RUSSIA FORUM BUZZ. Electricity: After the Breakup


Andrei Bougrov: “I miss UES, more overlookers have emerged now”, he opened his speech. Adequate electricity demand forecasts from the government are missing and very much needed. Realization of investment projects should be delayed. The main problem today is the absence of a long-term capacity market.

Sergey Tazin: There was no problem with transition from the time with UES to the time without UES, as the sector is disciplined. One problem today is the regulator’s non-transparent methodology of evaluating the capacity price offers. Tazin also called for energy saving in Russia.

Alexander Chistyakov: The payback period for energy-saving projects is three to four years, but the regulator has a one-year cycle (approves tariffs only for one year); therefore, we need to make the transition to a long-term tariff model. The Federal Grid Company’s transition to RAB from Jan 1, 2010, is fully realizable, and Chistyakov sees no problem with that. Due to falling electricity demand, it is no longer possible to transition all of the MRSK branches to RAB, originally planned for 2009, and there will be a delay. Some 80% of the decline in electricity demand is attributable to industrial consumers, who bear the burden of cross subsidization. The reform implied a medium to long-term view on the electricity sector generally, but now there is the risk that a short-term approach with “manual mode” will be applied.

Dominique Fache: In Europe, the share of residential consumption in total is higher than in Russia, and residents are paying much higher electricity prices than the industry. As a result, European energy companies are less sensitive to declines in industrial output than are Russian gencos. OGK-5’s investment program is being financed in line with the capacity agreement. It is important that the government fulfill what it has promised.

Stanislav Neveynitsin: EPC contractors lack the project realization experience; timelines are missed, and the crisis adds to the difficulties. It is better to move from the system with EPC contractors to a customer/sub-contractor relationship. The equipment is mostly imported, which has become a problem due to the ruble weakening.

Mikhail Slobodin: “We invested in a different country – growth in demand and forecast lack of capacity; the market model was created for growth”. In January 2009, electricity demand fell more than 7% y-o-y, and free-market electricity prices have fallen some 40% since August. There is the problem of non-payments, as well as the need to cut costs and teach the EPC contractors to construct new capacity (there are no real EPC contractors in Russia). This year will be very tense. There is also a need for serious revision of the federal “20-20” program along the following parameters: fuel balance, volumes of new capacity and location. This is because the environment has changed, as some potential consumers have abandoned their new projects, for example. To use bond instruments, it is important to be able to demonstrate predictable cash flows, which once again brings up the importance of a functioning capacity market.

Vyacheslav Sinyugin: The electricity sector is the only one for which the approved 2009 tariffs were not revised (downward), which is an important signal. The key argument for that was the investment need. The capacity market is one of the key pillars of the sector and there is an ongoing discussion about it currently taking place. It is important to achieve a balance of interests. The government has set the deadline for the complex document on the capacity market to be approved as March 2009. The ministry sees the necessity to correct the federal program, which outlines the location and development of the country’s generating capacity. The question is when it is better to do so: now or when there is more certainty about the dynamics? As regards the need for new capacity construction, the ministry has already started a detailed analysis, broken down by region. One source of financing could be infrastructure bonds.

Dmitry Ponomarev: He hopes that the share of liberalization will increase from the current 30% to 50% starting July 1, 2009, as was planned; there is no plan to abandon the liberalization scheme. The free market electricity pricing mechanism has proven itself to be adequate – as electricity demand fell, so did free-market prices. Free-market prices are below the level of tariffs only in four regions currently, while in the rest they are above. The capacity market needs to be modified. When it comes to evaluating economic feasibility of the capacity price offers that generators submit at auction, Ponomarev would prefer not to analyze the details of each genco’s input for that calculation. It would be better to put in place some standard metrics: if it is gas or coal-fired capacity, the region in which it is built, and so on.

PANEL:

Andrei Sharonov, Managing Director, Troika Dialog Group
Andrei Bougrov, Managing Director and Board of Directors Member, Interros Company
Alexander Chistyakov, First Deputy Chairman of the Management Board, Federal Grid Company, First Deputy General Director of MRSK Holding
Dominique Fache, General Director for Russia and CIS, Enel
Stanislav Neveynitsyn, Chief Executive Officer, OGK-2
Dmitry Ponomarev, Chairman, JSC “ATS”, NP “Market Council”
Vyacheslav Sinyugin, Deputy Minister of Energy
Mikhail Slobodin, President, Integrated Energy Systems Holding
Sergey Tazin, Chief Executive Officer, E.ON Russia Power

Troika Dialog

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