OREANDA-NEWS. February 26, 2010. Prime Minister Vladimir Putin has signed a decree stipulating the rules for the long-term capacity market at a meeting about investment in Russia’s electricity sector. While there are no details yet, we believe the approval of the long-term model of capacity market is a positive move and an important milestone for gencos as it might improve profitability. We think that OGK 2 might be one of the leading beneficiaries of the capacity market launch, reported the press-centre of VTB Capital.

Details on the decree have yet to be revealed and are important for the conclusion. While we do not know the final parameters, according to the latest statements the capacity market would be divided into two parts: investment obligations and competitive market for all other capacity; average 2011-2013 prices in competitive markets will be at RUB 151/kW-mo and RUB 182/kW-mo for European Russia and Siberia, respectively (slightly above current average cost plus tariff), which would be brought to the level of new capacity by 2021. We also emphasise that the concept of marginal pricing for existing thermal assets has a significant chance of being passed and should this concept be adopted, the most efficient thermal generators with the lowest capacity tariffs (OGK 2,4 and TGK 1) would win.

On the negative side, Vladimir Putin criticised gencos for not fulfilling their investment obligations. He personally mentioned OGK 3, TGK 2, 4 and the KES –owned gencos (TGK 5,6,7,9). He also said only those gencos fulfilling their obligations would be allowed to benefit from the free market pricing (in capacity and electricity markets). Among those that meet obligations Putin mentioned Gazprom (OGK 2,6, TGK 1, Mosenergo), Inter RAO, Russian Railways (TGK 14), E.On (OGK 4), Enel (OGK 5), Fortum (TGK 10) and LUKOIL (TGK 8).

The government might hammer out heat business regulation. Putin also stated that the ministries were assigned to prepare heat market regulation. We believe this might trigger a further move to the more efficient long-term regulation of the heat business. This also goes in line with Energy Efficiency Law to improve regulation by 2012.