Russia’s annual electricity generation is second only to China among the Belt and Road countries over the years. The electricity generation in Russia registered over 1 billion kWh for the first time in 2016. The Russian government expects that its annual electricity generation will see a 22%-48% growth by 2040. The investment demand in the electricity generation sector alone will exceed USD 130 billion and in the transmission field as high as USD 485 billion. The Huadian-Teninskaya Combined Heat-and-Power Plant jointly invested by China Huadian Corporation and Russian power company TGK-2 was put into commercial operation in June 2017, which has a total installed capacity of more than 450MW and a total investment of nearly USD 600 million, marking the largest electricity project invested by a Chinese company in Russia.
Russia's electricity market, whether in terms of stock size or incremental scale, is no worse than the markets of Pakistan, Brazil, Indonesia, etc., which are familiar to Chinese companies. However, big orders of engineering contracting or direct investment that match the market volume are not common. Russia has basically established an electricity market which is highly competitive and market-oriented with high standardization since its reform in 2006, which is much more complicated than the traditional overseas electricity markets familiar to Chinese companies.
I. Legislative framework of the Russian electricity market
The Federal Law No. 36-FZ “On Electric Power Industry” dated March 26, 2003 (Federal Law No. 36-FZ) establishes the basic legal norms of the national electric power industry and market of Russia, which specifies the electricity market entities, unified national (All-Russian) electric power grid and electricity transmission and distribution, competent authorities of electric power industry and the basic framework of the electricity market. As the wholesale electric power market coexists with the retail electric power market in most regions of Russia, the Russian government formulated Decree No.1172 “On Approval of the Rules for the Wholesale Market of Electric Power and Capacity and on Amending Certain Acts of the Government” ("Wholesale Electricity and Capacity Market Rules") dated December 27, 2010 and Decree No. 442 “On Functioning of Retail Markets for Electric Power, Full and (or) Partial Limitation on Electric Power Consumption Regime” ("Retail Electricity and Capacity Market Rules") dated May 4, 2012.
According to the Federal Law No. 36-FZ and relevant authorization of the Russian government, the Ministry of Energy is in charge of the construction, operation and reform of the electricity market in Russia, formulation of development policies and specific rules and regulations of the electricity market within its authority, and supervision of their implementation. In addition, the Federal Anti-Monopoly Service is primarily responsible for maintaining orderly competition in the electricity market and managing electricity supply and demand in areas where a competitive electricity market is not yet established.
The Russian electricity market is mainly under the operation of a group of specialized electricity trading institutions and electricity technology institutions such as the Market Council, Administrator of Trading System for the Wholesale Power Market (ATS), Center for Financial Settlements (CFS), Federal Grid Company of Unified Energy System (FSK) and System Operator of the Unified Energy System (SO). The Market Council is mainly responsible for establishing the market access, and various systems and contract templates of the electricity market. ATS is mainly responsible for measuring and integrating various trading information on the wholesale electric power market such as transaction volume and price. CFS is mainly responsible for trading clearing in the electricity market. FSK and SO are primarily responsible for providing transmission and distribution and technical maintenance services in the electricity market.
The management structure of the Russian electricity market is summarized in the following chart:
II. Basic rules of the Russian electricity market
1. Segmentation of the Russian electricity market
Russia currently has a two-tier electricity and capacity market (wholesale and retail). Based on whether it is connected to the Russian unified electricity grid, the entire Russian electricity market is divided into a unified electricity grid area and an independent electricity grid area (gray in the figure below). The wholesale electricity market coexists with the retail electricity market in the unified grid area. However, there is only a retail electricity market in the independent grid area, with the electricity price basically determined by the Federal Anti-Monopoly Service according to the statutory mechanism.
According to the standard of whether a competitive price mechanism exists, the wholesale electricity market in the unified grid area is further divided into price zones and non-price zones (blue in the figure below). The electricity price in non-price zones is generally determined by the Federal Anti-Monopoly Service according to the statutory mechanism while that in price zones is determined by the competitive mechanism except for residential electricity. In addition, due to technical conditions and other reasons, price zones are further divided into a first price zone (green in the figure below) and a second price zone (yellow in the figure below). In general, price zones, non-price zones and the independent electricity grid area are independent of each other. Electricity generally is not allowed to be traded across regions.
According to the Federal Law No. 36-FZ, generators’ participation in the wholesale market or the retail market, mainly depends on their installed capacity. Except for special cases such as unsatisfied technical conditions, the correlative relationship between the installed capacity of a power plant and the electricity market in which it can participate is shown in the following table: 
When Chinese companies invest in the Russian electricity industry, they will give priority to the more familiar generator in most cases. Meanwhile, they generally prefer large-scale projects. The electricity sale model of generators in the retail market is similar to that on the overseas markets that Chinese companies are usually familiar with. The electricity sale model in non-price zones of the wholesale market is relatively simple and clear because the price is subject to greater regulation. What makes Chinese companies confused is probably the electricity trading model in price zones in the wholesale market.
2. Main trading model in price zones
In order to balance the investment attractiveness and competitiveness of the electricity market, the Federal Law No. 36-FZ and the Wholesale Electricity and Capacity Market Rules set up a parallel trading model for capacity and electricity trading. In capacity trading, the purchase volume and pricing mechanism are highly foreseeable and stable for investors, which provides guarantee for the cost recovery and investment returns. In electricity trading, the purchase volume and price are basically determined upon competition.
The Wholesale Electricity and Capacity Market Rules provided 13 models for capacity or electricity trading in price zones. The Market Council accordingly formulated electricity purchase agreements applicable to each trading model, which will be signed by purchasers, generators, the Market Council, ATS, CFS and SO. It should be noted that when a generator and a purchaser sign an electricity purchase agreement for the wholesale market, they do not know the purchaser or the generator as their opposite party (except for the purchase agreements signed by them privately). Instead, it is CFS who signs the agreement with them on behalf of a nonspecific counterpart. Therefore, it is more vivid to say that a generator sells electricity or capacity not to a specific purchaser, but the entire wholesale electricity market.
In general, electricity generation companies sell their capacity and electricity mainly through the following four models:
(1) Sale of capacity by newly-built power plants
When there is incremental electricity demand in the wholesale market, the Market Council and ATS will invite bids for new power plant projects. In recent years, the conventional power plant projects are increasingly shrinking in number of bid invitations and installed capacity. However, bid invitation for renewable energy plant projects is organized on an annual basis. The installed capacity of the bid winning projects will be entirely purchased by the wholesale market. The term of purchase is generally 15 years. The price of capacity of newly-built conventional power plants is determined upon the bid price of the investor while that of renewable energy power plants is calculated according to the formula stipulated in the electricity purchase agreement as adjusted on a monthly basis.
In view of the openness of the Russian electricity market, electricity generation companies who are not awarded a new power plant project or do not participate in the bidding are not necessarily prohibited to build new power plants and then sell electricity to the wholesale market, but the cost recovery and revenue of such investors are not relatively guaranteed.
(2) Bid invitation for annual capacity
Based on the forecast of peak electricity demand in the wholesale market, SO will invite bids for the gap between the peak electricity demand and the electricity supply of the wholesale market for a given year (Year X) 4 years (Year X-4) in advance. Generally, the generator awarded the bid must guarantee to start electricity supply to the connection point on January 1, Year X. The capacity awarded of the generator will be entirely purchased at the price calculated according to the formula stipulated in the electricity purchase agreement as adjusted on a monthly basis.
(3) Sale of power through bidding mechanisms of day-ahead and balancing markets
Based on the hourly volume of electricity proposed to sell by a generator and purchaser’s hourly power demand on the day of actual electricity supply (Day X), the generator and the purchaser submit their respective prices to ATS on the day before Day X (Day X-1). ATS will calculate the nodal price per hour of more than 9,000 nodes on Day X in the wholesale market as the unified clearing price based on the prices of both sides, the forecast of supply and demand, grid operation and loss in transmission. However, the actual amount of power supply and demand on Day X always varies from the data obtained on Day X-1. Therefore, SO will organize the generator and the purchaser every three hours on Day X to re-quote based on the three-hour supply and demand volume predicted by SO. The generator and the purchaser must sell/purchase electricity through the balancing market according to the coordination of SO.
(4) Negotiation on and signing of electricity purchase agreements directly with large electricity users
According to the Wholesale Electricity and Capacity Market Rules, generators can directly negotiate on and sign electricity purchase agreement with purchasers in the wholesale market (the total electricity demand is greater than 20MW and the electricity demand per connection point is greater than 750KW, mainly for large industrial users and electricity supply companies in the retail electricity market). The electricity purchase agreement directly signed by generators and purchasers shall include the terms with respect to the date, term and price of electricity supply as required by the Wholesale Electricity and Capacity Market Rules and shall be filed the Market Council.
In addition to the above four major trading models, the capacity or electricity procurement methods provided under the Wholesale Electricity and Capacity Market Rules also include procurement with compensation for transmission losses and procurement guaranteed by unified electricity grid. However, the capacity or electricity sold through such methods in practice accounts for only a limited proportion in all of its sales.
3. Main contracts in the wholesale market
Before a generator enters the wholesale market, it needs to meet the technical standards for grid connection and sign more than 70 model agreements developed by the Market Council, covering market qualifications, electricity sales, financial settlement, transmission and distribution services, etc.
In addition, generators also need to complete the procedures for bank account opening and registration of market entity qualification. Generally speaking, it takes nearly half a year to complete all such work before accessing to the wholesale market.
From the perspective of generators, some typical agreements of the above-mentioned over 70 model agreements include:
III. Conclusion
Russia's electricity market maintains a relatively high level in maturity, competitiveness and complexity and its operation is more similar to those of developed countries such as European countries and the United States. It also provides reference for the electricity system reform that will be unveiled in China.
With respect to investments in Russian power sector, in accordance with the Federal Law N57-FZ "Procedures for Foreign Investments in the Business Entities of Strategic Importance for Russian National Defence and State Security" dated April 29, 2008, other than certain special industries, such as nuclear electricity and electricity transmission, there are not much restrictions on foreign investment in the electricity industry. However, on the Russian electricity market, in particular the zonal pricing for the wholesale market, over 70 wholesale electricity market agreements even in Chinese will certainly impose extreme pressure on any enterprise and great challenges on their in-house teams and external consultants. Therefore, in addition to active following-up and seizing of commercial opportunities, it may be a priority for potential Chinese investors in Russia electric power industry to set up a high-quality team and take advantage of external resources to pay close attention to and make a study of the Russian electricity market.
