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GLOBAL POWER REVIEW: RUSSIA

Russia’s nascent private generating companies, created as part of the reform process, are struggling to manage their infrastructure investment commitments in the face of the economic recession

Russia is located in northeastern Europe and northern Asia and is the largest country in the world with a total area of 17 075 200 km2. Its 142.3 million population is made up of a diverse collection of territories located across 11 different time zones.

Despite considerable economic reforms, the post-soviet democratic Russia still retains elements of a centrally planned economy with considerable power residing in the Kremlin. Former president Vladimir Putin was responsible for ending direct elections for regional governors with appointees and prime minister Putin remains, in most Russian’s eyes, the most powerful force in the country, despite the election of Dmitry Medvedev as president.

Russia’s economy has enjoyed very strong growth on the back of high oil and gas prices with GDP running at an average of 7.3 per cent in the years 2003-2007. However, the world economic downturn and collapsing oil price has hit Russia harder than most countries, resulting in a sharp slowdown in economic activity and a fall in value of the ruble of around 35 per cent against the US dollar.

Energy Overview

Russia’s economy is heavily reliant on energy exports, with oil, gas and fuel making up 65 per cent of total exports in 2007. This has manifested itself in contrasting ways in the last year with Russia able to exert political pressure on neighbouring countries reliant on energy exports. Its dispute with Ukraine in early 2009 also created unease in a number of other European countries, whose Russian gas supplies are transported through Ukraine. However, Russia’s economy has suffered heavily from the drop in oil prices from a peak of $147 a barrel to the current $41 a barrel with the government now predicting the economy will shrink by 2.2 per cent in 2009.

Russia has 60 billion barrels of proven oil reserves. Production of crude reached 9.4 million bbl/day in 2007, challenging Saudi Arabia for the title of world’s biggest oil producer with an estimated 7 million bbl/day being exported. At 47 570 billion m3, Russia has the largest natural gas reserves in the world. Reported production in 2007 was 656 billion m3, but production at monopoly Gazprom’s four largest fields are in decline and new fields in Siberia will be more expensive to bring on-stream. Russian’s consume around 400 billion m3 each year and the government is looking to reduce consumption by a quarter in order to increase export sales.

Coal reserves stand at 157 billion tones, second only to the USA. Production in 2006 was 303 million tones and output is expected to reach 400-450 million tones by 2020.

Electricity Market

Russia is the fourth largest generator and consumer of electricity in the world. Thermal power plants account for around two thirds of production followed by hydropower (20 per cent) and nuclear (15 per cent). Despite considerable geothermal, wind and wave resources, renewable energy production accounts for less than one per cent.

In July 2008, the state power monopoly RAO UESR was liquidated having separated its assets into multiple wholesale electricity companies (known as OGKs), which participate in a new competitive wholesale market. Fourteen territorial generating companies (TGKs) were also created, and these TGKs generated over $24 billion in investment from private investors in 2007. Germany's E.ON and RWE, Italy's Enel, and the Finnish Fortum are some of the most prominent foreign entities who have paid premiums for strategic or controlling stakes in the generating companies.

All 25 GW of Russia’s hydropower assets are held by RusHydro, which remain state-controlled as do all nuclear power assets, controlled by Rosenergoatom. The Federal Grid Company also remains state-owned and is responsible for system operation. Responsibility for oversight of the electricity sector has been given to the Ministry of Energy.

There are seven separate regional power systems in the Russian electricity sector: Northwest, Center, Middle Volga, North Caucasus, Urals, Siberia, and Far East. The Far East region is the only one not connected to an integrated power system. The grid comprises almost 2 million miles of power lines, 93 000 miles of which are high-voltage cables over 220 kV. There are currently two efforts underway to integrate the Russian and Western European electricity grids. Russia is participating in the Baltrel programme, designed to create an energy ring of power companies in the Baltic states. Also, the Union for the Coordination of Transmission of Electricity (UCTE), of which 20 European countries are members, has entered into discussions with Russian colleagues over the technological and operational aspects of interconnecting their systems.

Russia’s demand for electricity has been rising steadily since 1999 and was predicted to reach 1426 TWh by 2010. However this growth trend has gone into reverse with reported demand for electricity in January falling seven per cent year-on-year. As a result, free-market electricity prices have fallen 40 per cent since August 2008. Currently, only 30 per cent of electricity is freely-traded and this is expected to rise to 50 per cent later this year. Plans are also being drawn up for the establishment of a long-term capacity market to let generation companies recoup building costs.

Despite considerable geothermal, wind and wave resources, renewable energy production accounts for less than one per cent. Russia had 16.5 MW of installed wind generation at the end of 2007, although a federal programme has called for 228 MW of wind power by 2010.

Infrastructure Investment

Years of underinvestment in Russia’s power generation and transmission & distribution infrastructure has left the system operating at full capacity. The years of economic growth has put an increasing strain on the sector and was one of the main driving forces in the liberalization of the sector, as a way to attract investment in new plants and delivery infrastructure.

The new OGK and TGK owners took over obligations for construction programmes and to deliver specific capacities to the market in time. The current economic slowdown has meant that the majority of the new owners have found it hard to meet these obligations, partly due to non-payment issues. The new owners have lobbied the government to cancel projects and change the terms. Although the government has insisted that the planned infrastructure expansion programme must go ahead, announcements are anticipated concerning corrections to the 2020 master plan and investment programmes.

Much of the equipment employed in refurbishing and expanding Russia’s electricity industry is imported and this is becoming more expensive as the ruble weakens.

During 2008 Russia's nuclear energy sector completed structural reforms and increased its assets as well as mapping out a range of new sites for construction of nuclear power plants. This included the announcement of a new nuclear power plant in the Baltic exclave of Kalingrad in which private foreign owners would be allowed to take an ownership interest. With the appointment of Sergei Shmatko (ex-head of Atomstroexport) as Russia’s energy minister it is expected that nuclear power generation will have a higher profile both towards domestic electricity production and as a vendor for international projects.

Equipment in Russia’s hydropower plant is over 40 per cent obsolete due to chronic under funding. RusHydro recently announced a scaled back programme for 2009 that will see the sum of 79 578m rubles ($2.2bn) invested and the commissioning of 145 MW generating capacity.

Russia’s first power plant to be built on the basis of a turnkey EPC contract by a non-Russian company is nearing completion in Moscow. The €300 million ($378 million) advanced combined-cycle cogeneration facility, officially titled Mosenergo Moscow TPP-26 Unit 8, is being built by Alstom and will also be the most efficient in the country.

Future Trends

Russia faces the problem of completing its reform process and developing a fully traded market in the face of major economic pressures. Some of the transition steps are likely to be delayed. Long-term growth in demand will need to be met and the current owners of the wholesale generators are finding that the calculations they made at the time they bought their stakes, no longer stand-up. Some government intervention or consolidation in the sector seems likely. A few of the original investors in OGKs are currently looking to sell their stakes.

The contrast between the increasing state involvement in the oil and gas sectors and the liberalization and private ownership in the power industry has been much remarked upon. The difficulty in attracting investors to a nascent industry with highly subsidized prices is evident. Although tariffs rose 19 per cent in 2008, further reform is needed to bring consumer rates more in line with production costs, however the current economic climate makes this more difficult. If power producers were to recapture their costs and earn fair returns, prices would likely jump as much as 200 per cent.

Russia is not about to pull the plug on all state controls but will move cautiously and try to walk a fine line between opening markets and avoiding large price hikes that could lead to social unrest.