Electricity regulation in the Russian Federation: overview
A Q&A guide to electricity regulation in the Russian Federation.
The Q&A gives a high level overview of the domestic electricity market, including domestic electricity companies, electricity generation and renewable energy, transmission, distribution, supply and tax issues. It covers the regulatory structure; foreign ownership; import of electricity; authorisation and operating requirements; trading between generators and suppliers; rates and conditions of sale and proposals for reform.
To compare answers across multiple jurisdictions, visit the energy and natural resources Electricity regulation Country Q&A tool.
This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.
The Russian electricity sector consists of generation (divided into wholesale and retail markets), transmission and distribution. The majority of generation facilities in Russia are privately owned and primarily operate on natural gas and associated petroleum gas, with coal-fired generation forming a significantly smaller percentage of facilities. The nuclear and hydroelectric power facilities, as well as the major transmission facilities, are controlled by the state.
The current structure of the Russian power sector is a result of reforms that began in 2003. Before these reforms, all the facilities operating in the power sector were part of a fully integrated state monopoly, RAO UES, and prices in the power sector were fully regulated by the state. In 2008, RAO UES was unbundled into over 20 independent power companies with diversified ownership, which was a key element of the reforms and triggered the beginning of the formation of a competitive market.
The prices on the Russian power market have been gradually liberalised in recent years. In 2013 about 80% of electric power was traded at non-regulated market prices, but that figure should grow in 2014 as additional production and consumer markets are moved to unregulated pricing models. While the reforms envisage that all electric power will be traded at market prices in the future, the public is likely to continue to receive electric power at state-regulated prices at least for the foreseeable future. In addition, it is envisaged that the competitive market will not extend to certain geographically isolated regions of Russia (such as the Russian Far East, Kaliningrad and Arkhangelsk regions).
Paradoxically, ten years after the initiation of the reforms that ultimately unbundled the state power monopoly, there is a trend towards reconsolidation of transmission and distribution assets. At the end of 2012, President Putin signed an order under which large transmission and distribution assets are to be reconsolidated and controlled by the state. The order provides for establishment of an open joint stock company "Russian Grids" to acquire key assets of the Federal Grid Company and Holding IDGC.
The Ministry of Energy is in the process of liberalising the price for electricity generated by hydropower plants in the so-called second pricing zone (that is, Siberia). Under Government Resolution No. 374, dated 28 April 2014, Siberian hydropower plants have been able to sell 65% of their capacity at market prices since 1 May 2014. That is to increase to 80% by 2016 and 100% by 2017. Previously, all hydropower capacity in Siberia was regulated by the state. The government, however, is cautious about sharp spikes resulting from this liberalisation. If prices grow faster than official price-growth projections, hydropower producers will have to compensate the market for such excessive increases.
While the government is still officially committed to further liberalisation, concerns about inflation have led the government to pause further public price deregulation for the time being. In October 2013, the Energy Minister announced that further market reforms would not take place until the heat energy sector was reformed, which is slated to take place in the second half of 2014.
The regulatory framework for the electricity market in Russia consists of a significant number of legislative acts. The primary regulation is contained in the following laws:
Federal law No. 35-FZ "On Electric Power", dated 26 March 2003 (Electric Power Law), which provides the general framework for theÂ regulation of the electricity market in Russia.
Federal law No. 36-FZ "On Specifics of Functioning of the Electric Power in the Transitional Period and Amending Certain Legislative Acts of the Russian Federationâ¦", dated 26 March 2003, which outlines how the power market should function during the power sector's transition from state control to market regulation.
The Russian power market is divided into two separate levels, wholesale and retail.
The wholesale market is primarily intended for the trade in power between generating companies and suppliers, as well as certain large end-consumers. The participants in the wholesale market also trade in capacity (which is separate from trading in power). The basic regulation for the wholesale power market is governed by Government Resolution No. 1172 "On Approval of the Rules for the Wholesale Market of Electric Power and Capacity and on Amending Certain Acts of the Government" dated 27 December 2010, which provides the rules and procedures for the functioning of the wholesale power and capacity market.
On the retail market, power is sold by suppliers to consumers (both industrial and residential). The main regulation for the retail market is provided by Government Resolution No. 442 "On Functioning of Retail Markets for Electric Power, Full and (or) Partial Limitation of Electric Power Consumption Regime" dated 4 May 2012.
Transmission operations are primarily governed by Government Resolution No. 861 "On Approval of the Rules for Non-discriminatory Access to the Services on Transmission of Electric Power", dated 27 December 2004, which provides the procedure for obtaining access to transmission facilities and services.
Price formation, to the extent it is state-regulated, is governed by Government Resolution No. 109 "On Determination of Prices for Electric and Heat Power in the Russian Federation", dated 26 February 2004.
There are also numerous regulations that apply to other aspects of the power market, such as nuclear power and hydropower, energy efficiency, and so on. There are also several standard forms of agreements that have been prepared by the infrastructure bodies and are widely used in the power market and that, in many cases, are mandatory.
The Ministry of Energy is the regulatory authority primarily responsible for the Russian electric power sector. The Ministry of Energy is responsible for implementation of state policy in the power sector and the elaboration of regulatory acts for that purpose.
To the extent that prices on the power market remain controlled by the state (for example, tariffs for transmission services or residential tariffs), the Federal Tariff Service is responsible for establishment of these prices.
The Federal Antimonopoly Service supervises compliance with anti-monopoly regulations applicable to the electric power market (for example, non-discriminatory access to transmission services, avoidance of monopolistic prices, and so on). The Federal Antimonopoly Service can issue mandatory orders or penalties to companies with respect to violations of anti-monopoly regulations on the power market.
The Federal Service for Ecological, Technological and Nuclear Supervision (Rostekhnadzor) is the regulatory body responsible for implementation of and monitoring compliance with the health, safety and environment requirements.
See box, The regulatory authorities.
While the authorities described above are responsible for the overall regulation of the Russian power market, the physical operation of the power market is administered by the following market infrastructure bodies:
Market council. This is a non-commercial partnership of wholesale market participants that supervises the market and prepares the standard forms of documents and agreements used on the market. The market council is governed by a supervisory board that comprises representatives of market participants, the Russian Government and other market infrastructure bodies.
System operator. The system operator centralised dispatching administration was established as an open joint-stock company to oversee the dispatch of electricity and the stable functioning of the electricity transmission system. The system operator is currently 100% state-owned.
Trading system administrator. The trading system administrator is a non-profit company established as a fully owned subsidiary of the market council. The trading system administrator administers the wholesale power and capacity market and facilitates trades on standardised terms by bringing together sellers and purchasers.
Centre for financial settlements. The centre for financial settlements is a fully owned subsidiary of trading system administrator and acts as an intermediary for payments on the wholesale market.
The main players on the generation market are the companies organised as a result of the unbundling of the fully integrated state monopoly RAO UES in the course of reform of the power sector initiated in 2003.
The largest generation companies are:
OJSC The First Generation Company of the Wholesale Electricity Market (OGK-1).
OJSC The Third Generation Company of the Wholesale Electricity Market (WGC-3).
OJSC Territorial Generating Company Number One (TGK-1).
OJSC Mosenergo (TGK-3).
OOO Gazprom Energoholding.
The largest transmission company is the OJSC Federal Grid Company of Unified Energy System (Federal Grid Company).
The largest distribution company is the OJSC Interregional Distribution Grid Companies Holding (Holding IDGC).
The largest supply companies are:
OJSC First Supply Company.
OJSC St Petersburg Supply Company.
OJSC EK Vostok.
It is prohibited for a single company to combine generation, transmission and dispatch activities.
There are no direct restrictions on foreign ownership of electricity companies in Russia. However, certain restrictions may apply under:
The Strategic Investment Law (as defined below).
The regulations applicable to civil nuclear industry.
The Federal Law "On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for the National Defence and Security of the Russian Federation", dated 7 May 2008 (Strategic Investment Law) provides that acquisition by foreign investors of shares in companies of strategic importance is subject to state approval. Companies of strategic importance include, for example, companies with the status of natural monopolies or that use nuclear materials, and so on. Therefore, under certain circumstances electricity companies can be deemed to be of strategic importance to the state and therefore their acquisition by a foreign investor would be subject to state approval.
The Strategic Investment Law requires a foreign investor to obtain prior consent from the Governmental Commission, chaired by the Russian prime minister, if the foreign investor will acquire control over a strategic company as defined in the law. Such a transaction made without obtaining the required prior consent is deemed void.
In addition, special rules are imposed on transactions involving legal entities that form part of the Russian civil nuclear industry. The alienation of shares to a third party of a company included on the official list of Russian organisations authorised to own nuclear materials must be approved by the President of the Russian Federation. This rule does not extend to transactions between the State Corporation for Nuclear Energy (Rosatom) or Atomenergoprom (a company established in order to consolidate the assets of the civilian part of the Russian nuclear industry), and their respective affiliates, for the transfer of shares among the companies of the Rosatom group. However, the consent of Rosatom is still required for such transactions. Any transaction made without obtaining the prior approval of the president or Rosatom (as applicable) is void.
Import of electricity
The Inter RAO holding has a monopoly on the import of electric power to Russia. As reported by Inter RAO, in 2010 the amount of electric power imported to Russia equalled 17.5% of total electricity consumed within the country in that year. About 90% of all imported electricity originates from Kazakhstan and Georgia, the rest comes from other CIS countries.
Interconnection issues are regulated by bilateral agreements on parallel work of electric energy systems concluded between the market infrastructure bodies of Russia and respective country (for example, the Agreement on Parallel Work of Electric Energy Systems of the Republic of Kazakhstan and the Russian Federation entered into among the Federal Grid Company, the System Operator and Kazakhstan Electricity Grid Operating Company on 23 April 2010).
Electricity generation and renewable energy
Sources of electricity generation
Coal and gas remain the main fuels used for fossil fuel generation of electric power in Russia. Gas-fired generation represents approximately 47% of all power generation in the country, while coal accounts for 18%.
Nuclear power represents approximately 16% of all power generated in Russia.
Currently, less than 1% of electricity generated in Russia comes from renewable energy sources (excluding hydropower plants with capacity in excess of 30 megawatts). The breakdown of renewable energy generated in Russia is different from that in many other countries. Of the total of electricity produced in Russia from renewable sources:
Approximately 60% came from biomass.
Approximately 25% came from small-scale hydropower.
The remaining portion came from solar and wind power.
Additionally, large-scale hydropower plants accounted for approximately 20% of all electricity generation in the country.
Russia has been a relative late-comer in terms of adopting government policies and/or incentives to encourage the use of renewable energy. This was acknowledged by the Russian government in the strategy for development of renewable energy by 2020 adopted by Resolution of the Government No. 1-r "On Main Directions of State Policy in the Sphere of Increase of Energy Efficiency of Electric Power Generated On the Basis of Renewable Energy Sources for the Period Until 2020" dated 8 January 2009 (Strategy for Development of Renewable Energy).
The development of the measures to support and encourage the use of renewable energy is one of the main goals identified in the Strategy for Development of Renewably Energy. Although there has not been a lot of progress in this respect, certain improvements have been seen in the last couple of years. For example, in 2010 the government adopted regulations for the reimbursement of owners of generating facilities operating renewable energy sources for costs related to interconnection to the unified power grid system (Resolution of the Government No. 850 dated 20 October 2010).
Furthermore, in 2013 the government launched a programme that seeks to boost the development of renewable energy projects (Decree No. 449 dated 28 May 2013). Unlike most other incentive schemes around the globe, the Russian plan promotes renewables through the capacity market. In annual competitive bidding, selected projects are entitled to sign capacity supply contracts, which ensures the winning companies a certain price for providing the stipulated amount of capacity to the market and a guaranteed return on investment.
Renewable energy targets
The Strategy for Development of Renewable Energy sets out the following targets (out of total of energy produced) for the use of renewable energy sources in Russia:
These targets are not legally binding and there is no punishment for falling behind them (which in fact has already happened). Additionally, it appears the government intends to revise the targets downward, although that has yet to happen officially. The targets have been established for the state rather than for companies. Under the Strategy for Development of Renewable Energy, in order to reach the targets the state must develop and implement the necessary policies and incentives.
The main obstacles to the development of renewable energy in Russia, according to the Strategy for Development of Renewable Energy, are:
The absence of relevant legislation regulating (and, ideally, stimulating) the use of renewable energy.
The absence of state or regional programmes of support and/or benefits for companies using renewable energy.
The lack of required infrastructure, technologies and experienced workforce in the sphere of renewable energy.
The low cost of traditional sources of energy in Russia, which results in the use of renewable energy being non-commercial.
Together, these obstacles have resulted in projects based on the use of renewable energy being economically uncompetitive compared to traditional sources of energy.
The government has repeatedly expressed its intention to continue to increase Russia's civil nuclear capacity.
There are currently eight nuclear power projects under construction. As reported by Rosatom, in the next 20 years at least 14 new nuclear power stations with total value over US$60 billion are planned to be constructed.
Authorisation and operating requirements
Article 42 of the Electric Power Law provides that the project documentation for construction of electric power facilities is subject to state expert review, and that the construction process is subject to state construction supervision to ensure compliance with technical, safety and ecological requirements established for electric power facilities. These requirements equally apply to generation, transmission and distribution facilities except that the expert review and supervision process are based on different specific technical, safety and ecological norms.
The principal authorisation required to operate electricity generation plants relates to health, safety and environmental regulations. The system for licensing electricity generation has been gradually abolished over the past few years.
The health, safety and environmental requirements applicable to the operation of electricity facilities are those generally applicable to the operation of dangerous industrial facilities and include, among other things, the requirements to:
Obtain certain special permits and licences (including a licence for the operation of hazardous industrial plant and equipment).
Provide for the certification of equipment and training of specialists.
Comply with industry health, safety and environment requirements on a day-to-day basis.
Avoid exceeding established levels of pollution, and to pay for the emission of polluting substances into the environment.
Conclude and maintain insurance agreements and agreements with certain specialised companies (for example, for utilisation of hazardous wastes, unless the company utilises them itself on the basis of a licence).
The connection of generation facilities to the transmission grid is conducted based on an agreement for "technological connection" concluded between the owner of generation facilities and the owner of the transmission grid (the Federal Grid Company or a local electric grid company). The agreement for technological connection details the requirements that the facilities being connected to the grid must comply with, and specifies the works to be performed by each party for the purposes of interconnection. On completion of the interconnection, the parties to the agreement sign a "separation balance" whereby they specify the ownership of the facilities constructed for the purposes of interconnection.
Authorisation and operating requirements
The authorisations to construct electricity transmission networks are substantially the same as those required to construct generation facilities. See Question 10.
Under Russian law, operation of transmission networks is an activity qualifying as "natural monopoly". Companies that provide transmission services must register with the Federal Antimonopoly Service and comply with requirements equal to those applicable to companies having a dominant position in the market. Those requirements include, among other things:
A prohibition on establishing monopolistically high or low prices.
An obligation to provide access to the transmission services on a non-discriminatory basis.
Russian law establishes a general prohibition on a company combining the generation of power with transmission and distribution. For this reason, generating companies that own transmission (or distribution) facilities are required to rent these facilities to local transmission and distribution companies.
In addition, high-voltage transmission and distribution facilities that meet certain criteria form part of the Unified National Electrical Grid (UNEG). The UNEG is the collective name for the transmission and distribution facilities that are of particular importance for power transmission and distribution in Russia. The UNEG is managed by the Federal Grid Company, an open-joint stock company controlled by the state. The law does not require the UNEG facilities to be fully owned by the Federal Grid Company. However, companies that own transmission or distribution facilities that qualify as forming part of the UNEG must lease them to the Federal Grid Company and accept its management with respect to these facilities.
The payment for transmission and distribution services is established by the Federal Tariffs Service and does not form part of the envisaged transition to market prices.
In 2011, all tariff decisions switched to RAB regulation and are now based in the long-term (three to five years). However, for the first several years the tariffs are to be established at depressed rates of return in order to provide for the sustainable growth of tariffs. As part of the tariff for transmission and distribution, the users of services also pay for normative levels of line losses.
Authorisation and operating requirements
The authorisations to construct electricity transmission networks are substantially the same as those required to construct generation facilities. See Question 10.
In addition to the health, safety and environmental requirements (see Question 12), there are requirements applicable to local distribution companies that originate from the system of guaranteeing suppliers. To ensure that every consumer has access to power, the regulatory regime provides for a network of guaranteeing suppliers. A guaranteeing supplier has an obligation to enter into a supply agreement with any customer within its territory. The initial guaranteeing suppliers were appointed by default from among the successors of RAO UES in each particular region. Currently, the guaranteeing suppliers are appointed under an open tender organised by local authorities once every three years.
Consumers are free to choose their supplier on the retail market and to change their previously selected supplier at any time. In May 2012, amendments were made to the regulation of the retail power market that significantly simplified the procedure for changing supplier. Among other things, consumers are no longer required to pay a sales mark-up to the guaranteeing supplier, if the change takes place after providing a nine months' notice to the supplier. When a retail customer changes its supplier, the new supplier is entitled to buy power from the former supplier to meet the consumer's demand on a transitional basis.
The regulation of rates and conditions for the distribution of electricity is substantially the same as that for transmission. See Question 16.
Authorisation and operating requirements
Trading between generators and suppliers
There are four principal mechanisms by which power can be traded on the wholesale market:
Regulated bilateral agreements.
Unregulated bilateral agreements.
The day-ahead market.
The balancing market.
The wholesale market is open to generators, suppliers satisfying applicable minimum requirements, and large end-consumers. In order to enter the wholesale market an applicant must:
Demonstrate that the volume of planned electricity generation or consumption is high enough to be eligible for the wholesale market.
Enter into an agreement on accession to the trading system of the wholesale market and complete certain conditions in the agreement (the conditions usually include connecting to the closest transmission facilities and installing special metering equipment).
Enter into a number of other agreements required for the functioning of the wholesale market, including agreements for transmission and dispatch services.
Become a member of the market council.
The main participants in the retail market are consumers of electricity, suppliers, distribution companies and generators that do not have the right to participate on the wholesale market, because the volume of their power generation or consumption is not high enough to be eligible for the wholesale power market.
Rates and conditions of sale
The retail market generally operates based on the translation of prices from the wholesale market to the retail market, meaning that power price deregulation on the retail market proceeds in tandem with that on the wholesale market. The residential tariffs, however, will continue to be set by the Federal Tariffs Service for the foreseeable future.
Regulated price agreements. While the Russian power market is gradually transitioning from regulated power tariffs to free-market prices, a certain amount of power (currently about 20%) continues to be sold at regulated prices. The regulated agreements are viewed by the Russian authorities as a temporary measure to ensure a smooth transition to free-market pricing.
The entry into regulated agreements for a defined volume of power is compulsory for wholesale market participants. The regulated tariffs are set for each generating company by the Federal Tariffs Service. The term of regulated agreements varies from one to three years depending on the category of purchaser.
Free-price trading. Wholesale market participants may trade power at free prices on the day-ahead market or under unregulated bilateral agreements. The day-ahead market is based on a competitive selection of bids submitted by suppliers and purchasers for the following day. An equilibrium price is determined by the market infrastructure bodies on the basis of submitted bids. This price also takes into account system constraints and line losses.
Unregulated bilateral agreements may be concluded between the participants within the same pricing zone. They must contain certain key terms and be registered according to the prescribed procedure. For technological reasons, theÂ wholesale power and capacity market is divided into three independent geographic zones:
The first pricing zone (European part of Russia and Urals).
The second pricing zone (Siberia).
The non-pricing zone (including geographically isolated regions that do not form part of competitive market).
This division is important for a number of reasons; in particular, power can be traded at free prices only between participants within the same pricing zone.
In the event of an imbalance between the scheduled and actual generation/consumption, each market participant must sell or purchase power at the balancing market in order to correct any deviations. The amount payable or receivable by theÂ participant as a result of trading at the balancing market, with respect to its deviations occurring in each billing period, is calculated as the sum of the value of deviations occurring in each hour of that billing period.
Russia does not have a special tax on electricity. Carbon emission taxes also remain a long-term prospective plan and do not currently apply to power generation. Therefore, power industry companies are largely subject to the same taxation as other industries with only a few exceptions (such as electricity lines being exempt from companies' property tax).
Although no major reform proposals are in place, the Ministry of Energy has stated that certain legislative changes will continue to be implemented in compliance with the state's energy goals. Such changes are likely to be focused on:
Increasing the energy efficiency of the Russian power industry.
Gradual elimination of the currently existing cross-subsidisation of residential tariffs by industrial tariffs.
Attracting further investment in the modernisation of the Russian power industry.
The regulatory authorities
Ministry of Energy of the Russian Federation
Main responsibilities. The Ministry of Energy of the Russian Federation is a federal executive body responsible for drafting and implementing government policy and legal regulation in the oil and fuel sector, including issues related to the electric power industry, providing state services, and managing state property in the production and use of natural resources.
Federal Tariff Service
Main responsibilities. The Federal Tariff Service is a federal executive body exercising legal control over price and tariff regulation for goods and services. It also regulates natural monopolies, where its functions encompass price (tariff) determination and control over issues related to price (tariff) determination and application to the business of natural monopoly agents.
Federal Antimonopoly Service
Main responsibilities. The Federal Antimonopoly Service is a federal executive body responsible for adopting regulatory acts and exercising control and supervision over the legal protection of product and financial services market competition, protection of natural monopolies' activities, and advertising.
Federal Service for Ecological, Technological and Nuclear Supervision (Rostekhnadzor)
Main responsibilities. Rostekhnadzor is a federal executive body responsible for drafting and implementing government policy and legal regulation in the field of technological and nuclear oversight. It is also responsible for overseeing operational safety in the use of natural resources, industrial safety, and safety in the use of nuclear energy (with the exception of designing, producing, testing, operating, and disposing of nuclear weapons and nuclear power stations for military use), and the safety of electrical and heating plants and networks.
Description. ConsultantPlus is the largest service network operating in the Russian market of information and legal services. It provides access to the database of legal acts of Russia.
Description. This site is the official legal information portal.
Description. Garant is a legal information system that provides access to the database of Russian legal acts.
Description. The site for the High Arbitration Court of the Russian Federation, which is the highest judicial body for settling economic disputes. The site contains most significant cases and judicial documents.