Mongolia electricity single buyer(7)

Economic Policy Reform and Competitiveness Project

2.3. Assessment of the efficiency of the “Single Buyer” Market model

It has to be noted that characterization of the current system as a “Single Buyer” market is somewhat of a misnomer. The transmission company is not taking a title to the energy produced by generation companies, and is not legally responsible to pay them for what was actually supplied. It just simply allocates what funds are available to it in the MZBA redundant. This system also cannot be characterized as a power exchange in the traditional meaning of this word, since the settlement by funds allocation formula doesn’t track payments to the actual amount of energy produced and consumed. In fact this system represents an operation of a vertically integrated utility which is functionally unbundled into several business units and whose corporate management vested responsibility to distribute collected retail revenue among business units in accordance with the pre-approved formula into only one of these business units (in this case - transmission company).

As such, this system has all advantages and disadvantages associated with the reliance by consumers on the operation of a vertically integrated utility.

The advantages of the current system are:

Relative simplicity

Allows easy balancing of supply and demand and settlement at deviations

through the simple spot market settlement process

Prevents misappropriation of retail revenue

Provides financial stability to power sector entities

Contributes to maintaining reliable power system operation under difficult local

conditions

The primary disadvantages of the current system:

It does not foster competition

It allows government intervention into the settlement procedure

It doesn’t promote market relationship between distribution and generation

entities

It doesn’t provide non-privatized distribution companies with sufficient

incentives to improve collection of retail revenue

As was noted above, within the framework of the system, a spot market for energy to settle the deviation between planned and actual generation also is in operation. Only generators “participate” in this spot market.

The spot market functions in the following way: The daily regime planning group of the NDC develops generation dispatch schedules for the next “operating” day. During the “operating” day dedicated staff within this group tracks all deviations from the dispatch schedule, prices the energy deviations in accordance with the spot market rule developed by ERA staff and approved by the ERA and submits this data to the transmission company to be used subsequently for adjustments to funds distributed among generators as part of the funds allocation process. The spot market rule is somewhat simplistic and vague and doesn’t take into account all possible situations. According to the rule, energy deviations should be priced at the respective energy tariffs or by combined tariff if the two-part tariff is not yet in place. That doesn’t seem to be reasonable. As was noted above only generation deviation is settled through the spot market. Deviations on demand side are simply ignored. It is obvious that current spot market arrangements leave room for improvement.

Section I Page 2 Evaluation of the functioning of current “single buyer” wholesale electricity

market in Mongolia