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Journal number 3 ∘ Michael Becker Almas Zhakupov Anatoly Lazebnik Maryash Zhakupova Kakhaber Gabelashvili


Expanded Summary

This paper contains descriptions of various approaches for providing resource adequacy, in particular introduction in operation of the wholesale power markets in addition to electric energy markets yet another market – installed (rated) capacity markets. Paper also contains description of particular aspects of the future Kazakhstan’s installed (rated) capacity market to the extent these aspects are laid out in the normative documents that are available to date. Some of these aspects are compared to approaches used in other world power markets including capacity market of Russian Federation.

Key words: competitive energy market, local capacity markets, elastic capacity demand curves, UCAP model.

From January 2019 in Kazakhstan, a market for the provision of services to ensure the reliability of generating capacities to load bearing began to function, which in fact will be the market for available generating capacities.

In regulated electricity, the main responsibility for the reliability of power supply fell on vertically integrated companies (VIC). At the VIC, reliability issues were considered as an integral part of centralized energy system development planning. The number of capacities installed in the power system should exceed consumer demand during hours of maximum load for a certain amount, called the margin of reserve. The question is how to provide market participants with incentives to maintain margin of reserves in the volumes necessary to ensure long-term reliability.

With the separation of the forms of activity of vertically integrated companies by functional features and the transition to a competitive market, the situation has radically changed. The transition to a market-based electric power industry required major changes in approaches to the problem of ensuring the reliability of power supply.

In the competitive market model, it is necessary to provide mechanisms that create sufficient incentives for generating companies in order to maintain capacity at a level that provides the required level of “balance” reliability.

If you rely only on the electricity market, where the sole good is electricity, then in order to ensure a sufficient number of installed (available) capacities for “balance” reliability, electricity prices during peak hours should be very high, otherwise generating units, the insignificant amount of time used for electricity production, will not be able to provide a level of income that allows to repay their production costs and necessary profits.

According to estimates, to cover the full costs (including reimbursement of capital costs and return on capital), the cost of electricity produced by the most expensive peak capacities (the first 500 hours on the schedule) should exceed their fuel cost component by more than $ 500 / MWh, which leads to very high electricity prices. Therefore, the traditional pricing model in commodity markets using a single price for the manufactured product, which would at the same time provide reliability requirements in many power systems, is not applicable.

In order to stimulate investments in the competitive electricity market in generating capacities sufficient to provide the necessary level of reliability, special measures are needed. These measures should provide a significant amount of installed capacity resources with an additional source of income, otherwise these resources will be forced to leave the market and accelerate the time of the installed (available) capacity shortage. Such an additional source of income is the markets for installed (available) capacity, implying imposing capacity obligations on enterprises serving the load and paying generators for supported available capacity in accordance with these obligations.

The mechanism of markets for installed (available) capacity is based on the fact that the regulatory body (together with the system operator) determines the total volume of generating capacities that must be purchased from generating companies, which is necessary to ensure reliability, and the same total volume of capacity must be bought by consumers (buyers) in the wholesale market). At the same time, liabilities are established for each wholesale consumer to purchase a share of this capacity, which is proportional to the maximum of its consumption. This ensures the achievement of the required level of reliability, and the costs associated with ensuring this level are distributed among consumers. In this case, the price of capacity is determined by the capacity market, where the necessary volumes of capacity are sold and bought.

As a rule, most of the capacity trade is done through bilateral contracts between generating companies and capacity buyers (wholesale consumers). In addition, capacity can be bought and sold at auctions for which sellers and buyers submit price bids. Such a mechanism is used, in particular, in the USA in the electricity markets of New York, New England, PJM, as well as in the Russian Federation.

A properly designed capacity market should enable the investor in generating capacities to earn more during periods of a shortage of generating capacities than its fixed costs. Naturally, in periods of excess generating capacities, investors cannot rely on full reimbursement of their fixed costs. During these periods, investments are usually not made and prices gradually rise to the level at which they approach the level of fixed costs. In a perfectly organized market, competition from new construction capacities and market forces should cause the average market price to fluctuate around a fixed cost recovery point. It is advisable that capacities under construction be able to compete with existing capacities.

The introduction into functioning practice the competitive wholesale market of installed (available) capacity can be considered a positive phenomenon in the process of developing market relations in the electric power sector of Kazakhstan. The fact that the current “marginal” rates will be converted from single-rate to double-rate can give start to the development of competition in the electricity market. At the same time, the introduction of a capacity market does not exempt the management and enterprises of the energy sector of Kazakhstan from solving the main task - the formation of a concept for the further development of market relations in the republic’s electric energy sector. The formation of such a comprehensive concept will allow for a balanced interaction of electricity and capacity markets, organize a market for auxiliary system services and provide clear price signals for investors in the electrical energy industry.