Alina Bakhareva, an analyst with global research and consultancy organization Frost & Sullivan, attended this year’s Russia Power conference and exhibition. Here, she reports her key findings.

Alina Bakhareva, Frost & Sullivan, Russia

Russia Power 2009, one of the biggest conferences and exhibitions focused on the Russian power sector, was held in Moscow, on 28-30 April. Despite the challenges that the Russian economy and its power sector are facing, the presence of a record number of attendees is clearly a recognition of the long-term potential offered by the world’s fourth largest power system.


At Russia Power 2009, some investors expressed fears that Moscow was failing to produce a unified vision of the future development of the power industry
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Along with presenting at one of the strategic sessions, Frost & Sullivan had a number of meetings and discussions with industry experts, equipment suppliers, and Russian and international EPC contractors and engineering companies.

Our four key takeaways from the conference relate to the following questions:

1. The government’s position on continuing with its programme of power industry reform – will this happen, given the continuing global economic recession and shrinking power consumption in Russia?
2. Will the power industry stick to its commitment to construct new power plants and will the capacity market finally be enacted?
3. Frost & Sullivan witnessed a surge in interest from international players – is this a positive sign?
4. What will be the impact of the crisis on plant equipment and construction costs?

Takeaway 1 – The government’s position on continuing with its policy of power industry reform is not clear, or at least is not being communicated to the industry.

One of the goals of the power industry reform in Russia was to attract private investors into the country’s power generation sector. The full liberalization of the market by 2011, according to the plan laid out by RAO EES, the former power monopoly, was promised by the government as a means to secure investment and guarantee returns to private companies. With RAO EES having ceased to exist on 1 July 2008, the Energy Ministry has filled its role as the major regulatory body for the power industry.

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After charismatic RAO EES’s leader, Anatoliy Chubais, the brains and the driving force behind the reform, left his post in the summer of 2008, the power industry fully appreciated the role he played in moving the reform process forward. According to one of the presenters, “there was left no unified representation of the power producers, and it is extremely difficult, if not impossible, to engage the government in any type of discussion or dialogue”.

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This lack of communication and dialogue with the Energy Ministry was highlighted throughout the conference by international investors, engineering companies and equipment manufacturers. A participant went on to say: “the impression is that the Energy Ministry is hiding away from the liberalized market, as since the beginning of the year [2009] it has not participated in any of the round table discussions or conferences.”

So, aside from a few minor steps, such as the electricity tariff increases at the beginning of 2009, the government so far seems to have failed to produce and communicate a unified vision of the future development of the power industry.

Takeaway 2 – The industry’s pledges to continue its role in the reform process

While the official Energy Ministry’s vision, taking into account the new economic conditions, is still pending, private investors are pleading to carry on the reform process and, most importantly, enact the capacity market. Dominique Fache, the country manager and general director for Russia and the CIS for power giant, Enel, said in his opening keynote speech, that Enel was asking neither for investment programme delays, nor money from the government, but only for confirmation that the government’s earlier commitments would be acted upon.

The most eagerly awaited legislation is one that will set rules for the capacity market. Fache’s appeal was supported by another big international investor – Fortum, and a large number of new investors from Russia also voiced their support during the first day of the conference.

Those investors who are new to the power sector and are still learning about the peculiarities of the power generation business, may reconsider their decision, if the fundamental reform issues are not continued by the government.

Takeaway 3 – A surge of interest from international players is a positive sign

While some smaller Russian companies changed their mind on taking a part in the exhibition, many international companies did. Frost & Sullivan held meetings with companies from Italy, Germany and the USA that were first-time participants and, despite the current drop in power demand and the challenging market conditions, most were optimistic about their potential business in Russia. Although not always sure how to penetrate the market, the consensus was that they were keen to at least establish a presence and begin learning about the market.

Given the high level of awareness about the dilapidated state of power assets and infrastructure in Russia, this strategy could well pay off, given that Russian equipment is generally judged to be of inferior quality and lower technical standards in comparison to Western standards, but despite this, price levels tend to be similar to those for Western equipment.

Takeaway 4 – Inflated equipment and construction costs have been relatively unaffected so far due to exchange rates, the increased cost of finance and a serious lack of power engineers and highly-qualified technical workers

Equipment and construction costs globally have increased dramatically over the past few years due to a boom in demand for power generation equipment. The Russian market has not been left unaffected and is suffering even more because of the recent national currency depreciation against the dollar and the euro.

For example, the euro has appreciated by around 30 per cent since September-October last year. This, however, is likely to have a minimal effect on the international players’ dominance in key power equipment categories. As mentioned by several presenters and confirmed during Frost & Sullivan’s discussions, big international players, appreciating the difficulties in getting long-term loans with reasonable terms, have been offering 10-12 year loans with interest rates as low as 5-6 per cent as part of their offering.

Unfortunately for Russian equipment manufacturers, at the strategic sessions of the conference their names were mentioned only in connection with severe deliveries delays, excessively high prices and the fact that key equipment characteristics lagged behind those of their international competitors.


Dominique Fache of Enel (far left) emphasized the importance of continuing the power industry’s reform process
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Another issue that affects the Russian power sector is a serious lack of qualified power engineers and technical workers. As put by one of the participants, “to complete the largest projects we have to pull resources from wherever we can and they are the same people who built power plants 20-30 years ago. There is virtually no influx of young professionals into the technical and engineering positions”. Technical degrees are still regarded as leading to low-paying jobs and more than half of graduates go on to work in a different field – this evidence was provided by two visiting university lecturers.

Another important trend mentioned by several presenters relates to the engineering and EPC services market, which is currently in a developmental stage. Some presenters voiced their concerns over the segment being under a threat of monopolization by several large players having close ties in the power industry. At the same time, the big Russian engineering companies have watched their market share decrease and have called for a closer cooperation among the domestic industry and for new protective regulations.

While the economic and financial crisis has intensified some issues plaguing the power industry in Russia, it has brought some relief as the power consumption has decreased. Sergey Martynov, internal control and audit service manager, at coal major, SUEK commented that, “if power consumption had continued to increase at the same rate, 2009 would have become a truly difficult year for us, due to the restrictions we would have had to put on peak loads”.

Without a doubt, the political and legislative changes have to be brought forward in order to guarantee a return on investment and attract more investors into the sector. At the same time, the hidden opportunities to reduce costs are numerous, as many power generation plants’ operations are largely ineffective, with artificially inflated repair and construction costs and misrepresentation of coal quality being commonplace.

Alina Bakhareva’s presentation at Russia Power, ‘Renewable Energy in Russia: When the Market Can Pick Up’ can be found at www.frost.com.

Russian Power 2010 takes place at the ExpoCentr, Moscow, between 24-26 March 2010.