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  • Фото автораAlexey Presnov

Kazakhstani CHPP. A path to market.

Обновлено: 30 дек. 2023 г.

Last time we have generally examined approaches to organizing a competitive power market in Kazakhstan, as an integral part of the centralized electricity and capacity market, which will allow the country’s electric power industry to finally embark on the track of sustainable development, and not only in terms of ESG agenda, but also in the economic aspect. Should it not happen, no more nor less, the successful development of Kazakhstan as a county is also in question. And these are not just lofty words - this is a reality that many in the country, unfortunately, do not realize, staying in an illusion that the energy sector can continue to remain non-market, completely enmeshed in tariffs, immersed in constantly changing rules and subjectivity in decisions. As we promised, today we’ll talk about very important issues that must be resolved when creating a sustainable competitive market model.

Kazakhstan, like Russia, although located further south, is still a northern country climatically. And therefore, for a comfortable life here, reliable heat supply plays an important role. In the USSR, where we all have come from, heat supply in cities and towns was organized through the massive construction of combined heat and power plants (CHPP), which simultaneously produced both electricity and heat. CHPP, as sources of centralized heating, will celebrate their centenary in 2024 - the first of them was designed and commissioned in Petrograd, even though the first thermal power plants began generating electricity 45 years earlier in New York and St. Petersburg.

Therefore, the debate about which product is primary in the production of thermal power plants - heat or electricity - was a foregone conclusion from the very beginning of the emergence of the process of converting heating energy into steam that rotates the turbine and electric generator, and the use of part of this steam for heat supply was invented later. But this does not negate the fact that both electricity and heat from thermal power plants were initially intended for use in local markets; their integration into power systems occurred much later, in the 40s–60s of the last century as part of the creation of the Unified Energy System of the USSR. At the same time, combined heat and power plants had been used mainly as retail sources of electricity for nearby consumers, while the role of key system generation was assigned to large condensing power plants and hydroelectric power plants, and then nuclear power plants.

The reform of the Russian electric power industry, which ultimately led to the creation of a competitive wholesale market, albeit with certain and even sometimes serious reservations and errors, especially in the investment part, by and large had taken the thermal power plant of combined cycle off guard. These power plants are characterized by significantly higher operating costs compared to condensing power plants (as well as in capex) for obvious reasons. At the same time, CHPP are much less maneuverable in heating modes with optimal fuel costs and ratios of thermal and electrical energy production. Even though the overall efficiency of CHPP is significantly higher than that of condensed regional thermal plants (their fuel utilization factor reaches 80%, as opposed to 30% for regional power plants), their economics on the wholesale market, in conditions of heat tariffs regulated by socio-political restrictions, is problematic, which is proved for many years of the post-reform experience in Russia. They have been struggling to pass the regular auctions for the “old” capacity, and in the electricity market they often find themselves either unprofitable or clearing resources with a lack of profitability. In the first years after the reform in Russia, the issue of cross-subsidization of heat tariffs from electricity revenues was also acute, and the process of transferring CHPP to the so-called must-run regimes in the capacity market (payment for capacity outside of competitive selection) was used quite often. In the mid-2010s, solutions were proposed for CHPP plants using the alternative heat plant method - the marginal tariff for an existing CHPP plant for heat is set on the basis of the estimated costs of replacing the heat output of a CHPP by a virtual heat plant. Other forms of optimization of thermal power plants in the wholesale electricity market have been being also in place.

Nevertheless, in Russia the problem of the inefficiency of CHP plants on the wholesale market and, therefore, their displacement by boiler plants on the heat market, remains unresolved. The first competitions for quotas for the modernization of thermal generation COMMOD, which started several years ago, immediately revealed the problem of the non-competitiveness of CHPP in comparison with condensing cycle power plants and required separate solutions for the first ones. At the same time, the economics of CHPP up to 25 MW, operating on the retail market in accordance with Russian rules, show much better results, primarily due to the sale of electricity to retail consumers during capacity charging hours on the wholesale market at a discount. But there is one more reserve that is not used in Russia due to the existing architecture of electricity grid tariffs, based on a “caldron” method. This method mixes electricity tariffs of all distribution networks within one region, setting a unified tariff for consumers regardless of their distance from the source of generation, which includes a component of bulk grid costs (networks set accounts between themselves on an individual basis depending on power flows). It seems to be beneficial for the consumers in terms of even playing field for network access, but this deprives CHP plants of the advantage that was originally inherent in their purpose in the USSR - the simultaneous supply of electricity and heat to nearby consumers. In other words, CHP plants in this market design lose their actual status of distributed generation, which electricity is produced and consumed at the level of distribution networks.

For Kazakhstan, where the architecture of network tariffs is practically not structured at all, and this quite important work is still ahead, it’s so far possible bringing all combined thermal power plants heating mass consumers back to their original purpose - to work in the retail electricity market at times determined by the operators. That presumes direct electricity contracts with retail consumers for their thermal energy, thus hedging the risks of such consumers in terms of electricity price volatility on the wholesale market, and consumer’s interest in reduced tariffs for electricity transmitting, which, at a minimum, will not have the component of the main grid. We will discuss in detail how to implement this in practice in the special article of this series dedicated to the architecture of electricity grid tariffs in a market scenario.

With this approach, CHP plants receive a stable electrical load in heating modes, which ensures their maximum fuel efficiency in combination with optimal operating modes of the equipment, while consumers receive electricity at reduced tariffs and a stable heat supply. At the same time, combined thermal power plants, especially gas-fired ones, can sell excess electrical power (the so-called condensation tailings) in the wholesale segments of the energy market, primarily to the balancing market at high prices, which creates additional revenue. They will be able to work in the wholesale market outside the heating seasons and provide their electrical power to the System operator as a backup in emergency modes in certain segments of the market, depending on the degree of maneuverability. The “free walk” between the wholesale and retail segments, despite the basic rule - those who receive payment in the capacity market are obliged to work in the centralized electricity market, do not apply to combined thermal power plants in this scenario, and their retail consumers should not bear the burden of paying tariffs for the main grid, while tariffs in distribution networks must be reduced one way or another.

Of course, this is not the only mechanism for improving the economics of CHPP. Their role as sources of heat production in the conditions of Kazakhstan is difficult to overestimate in the medium term. And even in the longer term, with the growth of heat electrification as the main method of decarbonization of heat supply, the sites of today's combined heat and power plants will remain useful for a long time - as electric boiler plants, primarily receiving electricity from various low-carbon sources. Therefore, when considering their prospects in the market scenario, we cannot ignore the problems of centralized district heating (DH). The share of district heating in the Republic of Kazakhstan accounts for 54%, while the share of combined thermal power plants, according to various estimates, ranges from 67 to 80%. The problems of district heating from combined heat and power plants in post-Soviet countries lie in the low efficiency of these systems in general, and especially in the high losses in heating networks (up to 55% in the Republic of Kazakhstan), as well as directly in buildings and premises due to their low energy efficiency and lack of accurate regulation.

A side effect of the low efficiency of district heating based on social value of heat in cold climates is the forced cross-subsidization of heat energy tariffs by electricity sales, which is precisely one of the key reasons for the weak economic sustainability of CHPP in Kazakhstan and the chronic underfunding of their renovation and modernization programs. Revitalization of CHPP’s economics on electricity markets by letting them work at electricity retail in heating modes thus procuring them with a stable electrical load should be complemented by the options for more efficient operation of these plants in heat markets, taking into account the objective realities of regulated heat tariffs in view of their social significance and the impossibility of their considerable growth in the foreseeable future.

The main problem of DH in Kazakhstan, which has an impact on the economics of heat supply, as our analysis shows, is associated with extremely high losses in the heat transporting pipes network due to their deterioration, as well as the organization of metering at the borders of balance responsibility between networks and consumers heat receiving installations. In the context of the CHP simultaneous operations in the heat and electricity markets, combining the functionality of generation, transmission and distribution of heat, processes of internal cross-subsidization are inevitably observed in their economics, regardless of what costs and how they are attributed to this or that type of production – heat or electicity, what experts who facing the paradox of CHPP on the market fond of arguing - with overall much higher fuel efficiency, lower emissions per kWh of total energy, combined thermal power plants, nevertheless, turn out to be much less stable in the market compared to big condensing power plants .

In order to more accurately attribute costs in heat supply and identify sources of inefficiency, as well as to create local heat supply markets with elements of competition, it is possible to propose the mandatory separation of heating networks into separate structures - heating network enterprises. These enterprises must be responsible for the operation of networks, their development, interaction with both heat sources and its consumers, performing the function of a single buyer of heat energy in local markets within cities and other settlements, in the heat supply zone of CHP plants and boiler houses. In Kazakhstan, such enterprises exist, but many of them are part of energy holdings and are essentially structural divisions of CHPP that perform the functions of transporting thermal energy, which means they are cross subsidized within the holdings. Municipal heating network enterprises are often underfunded and have problems with personnel.

There are different options in terms of ownership rights to such enterprises, one of them, the most social-market at this stage from the point of view of public good, is the transfer of heating networks of all sources into the ownership of a separate municipal (state) company, so that in the future this enterprise created conditions for the most optimal purchase of heat from thermal power plants and other heat sources, developing them using market methods in order to loop heat supply to territories (for example, if the justified tariff from the CHP plant is lower than the tariff of a conditional nearby boiler house with a low chimney and higher specific emissions, then it may be advisable to build a bridge between the networks from the CHP plant and the boiler house, transfer the boiler house to peak operating mode, and the source of investment it may be possible to maintain the increased tariff of the boiler house for its former consumers). Considering the social importance of heat supply, state and quasi-state subsidies, which are currently allocated to all sources due to their crisis conditions and the effectiveness of which is hard to track, can be redirected specifically to such municipal heating network enterprises for the purpose of their advanced renovation and development.

This approach, which removes from CHPPs the burden associated with losses in heating networks, in combination with preferences for them in the electricity market, will significantly improve their economy and shift the focus of their efforts to maintaining the readiness of the main equipment of plants, accidents on which have the most severe consequences. At the same time, heating network enterprises will receive clear criteria for subsidizing their activities from the authorities, which will allow them to substantively engage in the renovation of networks and pumping stations with government support. Various options for cooperation with private companies, concession agreements, PPPs, long-term loans, and grants from international organizations specializing in utilities and energy saving are also at the consideration. The issue of barriers to investment in coal assets will also be removed. In the future, when the economics of heat supply and the technical condition in the country improve significantly, it is possible to consider the issue of privatization of such heating network enterprises, leaving control over their work through significant stakes in the possession and disposal of akimats.

This is a general vision of ours on how to find a solution for perhaps the most pressing of today’s problems in Kazakhstan’s energy sector. On how to ensure that the development of renewable energy sources in the country takes place on a truly market basis and is not perceived by the energy community as some kind of burden is in our next article of this series.

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