Sales on regular basis

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«Expert-Volga» magazine,
May 14, 2007

Volga TGC has «inherited» from Samaraenergo the department of dispatching and sales that had specialized in trading in open sector of electric power wholesale market. The department was extended and transformed into the directorate, currently it is one of the major structures of TGC. It was this directorate that helped the company to get used to the new rules of the wholesale market operation and to secure net profit of 440 million rubles in 2006.

Reformation of the Russian power system led to occurrence of so many new lines and spheres of activity that educational institutions could have introduced new subjects and branches of study. The territorial generation companies now experience acute shortage of specialists that can represent their interests on the wholesale power market. The deficiency was caused by the occurrence of new wholesale market of electric power and energy (NWEPM), that has changed the principle of power products sales and purchase.

Formerly the power brokers were on the staff of every TGC, that made it possible to earn additionally – in the free trade sector (FTS) of the Federal Wholesale Electric Power Market (FWEPM). Currently trading for prices, not regulated by the government, where accurate forecast is so important (requests are lodged for the next day), can no more be considered a separate market sector.

In this situations the advantage lies with the companies that started developing FTS before the NWEPM appeared. Samara power industry is the example of this approach. The special group for operation in the free trade sector (department of dispatching and sales) was created as early as 2002.

In his interview to «Expert Volga» magazine Andrey Bukhtiyarov, Volga TGC Director for wholesale market, described what has changed on the electric power wholesale market, how much one can earn and lose there now.

Flexibility check

— Last year Volga TGC realized more than 440 million rubles net profit. It is said that you managed to achieve this result mostly due to operation on electric power wholesale market. Is this correct?

— This is correct. From January 2006, when we have started operating activity and until September, when NWEPM has been introduced, the stations were not paid 15 per cent of nominally-fixed costs (power). That was the rule. The only way to set off these losses was to work on the electric power wholesale market. I am talking of the «old» market, which included the regulated sector, where we are obliged to supply minimum 85 per cent of the preliminary dispatching schedule, and the free trade sector, where we were allowed to sell maximum 15 per cent of our electric power for open price. Introduction of NWEPM has significantly changed our market strategy. Compared to FTS it became more flexible, mobile, interesting and complex at the same time. Price ranges and their volatility haму changed. And we are well prepared for this market.

— In other words, those 440 million were being earned first on the free trade sector and after September 1 – on the whole market?

— Yes, but it is not correct to separate the new wholesale market this way – into regulated sector and free trade sector. We should better forget about free trade sector. It does not properly correlate with the NWEPM operational principles.

— Nevertheless, the volume of trade for open price is still limited on the wholesale market.

— You are absolutely right. In compliance with the government regulation this share will increase gradually, by about 5 per cent twice a year. At NWEPM the system of regulated agreements between the buyers and sellers of the electric power is being introduced instead of the regulated sector and free trade sector. The agreement is called «regulated» because the prices of the agreement are determined by the Federal Tariffs Service (FTS). In the course of liberalization these agreements will be reduced to zero.

The major difference of NWEPM from the «old» market is that now the participants apply for full production and consumption volumes «a day in advance», and the results of tender for each hour of a day are the basis of UES of Russia production and consumption modes planning by the system operator. As a matter of fact, the most efficient and cost-effective stations are loaded.

Three basic advantages

— The Samara power engineers were among the first to start working in the free trade sector. Formerly, you were mainly the buyers on the wholesale market - Samara power system is scarce, the missing power has to be outsourced. But when FTS appeared Samaraenergo has mastered new activity – the brokerage. You speculated in price difference and sold the purchased energy not only to your customers but to the third parties as well. The trading took place not on a real time basis, you had to take risks but, nevertheless, your company was one of the most successful FTS speculators. How much did you use to earn on the free market then?

— From 350 to 450 million rubles a year on average.

— Is it little or much?

— It was a good amount for the company like Samaraenergo before it has been split by activities.

— How much are you going to earn this year?

— Not less than in 2006, I believe. But we have to understand that the market is changing, it is getting more difficult to operate on it. In view of the current liberalization the company should have serious competitive advantages.

— What are they?

— First of all I am speaking of people, specialists working on this market. They have to monitor the process constantly, to optimize the mode and make numerous calculations. And a lot here depends on their knowledge, ability to solve the company’s strategic tasks on the market in relation to each hour of the next day. The next important competitive advantage is associated with the expenses we bear in electricity production and the third one is availability of fuel for the generating facilities.

TPP against TPP

— How does your company look in comparison with other TGCs in terms of earnings from wholesale market operations? How much do your colleagues earn?

— I think we look well – according to the data from the site of the non-commercial partnership «ATS» (NP Market Administrator that arranges and maintains operations and interrelation of the electric power market participants and infrastructure. – editor’s note). However, the values of sales and purchase for each generating object supply benchmark are confidential. It is prohibited to disclose this information in order to avoid price manipulations. This information is only available for NP ATS, the producer and the Federal Anti-monopoly Service that strictly controls all the parameters. It carries out investigation every time it elicits the facts of overpricing.

— How often do they elicit such facts?

— I can only recollect one occasion. The prices were very high this winter in peak load period and FAS carried out investigation of that matter.

— According to your forecast will the prices for electric power grow this year?

— It is difficult to give the exact figures now. They will grow but moderately.

— Do you experience any competition on the electric power market? On whose side?

— There is a competition out of doubt. Our major competitors are GRES power plants and TPPs of other territorial generation companies.

— What do you expect from introduction of other segments of NWEPM?

— We are first of all interested in the capacities market. This segment, being in fact supportive, opens up new possibilities. It is possible to work without it, according to the current scheme. But it is introduced in order to show the real operating capacities of this or that company that trades at NWEPM. For example, if part of the company’s capacities is in stand-by status or under repairs, they should not be paid for at the wholesale market. The new segment will make the pricing more transparent and increase the income of the market participants. Moreover, it will stimulate the investment activities, because it will give the understanding of what facilities shall be constructed or updated.

Free from stereotypes

— You have mentioned that one of the basic competitive advantages is availability of good specialists that help the company to be successful on the market. You have created the separate department for trading at the wholesale market in 2002. What did it look like then?

— In the very beginning of the branch reforming the management of Samaraenergo decided to create a small group that would have presented the company’s interests on the electric power market. This way the department of dispatching and sales appeared. Originally 10 persons worked there. Not many power companies had that kind of service.

— Where did you find the specialists? After all, free market operation was unknown for you, just as for other power engineers; there were no trained specialists in this sphere.

— Some of the specialists came from the Central Dispatching Service that had also undergone reforming. But most part of the team consisted of the employees of our stations.

— What was the principle of the team formation?

— We needed people free from stereotypes, that existed in the old Russian power industry, people who had different way of thinking. And we found such people. The new department first studied all the normative acts, started developing forecasting programs. It happened sometimes that we measured illumination with photographic exposure meter. Besides, we have purchased the special program complex for data analysis and situations simulation. The results were good – accuracy of our forecast was 98,5 per cent, so the company avoided serious penalties for deviations.

All that came in useful when Volga TGC started operating as electric power producer and supplier to the wholesale market.

— What is this service like now? Has the staff grown?

— It is not a department now, but a directorate. Along with me 42 specialists work here. As I have already mentioned, the new conditions require forecasts for each hour of the following day, and this task is much more difficult. For example there are periods when electric power has a zero price on the market. And these situations can also be forecasted and we try to use it actively.

Actually, work of the company consists of three basic stages. First of all the situation is monitored (the results of previous day trade, current status of equipment, its load, fuel availability, weather conditions, forecast of demand at each delivery point, etc. are analyzed) and requests for electric power delivery for the next day are created. This is followed by the period of delivery on results of the auction sale, when the station operation mode is optimized with regard to fuel availability. All deviations from planned figures of actual electric power delivery volume and its purchase for auxiliary consumption are followed with penalties.

— Are the penalties high?

— It depends on deviations. The penalty can amount to 100 thousand rubles and to several million as well.

— Mistakes are expensive. The members of the «forecast group» are probably the most highly paid specialists of the company…

— I would rather not give the exact figures. I can only say that their salaries are not lower than the salaries of other specialists of the company. — Were your specialists ever hired away to other TGCs for example?

— Of course they were. The similar services have already been created in other TGCs and OGCs (wholesale generation companies – editor’s note), that is why the demand for such specialists is constantly growing. To my mind they will be trained in the specialized educational institutions. At least, it looks like this.