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On July 24, 2020, as part of the Russian Business Weeks, NIIKPU experts took part in the energy forum "Cross-subsidization in the Russian electric power industry: from a crisis legacy to an instrument of energy policy".

The role of cross-subsidization as an instrument of energy policy and its impact on achieving national development goals in Russia and abroad were discussed in the videoconference format. The participants in the discussion were looking for an answer to the question whether the “regulatory maneuver” in the electric power industry could become a tool for the modernization development of the Russian economy.

The event was moderated by Vasily Savin, head of the practice for work with companies in the energy and utilities sector KPMG in Russia and the CIS.

President of the Russian Union of Industrialists and Entrepreneurs Alexander Shokhin noted in his opening remarks that cross-subsidization, conceived in the early 90s as a mechanism of social support by curbing electricity prices through price increases for industry, has now turned into a full-fledged price regulation tool and tariffs and financing of important government projects.

Alexander Shokhin stressed that so far, even at the highest sites, it has not been possible to formulate a consolidated position on the issue of changes in cross-subsidization, taking into account the requirements of transparency and predictability and the formation of an effective "road map" to achieve this goal.

“In this regard, we believe that it is very important to conduct a full analysis of the impact of cross-subsidization on all subjects of the electric power industry, including consumers. I hope that based on the results of the discussion, we will be able to approach the formation of a unified approach to further changes in the cross-subsidization system, ”summed up the President of the RUIE.

Sergey Rozhenko, Energy Consulting Practice Manager at KPMG in Russia and the CIS, presented the results of the study “Cross-subsidization in Russia: International Benchmarking”.

KPMG analysts note that, contrary to popular belief, cross-subsidization is not a Russian feature. As noted in the report, cross-subsidization is a formalized instrument of climate and social policy, as well as a tool to support exports of the EU countries and the United States, through which from a quarter to half of the cashflows of energy markets are administered. At the same time, these countries are fundamentally different from Russia in the high efficiency of the use of “crossroads” funds to achieve national development goals due to a different goal-setting and targeted support, as well as a transparent model of administering payments, allowances and fees.

In Russia, according to the study, the total volume of non-market load on electricity consumers in 2020 reached a record amount of 1.09 trillion rubles, an increase of 220% over the past five years. The structure of the load has changed for the first time - instead of social programs, payments from businesses for the construction of a new generation have come to the fore. The total amount of non-market markups on the wholesale energy market reached 615 billion rubles, while the volume of business surcharges for reducing tariffs for the population amounted to 446 billion rubles. The investment burden is growing even faster: since 2015, it has increased by 244%. The main share (244 billion rubles) is accounted for by premiums for new TPPs built under power supply contracts, and a total of 267 billion rubles for nuclear power plants, hydroelectric power plants and renewable energy (RES). Despite the growth in volumes, analysts note a decrease in the "quality" of the content of programs, as well as the low efficiency of non-targeted social support.

According to KPMG analysts, the priorities and methods of administering the intersection with Russia require a fundamental revision, including taking into account the increasing importance of the global climate agenda and the growing technological lag of the Russian economy. To close the technological gap, it is necessary to eliminate a number of its fundamental causes, including the “economy of inefficiency” of investment decisions in thermal generation, industry and construction of buildings, as well as the “energy poverty trap” - high energy consumption and increased subsidies due to poor quality of housing of low-income citizens. In this context, what is needed is not elimination, but reconfiguration of the “intersection”, which can create a “leap forward” mechanism and make the market funds work and not be wasted due to low efficiency of generation and buildings.

The first step in the transformation can be the creation of a unified information environment for decision-making: approval of the methodology for monitoring volumes in the wholesale electricity market prices and network tariffs and reference disclosure of information on the contribution of "Surcharges and fees" in the accounts of household and commercial consumers, which will ensure transparency in the use of market funds, as well as development of a "Regulatory maneuver" scenario for a comprehensive change in the priorities for the use and methods of administration of cross-subsidization in Russia.

The full study is available on the KPMG website

Pavel Zavalny, chairman of the State Duma's Energy Committee, believes that the overpriced electricity prices associated with cross-subsidies limit the pace of industrial development.

“Until now, the federal executive authorities have different methods for assessing the volume of“ crossroads ”and, accordingly, different approaches to the development of mechanisms for its elimination. The decisions that were taken earlier by the government to limit it have not been implemented. There are no new relevant decisions regarding the determination of the maximum permissible level and the reduction of cross-subsidization, ”Pavel Zavalny said.

According to him, overpriced electricity prices associated with cross-subsidization limit the pace of industrial development and act as a constraining factor in the development of the Russian energy sector and the economy as a whole, especially small and medium businesses and agriculture. The annual losses of the country's GDP from cross-subsidization, according to various estimates, range from 0.6% to 0.8%, with its overall growth of no more than 2% (2.3% in 2018).

The Chairman of the Energy Committee believes that in order to solve the problems of crossroads, it is necessary to increase prices for the population according to the “inflation plus” scheme, and for the industry - “inflation minus” or not higher than inflation. The process can be accelerated and made easier for the population through the use of mechanisms of targeted assistance to the population and at the same time increasing the efficiency of the network complex. The key task in the elimination of intersections is to free business from the function of social protection of the population, which is unusual for it, in matters of payment for electricity, leaving its implementation to the institution directly responsible for its implementation - the state. The most effective way to solve the problem of social support in the course of eliminating cross-subsidization in the energy sector is to gradually equalize electricity prices for all consumer groups using budget funds to pay targeted social benefits to the most needy households depending on family income (by analogy with the system adopted under payment of utilities).

Alexander Starchenko, Chairman of the Supervisory Board of the Energy Consumers Community, spoke about the reasons for the so-called energy poverty in Russia and the extremely ineffectiveness of the distribution system with cross-subsidization, which is constantly becoming more expensive.

According to him, cross-subsidization was initially not a real way to protect the population from rising tariffs, but "a way to put a tick and try to keep tariffs for the population at a low level, regardless of how much this market actually costs."

“A delayed consequence of this approach is precisely the very same energy poverty of the Russian Federation. The very population that was supposed to be protected as a result of using these mechanisms turned out to be less protected than it could have been if normal social methods of protection were applied, ”said Alexander Starchenko, stressing that the existing system of cross-subsidization must be made an effective manageable tool.

Alisher Kalanov, Deputy Chairman of the Committee on Innovation Policy and Innovative Entrepreneurship of the Russian Union of Industrialists and Entrepreneurs, head of the RES investment division of RUSNANO Management Company, named several systemic challenges that traditional Russian exports will have to face in the near future.

“Until 2035, the Russian electric power industry will be more than twice carbon intensive. This will directly affect all products that are produced with our help. The second challenge is a significant reduction in the cost of renewable energy sources. It is important not to come to this point with the problem when we will completely depend on foreign engineering technologies. The third challenge is the emergence of new technology platforms, new industries. Many carbon-based components will have market restrictions, ”he said.

Deputy Minister of Energy of the Russian Federation Yuri Manevich stressed that high-quality energy management can significantly improve the situation in the area of ​​cross-subsidization. “We need clear accounting, order, fair distribution of cross-subsidies. With regard to non-market markups, at the moment, decisions have already been made on markups totaling hundreds of billions. If we are talking about a "crossroads" in the network complex, then it is also measured in hundreds of billions - 238 billion rubles. in year. We want to restore order on the part of all government agencies, and on the other hand, it is necessary to eliminate cross-subsidization in the power grid complex with a proportional distribution of energy between consumers, ”said Yuri Manevich.

Pavel Grebtsov, Deputy General Director for Economics and Finance, PJSC Rosseti, argued that cross-subsidization is not, in fact, a way of pricing.

“In a cascading environment, it is very difficult to administer cross-subsidization. The core of cross-subsidization is a quasi-tax that should be isolated, ”said Pavel Grebtsov.

Alexandra Panina, Chairman of the Supervisory Board of the Association Council of Electricity Producers and Strategic Investors of the Electricity Industry, is confident that the time has come to fight cross-subsidization. She stressed that for this it is necessary to reform the market, to enter into direct relations between the generator and the consumer, it is also necessary to develop a state system of benefits for industrial consumers and provide targeted support for various categories of consumers.

The forum was also attended by Natalya Nevmerzhitskaya, Chairman of the Board of the Association of Guaranteed Suppliers and Energy Sales Companies, Stepan Solzhenitsyn, General Director of the Siberian Generating Company, Valery Seleznev, First Deputy Chairman of the State Duma Committee on Energy, and others.

The speakers came to the general conclusion that a systemic and integrated approach should come to replace cross-subsidization, as well as the mechanisms of stepwise tariffs depending on the volume of consumption by access points, the so-called social consumption rate. The need to use funds from the federal and regional budgets to provide targeted subsidies for socially unprotected categories of consumers was repeatedly emphasized.

These measures will create conditions for the development of the retail electricity market and the transition to market-based pricing mechanisms in the power industry.

As a result of the event, a draft resolution will be developed with proposals for changes in the regulation of the RF energy market.

Source: http://nrb-rspp.ru