The reform process of the conventional electricity sector in Russia is nothing if not ambitious, and undoubtedly there have been significant gains. However, many believe it is entering a crucial period. We get the insider view of the industry, including the key reform issues, as well as its nuclear and hydropower expansion plans in Russia and beyond its borders.

Novovoronezh II NPP
The first reactor of the two-unit Novovoronezh II NPP is slated for start-up in 2014
Credit: Rosatom

Russia’s reform of its conventional electricity market is widely recognised as one of the most ambitious reform processes ever undertaken by any country.

The outcome of this process will not only have a substantial impact on the energy sector but also on Russia’s longer‐term economic performance. According to the International Energy Agency,”it will help to determine the nature and pace of investment and modernisation of the sector and will help to shape incentives for efficient, flexible and innovative operation and end use”.

The reform landmarks that have been achieved so far are impressive. They include the unbundling and significant privatisation of generation infrastructure; the introduction of an investment mechanism; progress toward more cost reflective pricing; and creation and strengthening of key market and regulatory institutions. However, the full outcome remains uncertain at the moment, and many believe that the reform process is in a critical phase.

Based on interviews conducted by Focus Reports on our behalf, we get the insider’s view of the Russian electricity sector from four major stakeholders – government, regulatory and state-owned entities.

Ivan Grachev, Chairman, State Duma – Energy Committee

The State Duma – Energy Committee plays an important role in shaping the legislation of the Russian power sector. From a legislative point of view, what are some of the key laws that still require further changes in order to guarantee better progress in the sector?

“In my view, the reforms of the power sector in Russia have not been carried out properly. The foundations of these reforms were built on the fact that modernisation would only become possible through market mechanisms. However, there is a strong disparity between the money needed for modernisation and the revenues that can be raised from the end-user side. As a result, the power system continues to degrade and its equipment depreciate.

“The market-based price formation system does not bring a fair price and does not correspond to the capacity we have in place. We need a change in the legislation of our sector, and thermal energy in particular. We need federal investment programmes specific to our sector. Moreover, we require better regulations around energy efficiency. All in all, drastic changes are required.”

The State Duma’s Energy Committee has had many conversations with the Federal Tariff Service and the Minister of Energy to discuss the issues regarding electricity tariffs. Where do these discussions currently stand and what do you propose?

“Looking back at the resources needed to modernise the system, there are different estimates. Yet, even if we divide the smallest estimates by the population and, for example, a time frame of ten years, we need to understand these targets are not achievable.

“We have to define which of these investments, such as infrastructure or power stations, will be handled by the government, and which will be taken on by private companies. Then we will be able to understand which tariff programmes will be suitable for the population.”

As private investors entered the market during the reforms, they had to commit to investing in new capacity up to 2018, in line with the government scheme. How satisfied is the Russian government with the investments that have been made on behalf of the private sector?

“As far as I am aware, most of the private investors did not satisfy these requirements. This was already obvious at the beginning of the reforms, because there was a clear gap between the cost of these investments and the capitalisation of these companies.

“The cost of producing a kW in Russia, for example, lies around $3000. The capitalisation per kW, however, lies around $300, which explains why there cannot be that much investment in this field. Although, there are some exceptions, related to either the richer regions in Russia or specific energy-intensive projects such as aluminum smelters.”

According to the World Bank, Russia has the potential to halve its energy consumption, indicating an immense opportunity for better energy efficiency. What steps have already been taken on this front?

“Based on the fact that Russia uses twice as much energy as it actually needs vis-à-vis its GDP, I agree with the statement from the World Bank. The main law on energy efficiency – Law 261- has been passed, but unfortunately included two major errors.

“The first is an increase in bureaucracy. Saying to a population that certain equipment for energy efficiency is mandatory is one thing, but assuming they will automatically invest remains an illusion. In reality, if someone does not have the financial resources to make these upgrades, even a written law cannot enforce the investment.

“The second illusion that foreign experts contend is that electricity price increases will automatically result in energy efficiency. It is a fact that the price of electricity has increased by a factor of 12 to the US dollar during the reforms, while this had no impact whatsoever on our level of energy efficiency.

“Therefore, we must understand what role the government will play in the modernisation of the sector’s infrastructure and equipment. From then onwards, we will have to build effective legislative mechanisms that will allow us to earn on energy efficiency.”

Sergey Novikov, Head of the Federal Tariff Service

Sergey Novikov   In early 2011, the then president of the Russian Federation Dmitry Medvedev (now prime minister) told the BBC that if the rising trend of electricity prices were to continue in Russia, the country’s power could become more expensive than in Europe or the United States as early as 2014. How do you view this statement today? Would you agree?

“Tariff increases are never a popular matter to discuss and few stakeholders -particularly consumers – support upward price movements. Therefore, it is standard practice for us to cooperate with regulatory authorities in the US and Europe to collaborate and compare both price indicators on the market, as well as the rules of functioning.

“In the period 2010-11, we thought that the regional regulatory authorities, i.e. those functioning on the territories of the constitutional entities of the Russian Federation, which are part of the regional administrations and formally independent from the Federal Tariff Service, would be much more careful in adopting investment programmes at that time. However, rather than their mistake, the discrepancy in expectations was the result of the legislation that was in force back then.

“As a result, we experienced a significant increase electricity transmission tariffs, which particularly affected the small and medium-sized enterprises. They saw their prices increasing abruptly, by 30-50 per cent, and urged us to adjust the regulatory framework. On the one hand, we clarified the requirements with regards to investment programmes and their returns, but on the other, we also increased the public factor in these decision-making processes.”

Russia’s ‘Energy Strategy 2030’ has set ambitious targets with regards to investment plans to modernise the electricity system in the next two decades. How healthy is the current balance between the revenues that can be made on the market and the money that will be needed for these investments?

“The most important aspect is to find a balance between the interests of the investors and the consumer of the electricity. The regulatory framework in Europe, the US and Russia has changed considerably. As a result, the structure of the sector, as well as the tasks of the regulatory authorities, have become increasingly complex.

“Our tasks are linked to the different interests in the sector. They need to support a reliable functioning of the sector, its development and take into account the interests of the consumers. These interests are often very different and sometimes even conflicting. Following the different structural changes in the sector, consumers have now become first-time participants in the process, sometimes even as producers or investors.”

“The new task of finding a balance between these different interests implies that we need to re-evaluate our regulatory tools in the broader sense. We need to look at our financial resources, which can both come from the market and from the budget, to develop the sector and find this balance.

Kirill Komarov, Deputy General Director, Global Business Development, Rosatom

Kirill Komarov   Despite the continuing global economic crisis and the Fukushima disaster in 2011, Rosatom managed to nearly double the number of overseas orders from 12 at the start of 2011 to 21 at the end of the year. How do you explain such strong performance in this challenging external environment?

“The Fukushima disaster first of all did not have a significant impact on nuclear energy worldwide.

“At a meeting in September 2012 at the International Atomic Energy Agency, the consensus among all countries present was the decrease in the construction of nuclear power plants (NPPs) up to 2030 has only been impacted by 10 per cent. We see that the only countries showing intentions to stop building NPPs were not very serious about their nuclear plans prior to the incident in Japan. Germany, for instance, has about 27 per cent share of nuclear, yet it did not have plans to build new reactors. The discussions – before and after Fukushima- have always been about the schedule to close down their NPPs.

“At the same time, those countries that are the current drivers of global economic growth, i.e. India, China, Russia and Turkey, as well as Southeast Asia, the Middle East the Latin America, have confirmed plans to build new NPPs. This is a current issue for Europe too, where we see important projects in the UK and Central European countries including the Czech Republic, Slovakia and Hungary. Also in France there is continuous interest.

“Another very important event has been the fact that the US, for the first time in 20 years, has obtained a license to build a new NPP. This implies that nuclear energy remains relevant and is still an important part of the global energy mix.

“There are several reasons why Rosatom has been so successful in this period. First of all, our NPPs are of the III+ Generation and use the most modern technology. Even before lthe 2011 incident in Japan, our NPPs met all the post-Fukushima requirements. These, for example, include all the necessary active and passive security elements.

“Another important factor is that we not only build NPPs abroad but also domestically, something our competitors do not do. You cannot go to another country and start building NPPs without showing its reliability on your own territory..

“A third factor is that we can approach the market with truly comprehensive proposals. Rosatom is a unique company by owning all technology related to the nuclear sector, from uranium mining to decommissioning. This is especially important for countries that have only just started developing their nuclear sector because we can help them in all the steps to build up their nuclear infrastructure. This extends from the training of personnel and the developing of a legal framework to answering fuel issues, structural challenges, and so forth.

“A very important aspect in this regard is that we can provide financing too. In today’s world, the biggest obstacle to building NPPs is not Fukushima but the global crisis. These days it is very hard to find money to finance expensive long-term infrastructure projects. NPPs are definitely a profitable investment, although it is hard to understand this if the return only comes after 20 years. Assuming that the life cycle of a NPP is roughly 60 years, during its last 40 years these plants really work as cash machines. At that point, the expense level to produce energy becomes much lower than for gas and coal-fired stations. The issue, however, is how to find the money for those first 20 years.

“This is why Rosatom has developed a detailed policy to allow its clients to find help for financing solutions. We now have several tools to address this issue, ranging from intergovernmental credit that Russia is willing to give to countries that want to build NPPs with our designs, to becoming investors ourselves. In this second instance, we do not only provide the technology but also provide the actual funding to build these NPPs. This is the so-called ‘build-own-operate’ (BOO) model, which we have now deployed in Turkey [for the Akkuyu NPP].”

Evgeny Dod, Chairman of the Board, RusHydro

Evgeny Dod   You took over the leadership of RusHydro together with a number of top managers from INTER RAO UES at the end of 2009. Have these first three years been an opportunity for RusHydro to make a new start?

“After three years, we can certainly draw a number of conclusions. Our main task in November 2009 was to deal with the consequences of the Sayano-Shushenskaya hydropower plant incident, a task that has been carried out successfully. We have set a fast pace of reconstruction and renovation of the plant and it will be accomplished in 2014. The number of new projects is also unprecedented: 4000 MW of new capacity is expected to be commissioned in 2012, and an additional 10,000 MW by 2015. These are unique volumes for the hydro sector in Russia, as well as in the [former] Soviet Union.

“We are also carrying out a programme of modernisation of our existing plants. We are planning to invest in the region of $10 billion with expected dates of completion within the next ten to 15 years.

“Considering that only 20 per cent of Russia’s hydro resources have been developed to date, the potential for the future is significant. HPPs can be considered as a stimulus for growth of regional industrial clusters. For example, we are at the commissioning stage on the Boguchanskaya HPP, which has an installed capacity of 3000 MW. [It is scheduled to be fully operational this year].

To investors you have announced great potential for the Far East of Russia. Can you elaborate on your expansion strategy there?

“RusHydro’s expansion strategy is mainly focused on Russia. When the government decided to provide us with the assets of RAO UES of Far East, representing around 9000 MW of installed capacity and several networks in that region. We are working on the synchronisation of our investment programmes with the construction of a comprehensive infrastructure in Siberia and the Far East.

“While our priorities clearly focus on Russia, we do have international projects too. Today, we own the 561 MW cascade HPP in Armenia and also have a cascade project lined up in Naryn, Kyrgyzstan. Our institutes are also working on projects in India, Vietnam and Africa. We also believe in significant potential for tidal energy in Chile and Argentina.”

Traditionally Russia is more associated with oil and gas resources rather than hydropower. How difficult is it for Rushydro to sell the idea of clean energy abroad?

“Russia is a unique country and we are fortunate to have large reserves of hydrocarbons. As a nation, we are certainly focused on using oil and gas as energy sources because these are cheaper to use and consumers are still unwilling to pay for more expensive energy from wind, solar and biofuels. simply for the sake of the environment.

“As a result, the returns for companies operating in such sectors have been less attractive. The Russian government, however, has now put programmes in place to increase the share of renewables to 4 per cent. As a company operating in the area of renewables, we [also] try to effectively push these initiatives.”This not only includes hydropower, but also geothermal and solar power. While this is not easy, Russia is also not an island. The growing global trend [towards renewable energy] will soon arrive in Russia.”

In partnership with Focus Reports, we will be publishing a two-part report on the Russian electricity sector this year. For more informaiton on Focus Reports, visit www.focusreports.net.

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