The publication in the Agency Blog on where and how the Kazakhstani power industry should have proceeded at this time caused a certain response in the country among professional public, judging the data of the quantity and geography at the site traffic. Moreover, I have obtained even a critical reply on the subject from one of the experts and a well known organizer of energy media in the country. The critique, besides a reproach that I am poorly familiar with country’s specifics, which is true, essentially lies on the arguments that the transition to the Central (Single) Buyer model on the power market is a well elaborated by the industry community and a hard-won, suffered choice, which, on the one hand, would allow to revive the market, to solve the problems of oligopolies and stagnation, to attract investments, to bring about real competition, but on the other hand to preserve control over prices and tariffs minding the socio-political importance of the energy. In other words, the decision is already taken, in detail written down into the Concept, there is no point to return to discussions. Besides I was rebuked in a way that it's easy to criticize, but hard to offer something instead.
Nonetheless, I reckon that discussions are futile when an official decision has been put in force but even then, such key documents for the industry and for the country can be scrutinized for faults, especially over time, when it would become clear that the Central Buyer model doesn’t solve any current problems but sometimes generates new ones. But to be more concise and taking the heat of criticism I suggest having a closer look at some Concept’s postulates.
Let’s start from the Chapter 4 “A vision of the industry development”. It says about the transit to “a new market target model based on centralized trade… which excludes speculations… promotes competition between electricity producers and between power consumers and retailers, to set a unified averagely weighted price for all purchasers at wholesale market and correspondingly to create even playing, non-discriminatory field for all…”
The essential phrase here is about competition needed to be organized between generators and, between, obviously separately, purchasers, as a result of which, it is assumed, a unified average price would be set for all buyers at wholesale market. But the unified price also might be set at the open spot market where bids from generators are balanced by bids of consumers, and a price is being born. This price could be marginal when markets clear by the most expensive resource at the moment as physical balance is achieved, as it usually happens, while all producers cleared receive this maximal price, getting (except the last generator) so called inframarginal incomes. And it might be formed as an averagely weighted, calculated on the basis “paid-as-bid” – this kind of setup has been run on some markets for a while, and it was widely discussed recently as one of the ways to contain electricity prices in connection with sharp gas prices spikes in Europe. If we talk just about that – about the average weighted price as a market instrument – there is no need in any Central Buyer. In both open spot market cases described above the direct competition based on short-term running costs of generators and bids of buyers is preserved. But the truth is that in case of averagely weighted price the balance between different types of generation, the baseload and the peak one, becomes disrupted since their capex and opex are also different. The generation with low capex is usually more flexible but more expensive at short run costs and sets spot prices, as base loads, to the contrary, have lower opex, but higher capex.
The single central buyer is needed for another reason, in order to purchase power from generation at controlled in advance, prognosed prices corresponding to a designated tariff, in fact, in order just to mocking free competition. This is a kind of “sovereign competition”, placed under surveillance. Consumers at such a market do not bid at all pricewise, they only order volumes, that’s why the Concept's phrase about some competition between purchasers has a very little meaning. The Balancing market, which is presented in the Concept as an important instrument of progress, as a matter of fact just plays a role of penalties, which affect only bids precision nothing more. The real Balancing Market all along with an Intraday one, incentivizing flexible resources, which Kazakhstan needs badly today and will need even more as the RES penetration increases in accordance with the Strategy on carbon neutrality, and the Concept itself – so far is not the case. As we know, the Balancing Market, working at imitative mode is available in Kazakhstan for a long time, so there is not much of the progress due to its commissioning in the new model framework.
Let’s go further on. The most important factor for the development is a smooth investments' process. In the modern power industry they are mostly carried out and recouped through a healthy capacity market, where new resources, on refurbishment and modernization, old ones compete within certain rules and specifics, with restrictions, defined by external agendas. But the Concept doesn’t say a word on this. On investments it tells the following: “The model transformation will be followed by improvement of the investing climate due to effective and economically justified attraction of investments into the power industry, including formation the framework for clear and predictable tariff policies…, excluding cross-subsidies between tariffs on heat and electricity (which increases CHPP competitiveness at the power market)” This is about what? About that tariffs will be clear and unified? But it was a competition there for the right to sell the power to the single central buyer at some unclear, not known in advance and competitive prices, wasn’t it? Or, indeed, by the regulated tariffs? The tariffs, controlled by the central buyer, all along with volumes of electricity, not, as of today, between only “linked”, and “not higher than”. What is this novation about? About more control and less market?
About CHPP. The cross subsidies between electricity and heat should be excluded, the Concept insists. Yes, this is a very acute and painful problem not only for Kazakhstan but essentially on the whole territory of the former USSR, including Russia, where CHPP is the main method of the heat supply in cities and towns. There are two options here – to raise the heat tariffs as it works in Finland, for instance, where prices on heat are more or less free, or to improve CHPP economics for account of their correct placement on the market as simultaneous source of heat and electricity for nearby consumers as well as providing some special privileges. They, in fact, have been conceived and invented to the purpose of energy supply for nearest consumers in the cities and towns back in the USSR, e.g., the retail customers, not wholesale. But there was no market in the power industry of USSR's times, therefore CHPP are needed some additional measures such as, for instance, tax exepmtions on the market, etc. The second option seems to be more appropriate for Kazakhstan, but it could be implemented only within the framework of certain complex regulatory solutions related to CHPP, as well as to the electrical distribution networks around CHPP, and tariffs for heat production and transportation. But the Concept doesn’t say a word on all these issues.
But it does say, though in some rather obscure wording, about some transition to a unified electric grid’s complex (Chapter 5). What it does mean exactly – a buildup of transit power lines to connect Western operation zone with the Kazakhstani united power system, or in addition to that, the creation of a unified single grid company with a universal tariff for the whole country, remains vague, but bearing in mind the general context of "conceptual" clinging to everything “unified”, "central" and "single", there is a suspision that “unity” and “singularity” may catch up the electrical networks as well, like in Russia, which would scathe the industry a lot in terms of the correct costs reflection, causing new sources of cross subsidizing and further mitigating the market signals.
Let's have a look at organizational measures. It was an unpleasant surprise to read a passage in the Concept where the KEGOC (country's Transmission System Operator in the European meaning) is being suggested to be reorganized in a way that System operator functions would be separated from transmission management and transferred to a governmental structure under Ministry of Energy. It is motivated by the fact that at this time the KEGOC is a commercial enterprise, but it operates the power system in the interests of all market participants and therefore should be independent and noncommercial. It seems there is some confusion in the minds of Concept’s authors. Non-commercial system operating structures are often featured in the US, where they represent NGOs owned by main market actors and are similar to the Market council in Russian and, obviously, Kazakhstani context. But to the contrary of these countries in the US they also run the power systems, whereas in Russia, for instance, the system operator is a separate state owned, regulated, but still a commercial structure. Anyway, the current setup when the KEGOC combines the functions of a system operator and running the country bulk grid looks quite progressive comparing, for example, to Russia, where there is the Federal Grid Company (FSK in Russian acronym) working separately from the System operator, and in addition the FSK is united with regional distribution level networks run by all Russia’s company “Rosseti” . The fact that the KEGOC is the commercial company does not in any way hinder to operate the system in state’s interest, the same way it is settled in most European countries, say, in Finland there is the “Fingrid Oy”, where Oy stands for a stock company. Creation of the special body at the Ministry of Energy to run the power system looks like a step not just back but directly into the USSR, to the Central Dispatching Department of the United Power System of the USSR, the unit on Kazakhstan. A very strange proposal, to my view.
The rest of Concept is about everything for good and against everything bad. Sometimes it is not very clear in wording and quite contradictory. For instance in Chapter 5.2 it again describes the principles of transition to the full central single buyer model which would allegedly bring competition in generation, but the affiliated with consumers generation, a share of which reaches up to 50% by some estimation is to be exempted from this mandatory centralizing process. It seems that time to time the authors of the Concept don’t fully understand the difference between a centralized spot market design and the single central buyer model. They say many words about competition, market liquidity, investments, even levelled playing field for market agents, even about competitiveness of Kazakhstani goods, but all these words become senseless as soon as they reiterate the phrase on the necessity of the single central buyer model as a key reforms' novation. Because this kind of model is not about competition, it’s about obligatory purchasing the power at the minimum possible prices, about rigid regulation, in fact, about production requisition from generation and levelling for consumers. It is interesting that they mention in this Chapter that it would work even within oligopolies’ environment. In other words, the competition by the iron fist, and not through a gradual restructuring of the monopolistic force in the industry within the free market framework.
Wrapping up, let us look at one more interesting point. Right today, when I was writing this post, the European Commission (EC) has issued its document on “Electricity Market Design revision: Proposal to amend the Electricity Market Design rules” in connection with crisis, which broke out in last two years due to sky rocketing gas prices. As it well known, in the EU the majority of electricity volumes are traded at centralized spot exchanges, and prices for electricity end-users have often been linked directly to the spot ones, which caused huge problems, when power prices have been spiking up following the gas prices. And the EC as a main remedy proposes now exactly the same market setup, which the Kazakhstani Concept is trying to get rid of so radically – bilateral long term agreements. It is about so called hedging contracts – contracts for difference, CfD, where a contract price is compared with a spot price indicator – a strike price. When the contract price exceeds the strike one, a generator pays to a consumer, and when the strike price is higher than a contract price, a consumer pays the difference. For Kazakhstan it probably would be suitable to widely use so called reliability options especially for amortized, but still workable generation, not requiring major refurbishing or substitution. The gist of these options is similar to the CfD setup, the difference is that it is a construct between a generator and the market as a whole. The market pays to a generator some premium as a kind of capacity payment but on the energy market, part of which a generator returns to the market once the market price exceeds a prior set in the options contract a strike price.
That kind of measures and market instruments may stabilize the prices without any single central buyer and at the same time create all those incentives the Concept refers to, but unfortunately all those words resemble blank declarations than realities.
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