Interview with GianguidoPiani, Consultant in Energy Technology and Energy Efficiency

According to Deputy Prime Minister Arkady Dvorkovich, the Russian government is looking to overhaul the electricity system, because “the current market model does not [fully] allow the attraction of private investment into electricity generation and grids.” In your opinion, what is the market model Russia needs to spur developments in the sector?

Can't we rather say – no market model? Electric power markets, in particular at retail level, are mostly a solution without a problem. This holds for Russia as well as for the West, where the reforms were started on ideological assumptions and without a basic cost-benefit analysis. In order to solve a problem rationally, first you define what you want to achieve, then you design alternative paths, finally you select the safest or most economic one among them. On the contrary, in the West first we had the reforms without exactly knowing what for, then when it later became clear they were not delivering (for example, on reducing retail prices), the target was re-defined. It is sufficient to look at the EU energy packages: despite the initial promises and expectations the first and the second one did not work so a third one was drafted.

In Russia the reform goals haven't been defined to start with. Maybe to find investment capital? The investment needs are enormous, but most of the population is not able to cover them through the tariffs. So instead of proposing an abstract market model and then having to keep tariffs artificially low anyway, it would be much better to admit that public infrastructure investments need to be covered by the public budget. Starting from that reality it would be easier to define the right approach and the playing field for the public and the private players.

For the industry, irrespective of any particular market model, tariffs should cover the real generation and transmission costs, pay for investments, and possibly not cross subsidize unrelated sectors.

In terms of regulation, is there any European market model or variations on it (from liberalized U.K., semi-liberalized Germany or monopolistic France) that would work best in the Russian setting?

The best utility examples from EU countries before the reforms were the French state-owned EDF and the German municipal utilities. The EU reforms are now destroying the real added value of these companies, in the first place the collective know how of their personnel. PR people have replaced engineers, and is that a smart reform?

For Russia, EDF could set an important example in the operation of HV power lines and coordination of large generation plants, while German city-level multi-utilities could set the right example for distribution networks, co generation of heat and power, even energy efficiency programs.

Some of the things I am mentioning are now technically illegal in Europe. But the way those companies were earlier operated would provide the right example for Russia, which in this case has the strategic advantage of not being an EU member and not needing to abide by its legislation.

What would be the best way to introduce effective competition in the electricity supply chain and spur development of the smart grid?

These are two different issues, with one very important common aspect – they give responsibility to the customer. In generation and supply, competition makes sense only for mid- to large consumers that are able to control their consumption, shift it in time, or curtail it. They might participate in a market to buy power, and at the same time offer a dispatchable opportunity to reduce loads. This is in fact the essence of smart grids.

For some types of companies this is technically feasible, for others it isn't. It depends whether buffers can be part of the process and to what extent the process itself can be controlled. Large air conditioning equipment can be controlled, to a large extent, so that this load can match the available power supply, but trains cannot operate on smart grid principles, otherwise they couldn't follow the timetable. Passengers would hardly appreciate it!

From the perspective of energy companies, does it make sense to invest in new (and costly) digitized infrastructure and new products and services (TOU tariffs, demand response, smart metering, etc.), when electricity is heavily subsidized and tariffs set? What is the key factor to commercializing Russian utilities?

Again, we need to differentiate between industrial/commercial and domestic customers. For the latter, the issue is more a political than a technical one. For commercial customers, time-of-use tariffs, demand response and the other aspects make sense if power generation in their supply area has characteristics that might require a differentiation in time. In the West there are notable peaks and troughs in energy consumption and typically there is a generation mix of cheap coal or nuclear, which is suitable to cover the base load, and expensive natural gas, to compensate for the peaks. In Russia, to start with, the peaks and troughs do not differ as much as in Europe. This depends in part on the heavy industry, in part because generation, and not the natural demand, dictates the supply.

If there will be a development, as can reasonably be expected, towards more distributed generation, energy efficiency, heat and power co generation running on heat demand, then the power generation and demand profile will show more marked peaks and troughs and a demand response pricing system to control loads would make technical and economic sense.

Concerning TOU tariffs, since several years ago commercial customers have been required to track their consumption on an hourly basis, with the so-called (in the Russian abbreviation) AIIS KUE systems.

Currently residential consumers have subsidized prices for peak hour electricity, which renders electricity relatively cheap compared to the value it confers. How can consumers be incentivized to take part in energy efficiency programs if electricity prices are kept artificially low?

You won't believe how many people are looking at energy efficiency now that electricity prices are on the rise in Russia. Utilities are currently introducing day/night tariffs, but that is realistically as far as they can go. Private customers can buy electronic, dual-tariff meters, install them, have them certified, and then pay for day/night consumption, with the night tariff usually half the day tariff.

The funny part is that there isn't any standard or technology for remote meter reading and the power utilities don't believe their customers to report consumption figures. In Russia there is an army of meter readers, people who regularly visit private dwellings to write up, rigorously on paper, the indications on the electronic display. After some days or weeks the bill is issued.

Is the picture for industrial consumers different, given they are paying high distribution charges? Would they be more open to energy saving programs such as demand response and microgrids?

Industrial customers are by definition open to any cost saving program, because their decision paths are simpler and they have money to invest. They are already active in this sense. Anybody who can deliver real solutions with real energy efficiency results that save real money has a market here.

The problem with microgrids, and by extension with smart grids, is a different one. At the present moment grid feed-in is not allowed in Russia. The reason is more technical than political and therefore cannot be changed overnight. I am aware of several situations where industrial customers could operate more efficiently in a pattern of distributed generation if they were allowed to feed extra electricity in the public grid, and even more if they could get financial compensation for it. But today such a system is not in place. There are plans to develop a grid code for the connection of distributed generation, but at the moment such a code is not yet being discussed in its technical details.

For a country so rich in fossil fuels, is there a place for renewables (apart from hydro) in the energy mix?

Allow me to answer with a different question. Have you ever been to a Russian city in the midst of the winter? In those conditions, would you want to rely on renewables? The issue in this country is first to reduce the enormous energy consumption level by increasing efficiency, and then to tap safe and (at least partially) dispatchable industrial and distributed power generators. When such solutions are in place, say ten years from now, it will make sense to talk about renewables, if at that time we still want to.

Gianguido Piani is a speaker at Smart Utilities Russia 2013.