Capacity market as an incentive for demand response in Russia

Russian electricity market reform was accompanied with an implementation of a capacity market in 2008. The capacity market was designed to oblige and incentivize mainly the existing generators to invest in new generation. However, the current capacity market rules and the high capacity prices create an unintended incentive for industrial response in Russia. At present, especially the industrial consumers in Russia are facing rapidly increasing costs of electricity due to high network charges and capacity prices, while the electricity price for household consumers is regulated and subsidized. This paper discusses how industrial consumers can reduce their total electricity costs by investing in their own generation. However, if a large amount of this kind of unintended industrial demand response took place, the cost base of the current capacity market would break while the going forward costs of capacity (i.e. the payments to the generators) are locked for several years ahead with the Capacity Delivery Agreements between the generators and the Russian state.