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The miracle of Moscow


Conference delegates among the record-breaking attendance at last month’s Russia Power show in Moscow learned of the enormous opportunities to modernize the country’s Soviet-era fleet of power plants, but the sector is not without its problems.



Barely 18 months after the liquidation of state utility RAO UES, the privatization of Russia’s electricity sector now seems little short of a miracle. Of course, Anatoly Chubais, the CEO of RAO UES, had had extensive experience in overseeing the controversial privatizations of several state-owned enterprises, but the feat was nonetheless an impressive one. However, unbundling one state behemoth into 24 smaller entities was just the beginning.

With Chubais now head of Rosnanotech, it was clear at the recent Russia Power Conference and Expo in Moscow that the Russian power sector is now lacking leadership. Government ministers still proudly extol “investment programmes”, “modernization initiatives” and “energy efficiency decrees”, but there is little incentive for investors in new power plant with Russia at present.

The reasons for this are manifold. Firstly, electricity prices are generally heavily subsidized: it is estimated that Russian tariffs are four times below the lowest level in Europe. Furthermore, it was noted consumers in some regions like Dagestan pay nothing.

Russia is trying to address this matter by implementing a ‘long term capacity market’, which would reward investors in new plant by offering guaranteed payments for the availability of power capacity, in addition to gaining revenue from selling electricity per kW.

However, analysts at Russia Power said the long term capacity market, the rules of which are to be announced by the Kremlin imminently, could amount to little more than ‘a tax and a lottery’, which would offer no guarantees for a return on investment. For fear of politically unpopular price rises, the capacity market is expected to include a plethora of price caps that would only serve to distort the market beyond the point of which it is worthy of the name.

Without a viable capacity market, analysts say, creating a liquid futures market would be key to “extract value” from the power sector. This is easier said than done. Most electricity is sold in Russia by way of long-term contracts and what little market activity they do embrace, like the day-ahead market, is somewhat illiquid.

The main sticking points for a futures market are the lack of suitable clearing houses and, as anyone who has conducted business or just visited Russia will acknowledge, the reels of red tape and bureaucracy stifling such market mechanisms. However, word is that banking big boys like JP Morgan, Merrill Lynch, Goldman Sachs and Deutsche Bank are looking at accessing the market to trade on the behalf of power suppliers for clearing purposes.

A key factor to the implementation of a power futures market could be a gas futures market. Gazprom has launched a training programme for a gas trading exchange, which would trade contracts up to 18 months ahead. With gas the main driver of Russian power prices, those utilities with upstream interests like E.ON and Enel, which have majority stakes in the generating firms OGK-4 and OGK-5 respectively, would stand to gain a significant competitive advantage.

Another problem for liquid trading is the lack of available data. There are 20 state agencies involved in the process of collecting data in Russia’s energy sector and they often work in silos with little interaction. After the liquidation of RAO UES, much of the data system was dismantled and with only monopoly firms obliged to supply data, only 40 per cent of energy providers give information to the state.

Perhaps inevitably, plans are being drawn up by the Ministry of Energy to create a ‘state data pool’ that would collate commercially sensitive data and organize them into ‘primary information’ like coal mine output, which would be disseminated to federal bodies and ‘secondary information’, which would be available to all.

This year’s Russia Power featured a dedicated hydropower sessions track for the first time. The sessions were well attended and there was much interest in the potential of small hydro power plants to serve the more remote parts of Russia. Yet despite the impressive domestic ngineering expertise on show, the lack of state funding has hamstrung development. In the words of one speaker, “the higher up the government chain, the lower the interest”.

Hydropower aside, Russia has yet to embrace renewable energy in any notable capacity ” even though the Sputnik III satellite harnessed solar PV way back in 1957. George Rizhinavilli of RusHydro announced that he was in discussion with the Ministry of Energy about support mechanisms for wind farms, without which little progress will be made. The deputy chairman of RusHydro said he expected the Kremlin to issue a decree introducing wind farm subsidy/feed-in tariffs, but could not proffer a date.

Russian grid losses average more than 20 per cent and the transmission and distribution (T&D) sector needs ‘root-and-branch’ reform to include smart metering and energy efficiency measures to replace inefficient, obsolete infrastructure, delegates heard.

There was also much unhappiness with the perceived way that medium-voltage distribution companies were possibly abusing their natural monopoly position and charging excessivly. However, without a ‘second wave’ of reforms to include the state-regulated T&D sector, little can be done, it seems.

The potential for refurbishment of the obsolete, Soviet Union-built fleet of aged power stations is simply vast. Many engineering firms, both Russian and non-Russian, see big prospects in the auditing of Russian infrastructure to ascertain and implement energy efficiency and emissions reduction measures.

However, the Soviet Union did not build power stations with efficiency or emissions in mind and several plants will inevitably have to close, even if they are the sole plant in the locality. But with such low power prices and lack of market certainty, observers say, it could be little more than an act of charity or, indeed, of political favour for foreign investors like Fortum of Finland, Germany’s E.ON and Enel of Italy to build new power stations in Russia.

The major players may continue to play the waiting game before committing to invest in new plant. In the meantime, expect “ruthless consolidation” of power suppliers who are unable to adapt to the harsh realities of the Russian power sector.


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