“T he m arket no w
determines
everythi ng”
President
Vladimir Putin, on gas prices to G8
Russian power consumption (1996—2005)
Russian generation capacity structure (2005) 10.4% 47.4%
66,5%
21.1%
16.7%
With the economic crisis in Russia, power consumption pl um m eted, and co nsum ers’ability to pay their electricity bills fell dramatically. In 1998, the process began to restructure the state-controlled RAO UES—the
w o rl d’s l argest uti l i ty company—and the power sector. The main driving force behind this process was the desire to stimulate greater economic efficiency and to introduce a competitive market. In the past, the price for power in Russia has been regulated by the government, with no concern for the actual cost of supply. In a deregulated, competitive market, the price for power is determined through a market-clearance procedure.
Deregulation in Russia differs in many ways from deregulation in most other countries. The process is driven mainly by RAO UES, whose goal is to ensure sustained growth in the value of its shares, increased production and a stable, secure power supply. In other countries, by contrast, the government simply issues directives and forces the power companies to comply.
End-user prices in Russia, especially household prices, are subsidized. The price level is low compared to the actual costs of supply. In most other countries with deregulated
electricity markets, end users
generally have to pay rates
reflecting the marginal cost of
supply. The situation in Russia,
however, is reversed; most of
the cross-subsidies are
transferred to households. An
important objective of the
RAO UES is to increase prices
to all end-user sectors
achieving higher revenues and
profits. This is necessary to
attract investments in the
power sector.
The original plan included
privatizing state assets in the
power sector while retaining
control of the natural
monopolies. During the
process, the focus seems to
have changed. Now, the idea
is of partial privatization, with
the state controlling 50
percent plus one share of the
companies dealing with
renewable natural resources.
Legal reforms related to the
deregulation of the Russian
power market were initiated
in July 2001. The plan was
based on the same elements
of deregulation as in most
other countries:
? di vi di ng the secto r i nto
natural monopolies and
competitive businesses
? devel o pi ng a co m peti ti ve
market for electricity
? regul ati o n of natural
monopolies to increase
efficiency
As part of this plan, RAO UES
has been reorganized. The
system operator and grid
company have been unbundled
and RAO UES split into
several business units. There
are two main types of
generation companies:
territorial generation
companies (TGCs), consisting
of combined heat and power
plants, and wholesale
generation companies (WGCs
or OGKs), which mainly
produce electric power.
Whereas six of the seven
WGCs are dedicated to
thermal power production,
Hydro WGC consists purely
of hydro generating assets.
The deregulation of the
Russian power market is
estimated to be completed by
2008. There are, however,
some indications that the
process will take more time.
The main result of this
process is that RAO UES will
be dissolved in 2009.
The process also includes
reduction of the influence of
the monopolistic companies
responsible for the grid
system and system operations.
Deregulation of the electricity sector Page 3
August 25, 2006
“ W e have set up
over 20 generating
companies in the
course of the
powersector
reform . I believe
that the advent of
strategic foreign
investors with
controlling stakes
[over 50 percent],
rather than
blocking stakes
[25 percent - 50
percent], would be
appropriate. And I
will spare no
efforts [to prevent
such a structure].”
Anatoly Chubais,
CEO of RAO UES
Price estimates
R u b l e s p e r M W h
Traded volume, GWh
The North-Caucasus Dispatch Center
Turbine hall at Sayano-Shushenskaya on the Yenisei River, 10 x 640 MW generating capacity
Capital Business Centre 3rd floor, suite 311 Ilyinka Street 4 103012 Moscow Russia
Telephone/Fax: +7 495 7817929
https://www.doczj.com/doc/f41135412.html, Energy@https://www.doczj.com/doc/f41135412.html,
ROSNOR ENERGO
largest utility company in the world, RAO UES, has been split up into more than 20 generating companies plus grid -system, maintenance and operating companies and re-search institutes. A competi-tive market is being set up to enhance efficiency, generate profits and attract investment capital. The market is being modeled along normal market lines, with a separation be-tween the natural monopolies and the competing actors. At present, as much as 15 per-cent is a free market, with the remaining 85 percent in transi-tion and still rate-based.
Because of the low rates on electricity and gas, the quality and efficiency of existing plants are declining. To make new
Following the structural and
financial crisis of 1998, strong economic growth in Russia in
the last eight years has led to the need for huge investments in infrastructure. The electric-ity sector itself is estimated to need $380 billion through 2030, with the main invest-ments occurring after 2010.
Russia is the largest producer of electricity in Europe, with 952 TWh as of 2005. Thermal power, mainly gas-fired plants, accounts for two-thirds of production, with hydropower contributing 20 percent and nuclear 10 percent.
The Russian electricity market is being reformed and deregu-lated. The core tasks should be concluded by 2008. The
investments defensible, do-mestic electricity prices, which have increased, will have to trend even higher, and quickly. T o day’s pri ces are at €17.50/MWh. With an estimated increase in demand of 200 TWh through 2020, prices are expected to double in the next five years.
Russia has the second-largest economically feasible hydro-power potential in the world. Only 20 percent is utilized. The main resources are in Siberia and the Far East. State-controlled Hydro OGK will become the world leader in renewable energy. Invest-ments are welcome in the sector. Rosnor will attempt to cooperate on investment pro-jects.
Executive summary
Company profile
Rosnor Energo is a Russian-Nordic advisory services company operating within the energy sector. Our main focus is engagement in Russia's energy markets and the ongoing energy reform in the co untry. T he co m pany’s partners have m o re than 20 years’ experi ence i n the R ussi an energy sec-tor and deregulated markets in Europe and the United States. We are, therefore, well-acquainted with regulatory issues, trading of physical contracts and financial instruments, portfolio risk mana-gement, derivatives hedging, production, and transmission.
Rosnor Energo was incorporated in July 2003. Since that time, we have undertaken a wide range of contracts connected with implementing a free competitive market in Russia in cooperation with governmental bodies and electric power companies. We are also involved in matters concerning the reconstruction and optimization of energy production plants.
Our aim is to use our valuable experience as a platform for cross-border cooperation promoting investments in the Russian energy sector.
C. J. Hambros plass 2c 2nd floor
NO-0164 Oslo Norway
Analyst: A. M?land