1 RAO UES Anatoly Chubais, CEO EEI International Utility Conference London, March 11, 2008 Power Sector Liberalization and Climate Change: The Russian Model

2 Russian Power Sector and RAO UES  Russia is the 4 th largest electricity market in the world  ~5-6% of world generating capacities  Average growth in electricity consumption: 2-4% p.a. since 2006 One of the world’s largest markets… … is being served by the world’s largest utility  Electricity output: > 70% of Russia’s total  Heat output: ~ 33% of Russia’s total

3 RAO UES: Pre-reform Model Generation Low voltage & High voltage Grids Supply 73 AO-Energos High Voltage Grids + Grid Services Centralised Dispatch 32 Federal Power Plants Minority Shareholders Russian Government 52%48% RAO UES

4 Basics of the Reform: Separation of Monopolistic and Competitive Sectors Monopolistic sectors Dispatching Transmission and Distribution grids Competitive sectors Supply Generation Private property and market Government property and Government regulation

5 Reform Opponents Political and Business Elite Changed Their Standing on the Reform Essence UES Reform UES Reform Key political factions in the State Duma Conservatively-minded energy specialists and scientists Majority of regional Governors VIPs in the Government and Kremlin Majority of senators in the Federation Council Influential oligarch groups Majority of minority shareholders

6 Competitive market Government ownershipPrivate ownership System Operator Monopolistic sectorsCompetitive sectors Federal Grid Company 1 Interregional Distribution Companies (IDCs) Hydro OGK Supply 6 Wholesale GenCos (OGKs) Rosenergoatom (nuclear) Independent GenCos 14 Territorial GenCos (TGKs) Russian Power Sector: Post-reform Model

7 Functional unbundlingLegal unbundlingOwnership unbundling The issue is not settled yet for the majority of EU countries: Ownership unbundling of VICs and spin-off of distribution grids EU countries Deadline for ownership unbundling of RAO UES (Federal Law No. 250, November 4, 2007) Russia July 1, 2008 ?? Power Sector: Functional, Legal and Ownership Unbundling

8 Competitive Wholesale Market: Supply/Demand Equation Prices Source: Administrator of Trade System (ATS) Average prices (Europe+Urals and Siberia), Euro/MWh Day (Apr 07) Week and month Sept.06Oct.06Nov.06Dec.06Jan.07Feb.07Mar.07Apr.07May.07Jun.07Jul.07Aug.07Sept.07Oct.07Nov.07Dec.07Jan.08Feb 08 Year

9 Power Market Development Pace of Liberalization: Government’s Plan and Actual Progress All new capacity and consumption commissioned after 2007 go to the free market 0% 5% 10% 15% 25% 30% 50% 60% 80% 100% 0% 20% 40% 60% 80% 100% Jan 1, 2007Jul 1, 2007Jan 1, 2008Jul 1, 2008Jan 1, 2009Jul 1, 2009Jan 1, 2010Jul 1, 2010Jan 1, 2011Sept 1, 2006 ~18% (Sept 06) ~20% (Jan 08) Excluding electricity consumption by households actual pace of liberalization (facts and estimates) mandatory increase of the liberalized market share ~ 25% ~35% ~40% ~60% ~70% ~90% 100%

10 Electricity Market System: Target Model Competitive wholesale electricity market as of September 1, 2006 Capacity market 2008 Ancillary service market 2008 Derivative market 2008 Liberalized retail markets as of September 1, 2006

11 Electricity Demand Growth Outlook: Mid-term and Long-term View Mid-termLong-term Source: UES estimates Basic scenarioOptimistic scenario kWh, bln Average annual increase in : 3,5% (basic scenario) 0,980 1,003 1,035 1,070 1,120 0,9 1 1,1 1, ,5 4,3 3,7 3, %

12 Prospects until 2030: Target Concept, General Scheme, Investment Programs General Scheme for locating power capacity until 2020 Target Concept for Development of the Russian Electricity Power Sector until Investment Program of UES Holding Company 5-year investment programs of energy companies from

13 CAPEX – 93 bn Euro Sources of Financing Private investments State budget financing Credits and loans Companies’ funds Other Euro, bn 4.8 (5%) 15 (16%) 22.8 (25%) 22.9 (25%) 27.5 (29%) Total: ~93 bn Euro (private investments ~27.5 bn Euro)

14 EV/IC, Euro/kW (Feb 08, weighted average) EV/length, Euro/km (Feb 08, weighted average) Thermal generation-2008: Key growth drivers Market liberalization causes a stable rise in electricity prices M&A. The approaching competitive sale of OGK and TGK shares to strategic investors makes these assets more attractive to portfolio investors Distribution grids-2008: Key growth drivers: Consolidation of 61 regional grid companies converted into 11 interregional distribution companies (IDCs): higher liquidity; lower cost of capital; entry of large companies with a high free float into the stock market RAB: higher transmission tariffs; optimized revenues, profits, and investments of IDCs Connection fees as an effective CAPEX mechanism Thermal Generation and Grid Assets: Undervaluation and Growth Potential

15 Funds raised so far and yet to be raised From Competitive Share Placements and Sales to Strategic Investors Total: ~ 27.5 bn Euro 27,527,5 0,40, Euro in billions Fact: 18.8 bn Euro UES estimates: bn Euro 0,8 0,5 0,7 0,2 0,3 0,4 0,8 0,7 1,31,3 3,1 0,3 0,5 0,6 0,2 0,4 1,5 1,2 0,4 2,4 0,3 1,7 1,1 0,7 4,2 2,0 0,7 TGK-13 TGK-14 TGK-7 AprMay Mar 08 TGK-4 TGK-12 May 08 TGK-9 TGK-12 OGK-6 TGK-3TGK-9 Dec Jan OGK-5 OGK-3 TGK-5 TGK-3 OGK-5 OGK-4 TGK-1 OGK-2 TGK-8 OGK-3 NovMarMay JunSep Oct TGK-10 TGK-7 TGK-11 TGK-6 TGK-10 OGK-1 FebMar 08 TGK-2

RAO UES Capacity Commissioning Program MW Thermal generation OGKs, TGKs, RAO UES Hydro OGK Total commissioning ,000 10,000 15,000 20,000 MW

17 RAO UES Investment Program for : Higher Demand for Suppliers’ Products and Services * Power Sector Development Program 2010 vs Generation equipment (Procurements of solely primary generation equipment for OGKs and TGKs): ~ 21.6 bn Euro 8-fold Electrical equipment (Procurements solely for FGC): ~ 7.6 bn Euro 4-fold Coal: ~ 731 million tonnes of coal 40% Gas: ~ 848 billion cub.m. of gas 30% Construction materials (Solely cement expenses of TPPs and HPPs): ~ 0.3 bn Euro R&D (Solely in thermal power sector): ~ 2 bn Euro Construction and installation (Solely in thermal power sector): ~ 9 bn Euro 4.5-fold 4-fold 8-fold * Expert estimates

Gas generation Coal generation Nuclear generation Hydro generation and other renewable sources Percent of total 41,5 25,1 15,9 17,5 33,2 32,2 20, Fossil fuel generation: 66,6% Non-fossil fuel generation: 33,4% Fossil fuel generation: 65,5% Non-fossil fuel generation: 34,5% Gas consumption increased from 175 bn cu m to 210 bn cu m (or by 20%) Coal consumption increased from 128 mn t to 285 mn t (or by 123%) Nuclear generation increased from 23.5 GW to 53.2 GW Hydro generation increased from 44.9 GW to 71.7 GW 2020 to 2006: Notes Changes in the Power Generation Mix Effects on Carbon Efficiency Source: RAO UES

19 Carbon Efficiency of the Russian Power Sector: Strategy SolutionsKey challenges A surge in power generation Gas-to-coal substitution (the gas share is 8% lower and the coal share is 7% higher in the generation mix by 2020) Gas generation: Introduction of combined cycle gas turbine (CCGT) technologies Coal generation: Introduction of clean coal technologies (CCT), introduction of carbon capture and storage (CCS) systems Other requisite measures: - Development of economic and market-based mechanisms for environment protection: CO2 emission tax; CO2 emission trading system - Development of renewable energy sources (hydro, tidal, geothermal, wind) Emission efficiency of the Power Sector (CO2 emissions / Generation) 0,73 0,58 0,44 0 0,2 0,4 0,6 0, (est.) CO 2 emissions, mn t Generation, bn kWh Source: RAO UES

20 Russian Power Sector: Changes and Estimates of GHG Emissions (1990)1990 level783.3 (2020) ActualEstimates CO2 equivalent, millions of tonnes (basic scenario) It is not until 2020 that the 1990 level of GHG emissions is exceeded Source: RAO UES

21 Our journey is about to end