There is a lull in the domestic electricity market

4 august 2016

That’s the conclusion that experts of the Analytical Center make in the new issue of their energy bulletin. The economic downturn in Russia, just like most crises, has completely changed the direction of investment activities from expanding capacity to cutting costs. And that’s exactly what we are seeing in our electric power sector, according to the experts, who go on to predict that after new capacity goes online in 2016-2017, further activity in the industry will be focused on modernizing existing capacity. The experts are confident that an increase in energy efficiency will allow the available power stations and grids to meet the demand for electricity. A glut of capacity will remain, allowing the industry to focus on cutting production and delivery costs as well as consumption per unit of output.

At the moment, there is a lull in the domestic electricity market. Companies’ strategies are mostly geared towards cutting costs rather than expanding capacity, since there is much spare capacity thanks to the expansion boom of previous years. The majority of European companies that Russia is interested in both as consumers of Russian energy resources and suppliers of new technologies don’t have plans for any large scale capacity expansion in the near future, with the emphasis being shifted towards renewable energy, a trend that continues to create risks for the Russian natural gas suppliers.

As work continues on updating the Russian Energy Strategy through 2035 and the General Scheme for the Siting of Electric Power Facilities through 2035, energy companies do not get enough signals about the general directions for the long-term development of the industry, the bulletin notes. Taking into account the existing glut of capacity and the unsolved problems the industry is facing (low demand, lack of certainty about how the day-ahead wholesale electricity and capacity market model and the retail electricity market are going to be developing further, delayed payment of bills by the public and forced generation), energy companies are not making any plans for large-scale expansion.

However, some capacity expansion must happen, because capacity supply contracts for thermal and nuclear power plants still remain in force and according to SO UES data, a net increase of 5GW in TPP capacity and 4 GW in nuclear capacity is expected to happen by 2020. There are no plans for building any new power plant capacity outside the existing capacity supply contracts, however, while it is estimated that the industry is going to have a glut of capacity for at least 6 more years. In this situation, companies are focusing more and more on improving the efficiency of their existing assets and on cutting costs. Furthermore, the strategies of many companies note that the insufficient predictability and imperfections of the electricity market (both wholesale and retail) poses serious challenges to the industry. And as for the development of renewable energy sources and new technologies, including energy-efficient ones, it hasn’t become a common trend for Russian companies and few of them prioritize it, unlike their European counterparts. Experts put it down to the existing structure of power generation capacity and the current level of infrastructure development as well as the fact that Russia has plenty of supplies of traditional energy sources.

The bulletin also touches upon such topics as the wholesale market of petroleum products in Russia, the impact of Brexit on investments in energy, the situation in the natural gas market and how it is developing in light of rising imports of NG from China, the continued negative price projections for coal around the world and others.

For more information, please see the bulletin “Energy Sector: Time to Cut Costs”.

For other issues of the energy bulletin, see the Publications section.