Costs of Ancillary Services & Congestion Management Fedor Opadchiy Deputy Chairman of the Board

United Power System of Russia ■69 regional power systems; ■7 interconnected power systems; ■ kilometers of power lines; ■Near 700 power plants of installed capacity 5 MW and higher; ■Over 900 substations of voltage 220 kV and higher; ■Total installed capacity of generation over MW; ■Peak power consumption MW 2 Network model for SCUC,DAM,BM: ■8503 nodes; ■13190 branches; ■1062 generators; ■269 sections

3 Long-term constraints Vast area and transmission constraints determine division of UPS into 21 free power flow zones for Capacity Market

Markets structure Price setting Capacity Market ● Provides long-term reliability – prevents generation insufficiency ● Forms efficient structure of generation (with minimal aggregated costs) ● Provides price signals to increase regional demand depending on generation sufficiency and capital costs Capacity Market ● Provides long-term reliability – prevents generation insufficiency ● Forms efficient structure of generation (with minimal aggregated costs) ● Provides price signals to increase regional demand depending on generation sufficiency and capital costs Electricity Market ● Provides short-term reliability and economical efficiency ● Provides efficient allocation of load between power plants ● Provides feasibility of electrical modes ● Provides price signals for consumption efficiency Electricity Market ● Provides short-term reliability and economical efficiency ● Provides efficient allocation of load between power plants ● Provides feasibility of electrical modes ● Provides price signals for consumption efficiency Ancillary Services Market ● Maintains reliable operations of the power system Ancillary Services Market ● Maintains reliable operations of the power system 4

Congestion management ■Nodal pricing uses network model that includes transmission constraints ■Mode feasibility is controlled at every stage of market procedures (SCUC (security constraints unit commitment) – Day-ahead market – Balancing Market) which allows to avoid overloading: ▬ SCUC takes into account predicted power system condition, interconnection condition and scheduled exchange, maintenance of generating and network equipment ▬ Day-ahead market takes into account updated power system condition, interconnection condition and scheduled exchange ▬ Balancing Market provides reliable real-time operation of power system and interconnection coordination ■Emergency control automatics provides protection against dangerous overloads of transmission lines and cuts 5

Distribution of reliability supporting processes and activities between market segments Electrical grid access technical requirements Deployment of protective equipment on power system objects No separate payments: term of technical requirements for market participant, obligatory for grid companies Power marketPrimary frequency control (general)No separate payments: part of payment for provided power; payment can be reduced in case of non-compliance Secondary load-frequency control (for hydro power plants with an installed capacity over 100 MW) Reactive power control Dispatcher orders execution Energy marketLoad following, balancingNo separate payments Providing of operating reserves Ancillary services marketPrimary frequency control (standardized) Paid separately Secondary load-frequency control Reactive power control (using generators in synchronous condenser mode) 6

Ancillary Services Types Ancillary Services Market-Based Prices Primary frequency control (standardized) Secondary load- frequency control Cost-Based Prices Reactive power control (using generators in synchronous condenser mode) 7

Frequency control services: creating competition in market with lack of supply Competition created as a result of Setting of annual limits on payment, based on previous year statistics and supply prediction Specific design of tender procedures (e.g. three proposals with most expensive bids can be rejected etc.) Market participants can be forced to obligatory service provision in case of unsuccessful tender (payments are based on regulated tariff) Transparent cost calculation methodology is used by market participants as a rough indicator of fair price Spinning reserves provided within frequency control services are paid separately in energy market that means increasing of price bids 8

Supply and demand curve Actual Demand Submitted proposals Price, € Reserve, MW ∑ (Pi × Ri ×T) ≤ L, where Pi – unit price, rubles (per 1 MW of primary operating reserve provided for 1 hour) Ri – reserve provided by unit (MW) T – time of use, hours L – total cost of service limited by regulator, rubles i – number of units submitted

Cost calculation methodology ■Physically based – several tests on working equipment were conducted to study frequency control mode impact on equipment ■Uses actual prices from equipment producers ■Several types of costs are identified: ▬ Capital costs – modernization of equipment ▬ Operating costs caused by decrease of equipment efficiency ▬ Operating costs caused by increase of failures and reduction of equipment durability ▬ Operating costs resulting from additional equipment maintenance ▬ Lost benefit in electricity market 10

Change in the number of participating units 11

12 Primary frequency control weight-average price dynamics* *Service price is a hourly payment for 1 MW of primary operating reserve

Reactive power service (using generators in synchronous condenser mode): a fair prices in the non-competitive market ■Reactive power market: reactive power is supplied locally so usually one only provider of the service exists in the area ■Synchronous condenser mode is a specific mode that causes expenses for generator ■There are no reliable methods for determination of economic impacts of reactive power control So cost-based pricing is used. The following factors are taken into account: duration of work in synchronous condenser, amount of energy consumed, prices in energy market, service quality. 13

Pricing characteristics ■Service cost is calculated using simple unambiguous equation ■Variables are measured hourly energy consumption and electricity market prices – e.g. completely verifiable values ■Following costs are taken into account ▬ Generator consumption ▬ Excitation system and power plant auxiliaries consumption ▬ Energy losses ▬ Costs of generator start (for thermal power plants) ■ Fixed rate of profit is included 14

Reactive power service implementation effect ■Before: in 2009 synchronous condenser mode was used on 69 units of 19 power plants: ▬ 64 units of 14 HPP (of capacity up to 500 MW) and 5 units of 5 TPP (of capacity up to 200 MW) were used in synchronous condenser mode for hours in total ▬ 28 of these HPP and TPP units were used in synchronous condenser mode for more than 1000 hours each ▬ Synchronous condenser mode on one of HPP with 250 MW units was used for a total of hours ■Service implementation ▬ Two groups of applications of synchronous condenser mode usage were defined: reactive power control (which is payable service) and all other purposes (which are in the interests of power plant and non-payable) ▬ Distinct criteria of necessity of synchronous condenser mode usage for reactive power control were formulated ■After: in 2013 ▬ 65 units of 9 HPP provided reactive power service using synchronous condenser mode for hours (in addition near 300 hours of synchronous condenser mode usage for non- payable purposes took place) ▬ Usage of TPP units in synchronous condenser mode was phased down ▬ Expenses on synchronous condenser mode usage were reduced significantly 15

Conclusions ■Reliability supporting activities in UPS of Russia are distributed between different market segments ■Electricity and capacity markets provide efficient usage of network capacity, emergency control automatics is used in case of contingencies ■Artificial competition in the frequency control services market with lack of supply was created. This competition provides a strong incentive for further modernization of power plants’ units to meet the requirements for market participants so that we anticipate saturation of demand in 2015 ■Cost-based pricing mechanism for non-competitive reactive power service was created. Reactive power control implementation resulted in optimized usage of generators operating in synchronous condenser mode 16

Thank you for your attention Fedor Opadchiy