The Russian bear stirs from its slumber

In August last year, RAO UES (Unified Energy System of Russia), the dominant player in the Russian electricity sector, put forward an investment programme for the period 2006- 2010, totalling RUB2 trillion ($76.4 billion) and providing 20.9 GW of new generation capacity. At the time this was seen as ambitious. However, subsequent government predications forecast that the average consumption growth rate would reach five per cent by 2011.

In response, RAO UES has now released an even more ambitious programme of investment until 2011. Totalling RUB3.1 trillion, it will finance both new generation and grid construction, adding 40.9 GW of generation capacity à‚— close to double RAO UES’ projected capacity à‚— with 34.2 GW of this to be constructed by RAO UES and its successor companies.

Will this investment be enough to solve Russia’s significant supply- and-demand problem? According to Jim Balaschak, CIS Energy & Resources Leader at Deloitte & Touche CIS, this investment figure is realistic, although long “overdue”. The requirement for power in Russia is huge and growing rapidly, with demand in Moscow alone said to be increasing at between 6-7 per cent a year. But no new generating capacity has been added in decades, which in more recent years has led to problems such as the blackouts in Moscow during the winter of 2004.

RAO UES says it plans to spend RUB1.8 trillion on new power unit projects, with the majority of new capacity being created at existing power plants, while the remaining RUB1.3 trillion has been earmarked for grid infrastructure construction projects. The largescale construction of generation capacity will be financed through a combination of its own funds and capital raised by the sale of shares in its wholesale generation companies (WGCs) and territorial generation companies (TGCs), project finance arrangements and private investment. Investment in the grid infrastructure will be financed with funds from the power grid company, along with new connection charges, government investment and capital from the sale of RAO UES’ shares in the WGCs and TGCs.

Although RAO UES says that funds raised from private investors will be under its ‘investment guarantee mechanism’, are investors likely to receive a fair return on their investment? This, says Balaschak, is difficult to answer, with market reforms slow in materializing, particularly tariff reforms. However, he remains bullish about the potential of investing in the country’s electricity sector, and believes that that interested parties are already circling, including large fuel suppliers such as Gazprom, big energy consumers such as Rusal and large foreign power companies, including several of the leading European players.

Balaschak also believes that the future of the Russian electricity sector lies in privatization, saying that “putting the sector in the hands of private owners would not only increase efficiency and ensure better asset management, but private ownership would attract more private capital”. However, that scenario is likely to be some way off.

Russia’s electricity generation has traditionally come from thermal sources (coal, natural gas and oil), along with hydro and nuclear, but the investment programme gives the country the opportunity to rethink the technologies it uses. RAO UES plans to introduce combined-cycle technologies to increase the efficiency of gas generators, and clean coal technologies, such as circulating fluidized bed combustion and ultra supercritical steam conditions to coal fired power plants. These will also help Russia towards meeting its greenhouse gas emission commitments à‚— Russia ratified the Kyoto protocol in 2004.

An obvious consequence of RAO UES’ ambitious generating capacity programme will be the creation of a significant requirement for batch-manufactured thermal power equipment. It expects to spend over RUB690 billion on equipment procurement for power generation and RUB200 billion on high voltage equipment for bulk transmission grids. The “shopping list” makes for impressive reading and includes 100 gas turbines, 67 gas turbines and 125 waste heat recovery boilers for combined-cycle power plants, while coal fired power units look set to require over 70 steam turbines. With RAO UES’ announcement, Russia’s electricity sector is not only offering interesting investment opportunities for private investors, there will be many a power engineering company and OEM booking their flight.

Warmest regards,

Heather Johnstone
Senior Editor

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