A Single Buyer in Kazakhstani way – a mirror of errors.
Обновлено: 18 мая
An online conference of the Association “Kazenegry” – the biggest association of power producers and consumers in Kazakhstan, which was held on May 3rd, 2023, finally revealed what the Single Buyer market model does mean in a Kazakhstani way. The core of the model consists in the mandatory centralization of daily operations at the wholesale market through a Single Buyer institution, whose functions will be designated to a subsidiary of the Energy Ministry – the Accounting Settlement Center (the RFC in the Russian transcript). This structure currently administers supplies of utility scale RES and deliveries from the so-called capacity market on long term agreements. This centralization will not affect consumers with own generation comprising approximately 30% of production and consumption in the country. In addition, a balancing market with financial liabilities is to be introduced with settlement process led by KOREM (a trading platform organizing tenders and auctions for the industry with limited market activities at this time) for some reason, not by the System Operator, which physically operates system disbalances and runs ancillary services market – an organic part of the balancing procedures. The Day Ahead market, also being run by the SO, and financially by the RFC, is essentially a platform for various generators’ bids as per loading commitment within designated tariffs' frames. On demand side of this market volume-based bids from wholesale consumers including retail suppliers are to be structured. The RFC will calculate averagely weighted hourly prices in accordance with generation mix selected by the SO to bear a load for a specific hour . Intraday bids adjustments from consumers as well as from producers are forbidden, all imbalances will go to the Balancing market at the minimum tariff when they coincide with system movement and at the maximum one when they counter the system.
What do we have as a result? It is assumed that all consumers regardless of their location, including Western operational zone (which is not connected to the rest of the Kazakhstani power system and functions in an isolated mode) will receive a unitized, averagely counted generation tariff for every hour of the day, plus an additional pay for an imbalance deviation, if any. Considering general commitment to consolidate distribution networks, it is fair to expect that retail end-users’ tariffs will be also almost the same throughout the country, i.e. from the demand perspective electricity will become a somewhat universal commodity at a unitized price, as it used to be back in the USSR. Any actions on consumer’s part in attempts to decrease power costs at a given moment and at a specific location will become senseless, the regions with cheap production and advanced grid infrastructure will subsidize the other ones, less fortuned with energy resources. Consumers would be able to cut their power costs only through shrinking consumption volumes, and, to some extent, by shifting the load from evening hours, lowering their prognosed capacity use bids at 6 evening hours frames, when capacity consumption is being controlled. In addition, some hourly stakes are to be used, kinds of coefficients that should incentivize load reduction at some hours, and, obviously, to the opposite increasing the load at system minimims, thus levelling generation use within day schedule. It is clear that all these measures supposed to increase demand elasticity to the price change will be mostly synthetical and administrative, not reflecting real system costs in temporal and locational dimensions to a necessary extent
Finally, a model with maximum costs’ socialization will be created, the main market principles of causation and cost allocation will be not just breached but totally ignored and this would lead to a complete mitigation of the market signals, while the role of subjective decisions will be maximized. On the supply side a total socialist style leveling of incomes and apathy will flourish since in the absence of possibilities to control their own revenues on the market any other way but within an administrative procedure of tariff setting for a one or another group of generators (CHPP, thermal plants on various fuel, HPP, etc.) there is no need to boost efficacy, cut costs, raising fuel efficiency. The essence of this reform consists in stripping off rights of generation to influence the sale of its production in any way, e.g. making choices based on consumers creditworthiness, payment options and so on. All these rights are to be transferred to the Single Buyer that is becoming a firewall between suppliers and consumers, and a financial controller at the same time.
In other words, a market, whatever it was – oligopolistic, distorted, malfunctioning but still a real existing market in the Kazakhstani power industry with some space of freedom, although limited, is being literally closed for majority of producers and consumers. All those trends and tendencies, inherent to modern power markets regarding consumers’ interactions to power systems in the first place, developing their own resources based on RES, Demand Response – DERs in a broader sense, their integration into power systems, competing by fuel efficiency among different generation units taking into account their ability to lower carbon footprints, advancing corresponding technologies in generation, at consumers, on the power system management tools as a whole – all that is becoming unnecessary and non-relevant, being worth and vital to an extent that would be understood and promoted by some individuals with authority, on their personal views and preferences.
And this is not all.
The problem is that proposed market construction in this special "SB - Kazakhstani way", not only quite far from classical SB designs (where long term agreements with IPP are stricken to provide a certainty for demand and payments, and such a system actually exists in Kazakhstan for RES and capacity procurement), which are used as more simple and faster to implement solutions comparing to competitive markets, happens to be so complicated that it not just devaluated its advantages, but would hardly be capable functioning at all.
For instance, the mandatory upfront payment being introduced for consumers on the planned day ahead purchased volumes, including independent retailers, absence of which sends consumers to BM at highest tariffs rising in a speedy manner, will surely lead to a collapse of the whole this system in a near future. The numerous exemptions will be imposed upon at a “phone call”, payments postponements, changes and additions, and the RFC will be in the center of all these arrears, which doesn’t have its own funds to abate all these hurdles, and at the same time it will have to participate in countless court litigations between suppliers and consumers. In general, the volumes of BM might occur unproportionally high in such a system, and this would bring additional difficulties to interactions of all market managing structures – RFC, KOREM, KEGOC. The latter, being alienated from managing BR financial settlements, but still responsible for the market operations, would solve arising system issues exclusively from the standpoint of reliability and security of power supply, as it had used to be in the old good times of the Soviet Union on the principle – we don’t care about costs, the lights should always be on. The difference is that these days the power industry of the country is immersed in the roaring waves of the capitalistic market economy.
The problem of power deficit that should be allegedly resolved by this SB model through competition and expeditious investments attraction also doesn't have a solid perspective. It is hard to believe that any serious competitive bidding trade of the incumbent generation (as an addition to out-of-market loading RES, three categories from the capacity market – new build, refurbishing and flexible generation plus CHPP) would ever take place as all their power will be normally traded by their full tariffs at maximum hours, and at minimum hours many of them might not be called at all, while costs of their stops and starts-up would remain unpaid.
Power price forecasts for specific consumers, despite that it seems to be an ultimate task and a clear advantage of such a form of the SB model, also might be hard to manage because of high volumes of the BM. Disregarding system bottlenecks for power flows will demotivate new transmission lines construction and will make SO regularly announcing extraordinary system regimes.
At the same time the whole system will require considerable costs and efforts from its managing authorities both at stages of implementation and routine functioning. In other words, lots of ado and hassles will take place with not much good as outcome.
What has to be done? To my view, if the decision on this model introduction from July 1st 2023 is taken and can't be reversed, then, while it is not late yet, first and foremost, it is worth trying to rectify the most odious errors, such as stripping KEGOC off the functions of the financial settlements in BM, and then to use this experience of the current centralization for creation a concept with subsequent development and practical realization of a real competitive market with long term horizons for further evolution which is, by the way, completely absent in the proposed SB design. And one should start this work now, just prior to the first and second.
While it is not too late yet.