New money is expected from old TPPs (thermal power plants)

Energy companies are offered to make up for cost of facilities on the free market

The industry proposes to reduce the amount of guaranteed energy capacity payments that will be received by old TPPs after modernization. The business wants the facilities to receive at least 15% of their income through the sale of electricity on the exchange. The measure, according to consumers, will force energy companies to increase the efficiency and generation of facilities. Generating companies criticize the proposal, pointing to the low profitability of electricity sales. The initiative is unlikely to increase the efficiency of TPPs, but it could reduce competition and increase facility prices, experts warn.

The “Community of Energy Consumers” (that unites industrial consumers) proposed to the Ministry of Energy to reduce the share of the mandatory payment for energy capacity for projects to upgrade old TPPs by increasing their income from the sale of electricity. The upgraded facilities must receive at least 15% of the total payment from day-ahead market profits (DAM, a competitive power trading sector), the association says in a letter (Kommersant has got a document dated December 12, 2022). The Ministry of Energy did not respond to Kommersant.

According to the program for the upgrade of old TPPs, energy companies should modernize 122 facilities with a capacity of 25 GW and a cost of 307 billion rubles by 2028. The investments in the TPP upgrade are paid off through guaranteed payments from the energy market.

Now it is assumed that the TPP upgrade will pay off using the proceeds to be received from the mandatory payments of wholesale consumers for capacity, as well as sales of actually generated kilowatt-hours (set through a DAM factor). The minimum factor now is 4%.

More than half of the already selected projects (65%), according to Kommersant’s estimates, have the minimum DAM factor of 4%, that is, these facilities, regardless of the scope of generation, are guaranteed to receive 96% of the income through a payment for capacity. The highest factor of 38% was set for only 16 projects. This trend reflects the desire to maximize more stable revenue in the capacity market, says Maxim Dyakin from Vygon Consulting.

Consumers believe that a growth in DAM factor will force generating companies to increase the efficiency of facilities. According to them, an growth in DAM factor to 15% can increase fuel efficiency of a power unit in the European part of the Russian Federation and the Urals by at least 12%, and their load—up to 57%.

In Siberia, fuel efficiency of projects can increase by 8% with a load of 55%. As a result, this will lead to a decrease in the DAM prices.

The proposal of consumers “has no grounds and does not take into account the real situation on the DAM”, the “Council of Energy Producers” (CPE, unites generating companies) told Kommersant. There they say that sale of electricity “is characterized by low profitability”, including due to a high share of mandatory pricing (NPPs and HPPs), forced operation of TPPs, and low price volatility. DAM price dynamics has been lagging behind the growth in fuel prices for many years. “The actual average profitability of operating plants with steam power cycle is no more than 3–5%, and in some periods it is negative,” the CPE says.

Independent analyst Yury Melnikov notes that many old plants in the Russian Federation are technologically very close to the maximum efficiency of the steam power cycle with their steam parameters.

A significant increase in efficiency by 10–30% is possible only when the steam-powered technological process is replaced with a gas turbine or combined cycle process. According to him, for coal-fired TPPs, such growth is achievable only with a transition to the use of super- and ultra-supercritical steam parameters. But Russia does not have such technologies.

Energy efficiency can only be significantly increased for gas turbine projects, but their cost is substantially higher, agrees Maxim Dyakin: “Increasing DAM factor to 15% is likely to lead to an overestimation of capital expenditures in applications for the selection of upgrade projects.”

The “Market Council” (energy market regulator) doubts that the initiative will lead to an increase in the TPP efficiency. “The selections are carried out at a single-rate price of electricity, therefore the bidder will be able to declare a high DAM factor in relation to a project with low expected margin of electricity sales (corresponding to a low DAM factor) due to overestimating the declared capital investments, which will keep the projects profitable without increasing fuel efficiency,” the Council says. In this case, the competition at tenders will most likely decrease, and more expensive facilities will be announced, which will lead to an increase in prices for their capacity.