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Russia Closed Public Power Supply Market for Foreigners

Russia Closed Public Power Supply Market for Foreigners

21.12.2009 — Analysis

Power consumption in the industrial Sverdlovsk oblast in 2009 is going to be lower than in tough 1995. The economy is not expected to recover after the crisis any time soon. Meanwhile, energy sector is trying to jump at this opportunity to upgrade the system. However, these attempts are not very successful: investors are unwilling to invest in power generation, and there's no motivation for developing power grids. RusBusinessNews correspondent found out that the power sector is on the verge of yet another nationalization.

According to Yuri Zakharov, director of the Urals branch of CJSC "Energy Forecasting Agency", the maximum power consumption in the Sverdlovsk oblast electric power system in 2009 will equal 6,300 MW, which is 100 MW less than in the unfortunate year of 1995. This reduction occurred due to the industrial sector: "RUSAL-BAZ" JSC reduced power consumption by 30%; Serov Ferroalloy Plant JSC, 50%; Pipe Metallurgical Company JSC, 16%. It will take the economy quite a long time to recover after the crisis: the expert believes that the record-breaking figures of 1990 will be not reached before 2016. 

However, this remarkable drop in power consumption hasn't solved the problem of power supply to heavy consumers. According to Artyom Bartenev, director of JSC "Regional dispatch control of Sverdlovsk Oblast electric power system", the Ekaterinburg node has broken the consumption record this December. The grid in this region is operated at the limits of its capacity, therefore it has been planned to build two new substations here. Until they are commissioned in 2011-2012 local power engineers will either have to suspend repairs or introduce consumption limits.

The situation in another problem region - Serovo-Bogoslovski - is slightly better. The crisis helped reconstruct currently operating grids and start building a new 500 kV power line Severnaya-BAZ, which is scheduled for commissioning in a year.

However, power engineers cannot use this drop in consumption in order to upgrade the whole system. Gennady Nikitin, director general of OAO "FGC EES - MES Urals", has acknowledged that as a result of energy reform many national grid units now belong to a large number of legal entities. However, there is no document regulating relations between stakeholders, which hinders development and reconstruction of the Unified National Power Grid. 

Crisis doesn't help substantially upgrade generating capacity either. According to Yury Shevelev, the Sverdlovsk oblast minister of energy, many projects have been frozen because of the drop in power consumption. These projects will be finished only when they start to pay back. So far it has been problematic.

Deputy Director of LLC "UGMK Holding" Vladimir Nechitaylov says that today it is completely impossible to find an investor for building a new power plant. Some time ago Ural Mining and Metallurgical Company started building two coal powered generation blocks with a total capacity of 1000 MW; however, the project reached a deadlock. According to the expert, not a single credit institution expressed any wish to participate in the project. Bankers believe that it is the government, not business, that should build infrastructure. However, the Russian government isn't particularly keen even on upgrading the railroad which is crucial for the delivery of fuel to the new plant. In addition to that, the Russian authorities don't allow to certify the purchased equipment as one module, which would considerable reduce customs duties. As a result Korean and French suppliers refused to participate in the project; instead, there appeared American intermediaries who offered to buy second hand Chinese equipment. They have been said to have all the certificates allright.

Vladimir Nechitaylov presumes that in this situation public-private partnership should be used; alternatively, the costs should be covered by raising the power tariff. Georgy Leontyev, a State Duma deputy, believes that raising tariffs will bury the industry and devastate the people.

The expert admits that the Russian power sector reform didn't help introduce market relationships: the expectations of attracting investment in the power generation sector weren't quite met, and it didn't spark any competition that was supposed to drive prices down either. That's why the government now has to reconsider its plans.

For one, Russia suspended its renewable energy programme. There are several reasons to it. First, it is difficult to sell high-priced electric power generated by solar plants or wind farms during the crisis; second, the state doesn't want to import technologies and it doesn't have its own technology either. That's why the government temporarily closed the public power supply market for foreigners and drastically increased the funding for research and development instead.

Experts say that it will be quite difficult to reduce dependence on foreign equipment: Russia lacks, among other things, the transformer steel and test base required for new equipment. However, the die is cast: officials cautiously remark that by 2020 the country will generate 20 GW from renewable sources.

In addition, the industry will be ‘strongly advised' to reduce its power intensity. Municipalities will be ‘voluntarily forced' to use local fuels: peat, chips, etc. Generating companies will have to meet the prime cost of energy generation standards, and if they fail to do so, they will be fined. Industrial enterprises will also be fined if they are found to consume power unsparingly.

According to Mr. Leontyev, the government is trying to find the golden mean between making electric power sector attractive for investors and raising tariffs for end users. It is not improbable that the sector will be regulated ‘manually', that is, will be controlled by the government.

The federal government has already obliged the governors to develop new regional strategies for electric power sector development. There is a snag, however; today experts don't have a faintest idea of what power consumption is going to be like tomorrow. Oleg Gromov, deputy director of JSC "Regional dispatch control of Sverdlovsk oblast electric power system", said that the regional industrial enterprises are not planning to increase power consumption in the short term.

Vladimir Terletski

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