 Reformed Russian Power Markets Attract TRM Vendor Interest - By Gary M. Vasey, Ph.D. Daily IssueAlert 6/24/2009 Free Russia is the fourth largest user of electricity in the world, but its regulated power markets have created a number of issues as demand growth has threatened security of supply on the back of lagging generation capacity investment. In fact, outages and power cuts during heavy usage winter months where rapidly becoming the norm as regulated power prices acted as an incentive for increased consumption and a disincentive for investment in new capacity. The solution to this problem was a plan to de-regulate the power industry. A Brief Synopsis of Russian Electric Power De-Regulation De-regulation, to some extent, has followed a similar pattern to other countries de-regulation efforts; unbundling the functional parts of natural monopolies into separate competitive entities and then engaging in a privatization program for many of those new competitive entities. In a country the size of Russia, however, that is a very complex task involving more than 70 vertically integrated regional companies that had to be divided into transmission lines, supply and service companies. The process started at the beginning of this decade and is planned to complete in 2011 with fully competitive power markets supported by Federal law. Electric industry restructuring was essentially completed on July 1, 2008 and 20 of the 21 newly-created generation companies are to be privatized with many of them already having been privatized attracting both Russian and foreign (E.On, Enel, Fortum and other companies) investors. Since September 2006, wholesale and retail power markets have also come into force as wholesale electricity (capacity) market transitioned to regulated contracts concluded between buyers and sellers where prices are regulated by the Federal Tariff Service and a spot market-day ahead (DAM) was launched. In April 2007, regulated contracts were due to be replaced by unregulated ones but not until 2011 will electric power be sold at competitive retail prices. Of course, there remain concerns over completion of the program at a political level but in reality; the case for de-regulation is based on consumer and investor behavior and the increasing possibility of demand outrunning supply. The Russian ETRM Software Market The possibility of the world's fourth largest electric power consuming country having competitive wholesale markets naturally suggests that ETRM software solutions will be required there. Typically, large utilities in non-competitive markets utilize home grown solutions and even spreadsheets to track long-term power purchase and sales agreements but as competitive wholesale markets develop there is are a larger number of transactions of different types to track and an increased element of exposure to be managed—hence the need to deploy complete ETRM software solutions. Russian power companies will have several options to chose from:
In other markets undergoing de-regulation in the past, a fair proportion of companies have opted to initially develop their own solutions either internally or utilizing a partner. This option is often naturally seen to insure that the companies business processes—often viewed as strategic or competitive in some way, are reflected in the final solution. Over time, as the cost and complexity of the task of building and maintaining the software increases and, as viable commercial solutions become available, there is a migration to commercial packaged solutions. CommodityPoint views Russia as a "virgin" market in which most companies currently have no commercial solution deployed which over time will become a "replacement" software market as commercial solutions are adopted. But how will the commercial software market actually develop? CommodityPoint has observed historically that it will develop in two ways:
The first issue for any firm developing or trying to sell existing ETRM packaged software in Russia is developing a good understanding the industry there and more importantly developing views on how things will eventually work out in terms of market structure and players. This is quite difficult because market and industry information in languages other than Russian is often only available in the form of high level summaries. Yet, good knowledge of how Russian power markets will evolve and work is clearly required. A second issue facing western vendors is localization of the software with Russian language user interfaces and the specific functionality required to cater for Russian requirements. Finally, there is the question of a local presence to offer support and services around the software—again in Russian. Clearly, this all requires a good degree of investment on the part of any vendor entering the market and confidence that the de-regulation process will actually complete and demand for software solutions will emerge. In a sense, it favors the initial development of custom solutions. On the other hand, the Russian market for ETRM software for electric power is clearly enormous. Recent Developments A recent industry conference in Russia featured both OpenLink and Navita as participants and Navita has recently announced a partnership with Technoserve to serve the Russian market for ETRM software. Technoserv is a Russian company with a $1.48 bn in annual revenues and 1,600 employees dedicated to system integration, IT services and consulting. Under the terms of the agreement, Technoserv will act as a preferred reseller and delivery partner of Navita, while Technoserv will designate Navita as its preferred solution provider of ETRM systems. Other major vendors must also have interest in Russian power market developments though CommodityPoint in unaware at this time of other vendor's active there. Summary CommodityPoint will continue to track Russian power de-regulation as, due to its sheer size, it is likely to have influence on the TRM software landscape. CommodityPoint expects to see local solutions emerge that may become future TRM software providers generally—not just in Russia. It also expects to see the major TRM vendors show interest in "Russianizing" their software to cater for that market and to seek early adopters to fund that effort. If Russian power markets do become truly competitive (and in some respects, Russia is ahead of parts of the European Union in its efforts), the market is sizeable enough to have some broad impacts on the future development of ETRM software.
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