Power Industry Reform: expansion of investment opportunities

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Power Industry Reform: expansion of investment opportunities Vasily Zubakin, Board Member, OAO RAO «UES of Russia» Power Industry Reform: expansion of investment opportunities Russia: going global Russian Trade and Investment Conference London,October 12-13, 2005

Table of Contents Share of OAO RAO “UES of Russia” price dynamics UES is undervalued Structure of Russian Power Sector in 2008: Target sector model Power Market Development New Value Challenges: bringing new companies to the stock market Investment opportunities

Share of OAO RAO “UES of Russia” price dynamics 2 Share of OAO RAO “UES of Russia” price dynamics US cents 37.8% 18.7% 21.40% 01.01.2005 07.10.2004 07.10.2005 (1) (1) Приведен к цене акций РАО «ЕЭС» на начало периода

EV/Installed capacity, $/kW UES is undervalued Reasons: EV/Installed capacity, $/kW 1 942 1 631 1 287 1 003 478 410 134 200 400 600 800 1 000 1 200 1 400 1 600 1 800 2 000 Enel Endesa Cemig RAO UES $/kW E.On CEZ Electrobras  Complicated reform model Uncertainty regarding terms and rules for liberalization and operation of wholesale power market Uncertainty regarding government’s intentions to reduce control over generating assets Long period of anticipation of the launch of target companies on stock market   

Target Power Sector Model Monopolies Competitive Power Generation Private shareholders Government <25% <25% Territorial GenCos (14) 51-60% <48% 75-85% System operator FGC (Transmission) Wholesale GenCos (6) Hydro GenCo (1) Competitive market >75% >75% 49-40% >52% 25-15% <48% > 49% Supply companies Other generating companies IDC (Distribution) (4) Independent Regional Energos >52% Nuclear power generating company FGC – Federal Grid Company IDC – Interregional Distribution Company

Будущая стоимость энергетических активов ОГК-1, 2, 4 ОГК-3 ОГК-5 ОГК-6 ОГК-7 ОГК ТГК МРСК ТГК-14 ТГК-1,13 ТГК-4,6 ТГК-2, 5,8 ТГК-7,10 ТГК-3 ТГК-9 МРСК 1,2,3,4 2005 2006 2007 RTS STOCK EXCHANGE Factors of growth: Gradual liberalization of power market Effective management, cost- cutting, key performance indicators, motivation Boost of liquidity: listing on market, listing of ADRs and other derivatives on international markets. Effective IR. High standards of corporate governance Overall value of target companies will grow

Investment opportunities Required vs. Available Capacity in Russia 50 100 150 200 250 300 2000 2005 2010 2015 3 2 1 (1) Required Capacity – Optimistic Scenario (2) Required Capacity – Pessimistic Scenario (3) Available Capacity TPP NPP HPP gW Most of the sector's industrial potential was created in 1960s-1970s. During the economy slowdown of the 1990s the commissioning of power plants and electric grids, as well as the regular maintenance volume dramatically decreased, which resulted in rapid capacity wear. By 2004, the heat power plants wear & tear reached 70%, and that of hydroelectric power plants – 80%. The standard no-failure operation capacity has run out by 41% for heat power plants and by 50% for hydroelectric power plants. The stable growth of the country's power demand within the next 10 years calls for an specifically careful estimation of the existing power industry capacity, its ability to satisfy the growing demand for power and heat, and, therefore, for outlining the real scope of the necessary modernization and development. Forecasted trends (RAO "UES of Russia" estimates): ·        The optimistic scenario suggests that the GDP will continue to grow at the existing high rate of about 6.3-6.7% up to 2010, and at 7.1-7.2% between 2011 and 2015. ·        The conservative scenario suggests that the GDP growth rate will gradually decrease to 4.4-4.6% by 2010, and to 4.0% by 2015. Before 2015 investments necessary for new construction, modernization and maintenance of existing assets amount to 48 – 65 billion US dollars: up to 20 billion dollars to modernize and increase the operating life of the existing assets 28 – 44 billion US dollars to commission new capacities Investments needs of electric power industry

Ministries and agencies (investments repayment) Investment guarantee mechanism The goal is to attract investments into new capacities construction to cover the forecasted power deficit before the competitive power market starts functioning Government identifies the area of the deficit Investor selection is competitive Requirements Exclusively new modern equipment Standards for efficiency, flexibility, environmental safety Ministries and agencies Federal Tariff Service Investor’s compensation for technology reserve included in to the tariffs of System Operator – Central Dispatch Administration Consumer starts paying only after the object is commissioned Protection mechanism is effective for 10 years. Two-stage mechanism of investment repayment: Construction investment repayment through payment for capacity reserve formation services Payment for power generated at a price not higher than the set tariff The investor it is obliged to give after the conclusion of the contract financial guarantees for the period of construction and operation Investor’s obligations upon the agreement conclusion: Financial guarantees for the period of construction and operation Availability of all the power in the market Participation of the investor in the market Adjustable contracts -only payment for electric power do not participate in free bilateral contracts do not participate on the market of capacity participate in the market of system services in accordance with general practice Bidding procedure Power tariffs • The organization of competitions System Operator Investors Механизм гарантирования инвестиций работает следующим образом: ·  инвесторам гарантируется возврат инвестиций, зафиксированный в контракте с Системным оператором (ОАО «СО-ЦДУ ЕЭС»), с необходимой нормой прибыли на инвестированный капитал посредством платы за услуги по формированию технологического резерва генерирующих мощностей (аналога платы за мощность). Вся произведенная по команде системного оператора электроэнергия будет оплачена по тарифу на электроэнергию, покрывающему переменные издержки генерации электроэнергии; ·  инвесторы выбираются на принципах конкурсного отбора с использованием критерия минимальности платежей рыночного сообщества за предоставляемые инвестором услуги по формированию технологического резерва генерирующих мощностей и на приобретение электроэнергии, произведенной на указанных мощностях. При этом в отборе должны рассматриваться кандидаты, соответствующие установленным квалификационным требованиям; Конкурсы будут организовываться Системным оператором (ОАО «СО-ЦДУ ЕЭС») и проводиться под контролем Государства. ·  инвесторы получают гарантии снабжения топливом; ·  за счет механизма гарантирования инвестиций обеспечивается страхование валютных рисков для инвесторов; - применение механизма гарантирования инвестиций в настоящий момент позволит ликвидировать будущие издержки рыночного сообщества, возникающие в результате возникновения дефицита генерирующих мощностей и предпринимаемых впоследствии мероприятий по его устранению. Guaranteed payments (investments repayment) Trade System Administrator Payment for electric power Investments Payment for electric power Capacity Payments Generation Customers

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