Analysis of the Results of Russian Electric Power Sector Reform and Proposals to Change Its Regulatory Approaches

According to the IPEM report the main result of the reform is a significant rise of electricity prices for ultimate consumers. For example, since 2002 industrial tariffs have risen by 2.7 times. It deprived Russian industry of one of its most important competitive advantages in comparison with industrially developed countries – lower energy costs.

This problem should be addressed comprehensively. First, it is necessary to improve the transparency of power grid sector. Second, it is essential to solve the non-payment problem which came to the fore as well as other problems of retail system. As for the wholesale market, flawed (in terms of development of market relations in the industry) mechanisms of power delivery contract (in Russian - DPM) and competitive capacity outtake (in Russian - KOM) should be abandoned as they appeared to be profitable only for a part of generating companies, but absolutely not profitable for consumers. The proposed system of relations within the framework of bilateral contracts can form real market signals from the industry, both in terms of volume and prices. We’d like to draw your attention to the fact that the reform of wholesale market should not be separated from other measures aimed at the improvement of the industry’s efficiency. These measures include improvement of the transparency of power grid; fight with non-payments; and, of course, solving the problem of cross-subsidization.

Competitiveness of Russian economy is questioned by the unpredictable rise of electricity prices. For instance, profitability of companies operating in power-intensive industries has declined: profitability of metallurgy accounted for 21-32% in 2008, but then it declined to 6-13% in 2012, which is even less than in 2009 when crisis took place.

The main reasons of tariff rise of power grid are connected with the mistakes of implementation of RAB regulation, lack of transparency of power grid companies’ investment programs and unsolved problems of cross-subsidization (including so-called “last mile”).

In the power generation sector in turn competitive environment which is required for price and cost reduction has never been created. The power delivery contract mechanism transformed from the mechanism which ensure that investor’s obligations are met to the flawed instrument of elimination of business risks for generating companies and guarantees of the return on investment in a very short time by industry standards.


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