not want to repeat myself, but I will note certain points.
According to its developers (National Commission for State Regulation in Energy and Utilities – NCSREU), the Rotterdam+ formula was introduced in order to ensure autonomy from the ATO zone in terms of the supply of coal.
Rotterdam+ applies to both the power plants using anthracite coal and the plants using the gas group coal which is available in Ukraine.
Since the introduction of Rotterdam+ the tariff of ALL heat and power plants has increased significantly.
However, this has not helped the heat and power plants using anthracite coal to diversify coal supplies, although they are still receiving money for this.
On February 15, 2017 temporary emergency measures were introduced in the electricity market in connection with the termination of supplies of anthracite coal from the occupied territories.
Today in Ukraine there is only one power plant using anthracite coal – Luhansk heat and power plant (2 blocks). Coal is supplied there from the Russian DTEK mines, while Rotterdam+ regularly collects money from consumers for ALL power plants and for all coal, not just the anthracite one.
It gets worse and worse as it goes on. Those stations that had to stop their work due to the lack of coal receive an unbelievable tariff for working with equipment composition below the minimum one.
(The minimum permissible composition of the equipment is the blocks, the minimum permissible number of which with minimum load must be in operation depending on the average daily temperature of the outside air in accordance with the forecast of meteorological conditions to ensure reliable operation of the station)
Decision of the National Commission for State Regulation in Energy and Utilities:
Justification for the decision of the NCSREU “On approval of tariffs for electric energy sold to the Wholesale Electricity Market of Ukraine by producers working on price bids and determination of the weighted average tariff for power generating companies of heat power plants in March 2017”
Justification for the decision of the NCSREU “On approval of tariffs for electric energy sold to the Wholesale Electricity Market of Ukraine by producers working on price bids and determination of the weighted average tariff for power generating companies of heat power plants in April 2017”
So, money is being collected from consumers to ensure the work of the power plants using anthracite coal; but there is no coal and the stations are “standing idle”. It would seem that if they are standing idle – that is they are not generating electricity – they should not receive any money. Their place in the energy balance was taken by cheap Energoatom and Ukrgidroenergo, so it would be logical to reduce the wholesale market price, which would mean a reduction in the tariff for electricity and a reduction in cross-subsidies.
Far from it. NCSREU only remembers about reduction of cross-subsidies when it raises the tariff for the population, in other cases it acts in the following way:
Part 2
At the end of 2016, NCSREU announced an unprecedented decrease in the wholesale market price, first by 10% from 01.01.2017, and then by 5.8% from 01.04.2017 (NCSREU Order 2326 dated December 20, 2016).
(I will indicate it separately that wholesale market price has no direct relation to the tariffs for the population. It is directly related to industrial consumers of categories I and II (almost all except the population). However, the population experiences the fluctuations of the wholesale market price in the value of the commodity output into which the cost of electricity is envisaged. The consumer always pays for everything; if not by direct payment, then in a different way).
To reduce the wholesale market price there should be an economic reason, namely: a reduction in the cost of one or more of its components (the net cost of electricity production, of the tariff for the transmission of electricity, the amount of losses in networks, subsidy certificates, excise tax, etc.) or displacement of more expensive electricity by a cheaper one in the energy balance. However, as of December 2016, I do not know any objective grounds that could have caused the decline in the wholesale market price. Therefore, it can mean that the price had been overstated all the time prior to this. Consumers had been paying it, and somebody had been making money.
There is another possible reason. The commission planned to introduce incentive RAB-financing in 2017. Perhaps, a reduction in one type of payment should have been compensated by introduction of another, with the subsequent raising of tariffs to at least the same level.
On 23.03.2017, the NCSREU amended the Order 2326 dated December 20, 2016 and canceled the reduction of the wholesale market price by 5.8%, arguing that this had resulted from the blockade of trade with the occupied territories. Let’s figure out the reasons for this decision.
Emergency measures were introduced in Ukraine, as a result of which the ratio of various types of electricity generation in the overall energy balance changed. The share of nuclear power plants and hydroelectric power plants increased, while the share of heat power plants decreased. When expensive heat power plants are replaced with cheap nuclear power plants, it is logical to reduce the wholesale market price. Meanwhile, in fact we see an increase. And during a meeting of the Commission, its chairman Dmytro Vovk mentioned almost a dozen times that it was the blockade that was the reason for the increase. This is another manipulation. What really happened:
Together with the cancellation of the decrease in the wholesale market price by 5.8%, the Regulator raised the tariff for Energoatom and Ukrenergo. Heat power plants that actually stopped due to the lack of anthracite coal, are in facts producing a small amount of electricity every month in order to be able to legally obtain fabulous amounts of money for working with equipment below the minimum one.
This can be easily traced on the example of Donbasenergo, since they only have one station in the power system of Ukraine (Slovyansk), so we see its tariff immediately – 89,076.56 hryvnias per 1 MW*h in March and 96,126.37 hryvnias per 1 MW*h in April. In other companies, the tariff of each separate heat power plant which is sanding idle is also exorbitant. Thus, for five stations that are standing idle because of the absence of anthracite coal consumers are paying more than a billion hryvnias per month! And all this is absolutely legal, because this is the current model of the market. A legitimate mockery of consumers – that is, of the whole country in the time of war.
These examples show the absolute inefficiency of the current market model. Consumer interests are in the last place. Whatever happens in the work of the system (an increase in the share of cheap generation, the closure of inefficient blocks, a reduction in demand), it does not influence the price reduction. Only introduction of a new market model, built on competition, can provide the consumer with high-quality power supply at an effective price.

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