1 Anatoly Chubais Chief Executive Officer RAO UES of Russia Verbund-Conference – ENERGY Fuschl, Austria The Future of the Power Industry: The Russian View

2 RAO UES of Russia: a leading role in the power industry 4%4% 96% 68% 32% 30% 70%70% Electricity generation RAO: 652bn kWh Heat generation RAO: 466m Gcal Length of transmission lines RAO: 2,483 thsd km RAO UES of Russia Other 3,993 1,640 1, Germany US China Japan Russia Canada India France UK Brazil % of World Total 24.9%10.2%6.8% 5.5% 3.7% 3.7% 3.5% 3.5% 2.4% 2.1% TWh Source: IEA RAO UES and the Russian Electricity Market

3 RAO UES Russia RAO UES of Russia - financial performance 8,780 10,520 13,712 16,052 19, ,856 1,938 2,857 4,066 (400) 18 1,429 1, ,109 23,593 5, % 23.0% 18.0% 14.0% 18.0% 21.0% (1,000) 1,000 3,000 5,000 7,000 9,000 11,000 13,000 15,000 17,000 19,000 21,000 23,000 25, % 5.0% 10.0% 15.0% 20.0% 25.0% RevenuesEBITDANet IncomeEBITDA Margin Source: IAS Group financial results (1) Excluding doubtful debtor expense (2) As reported US$m RAO UES and the Russian Electricity Market (2) (1)

4 Sources: JP Morgan, RAO UES of Russia Private ownership Government ownership Privatization Deregulation France (2000) Hungary (1999) Thailand (1996) Italy (1999) California (1995) UK (1990) Ukraine (1997) Scandinavia (1992) EU Electricity Directive Russia (2003) Argentina (1990) Brazil (1995) South Africa (2000) Greece (2000) Kazakhstan (1998) Moldova (1999) Government regulation Competitive market Market-Oriented Energy Industry Development: the choice of most countries Global Power Market Trends: liberalization and globalization Austria (2001) Belarus (2004)

5 Power Sector Liberalization: a radical change over the last 15 years 1990s: launch of the liberalization process in the power sector involving complete unbundling of vertically integrated companies confined to their own region (country) Dramatic increase in competition Markets redistribution: crowding out the competitors and takeovers Greater geopolitical role of the power sector as a result of its liberalization Prerequisites for liberalization: …and necessity Spectacular development of advanced technologies Consumers’ pressure on prices opportunity… Global Power Market Trends: liberalization and globalization

6 E.On ranks 2nd in the UK with its 11% of the total generation PowerGen (2001) * Yorkshire Cogen (1998) East Midland Electricity (1998) TXU Europe (2002) PowerGen Renewable Holdings (2002) Midland Electricity (2004) New England Electric System (2000) Niagara Mohawk (2001) E.OnNational Grid Recent Major Cross-Border Acquisitions Sources: Cambridge Energy Research Association (CERA); PwC; companies’ data * YearActualClosed National Grid USA is one of the 10 largest electric utilities in the U.S. by number of customers (more than 3.2 million) Singapore Power TXU Australia (July 2004) On 30 July 2004, Singapore Power finalised its acquisition of TXU Australia from TXU Corp, USA After acquiring TXU Australia, Singapore Power has emerged as a key player in the Australian electricity market Global Power Market Trends: liberalization and globalization

7 Power Sector: globalization is just the beginning Forecast: Further redistribution of assets in the global electricity industry comparable, in scope and effect, to similar developments in the oil and gas markets Global Power Market Trends: liberalization and globalization

8 RAO UES of Russia: reform basics Power Sector Reform and Liberalization in Russia

9 Target Sector Model Private shareholders Government MonopoliesCompetitive Generation FGC (Transmission) System operator IDC (Distribution) (4) FGC – Federal Grid Company IDC – Inter-regional distribution grid company Competitive market Power Sector Reform and Liberalization in Russia Nuclear power generating company Wholesale GenCos, WGC (6) Territorial GenCos (14) Hydro GenCo (1)

10 Business Trends in the Russian Power Industry: two-way street Foreign companies in Russia RAO UES of Russia in other countries - Enel (Italy), in an alliance with ESN Energo, Russia, won a public tender for the operation of North-West CHP; - Fortum (Finland) acquired more than 30% of the shares in RAO UES’ Saint Petersburg regional utility Lenenergo; - Acquired or took under management electricity assets in Georgia, Armenia, Moldova; - Launched the Sangtuda-1 hydropower plant construction in Tajikistan; - RAO UES of Russia acquired 50% of the shares in a high-capacity power plant in Kazakhstan; - RAO UES of Russia is a preferred bidder for the purchase of major generation assets in Bulgaria

11 Security of Energy Supply: lessons and conclusions August 2003: USA/Canada. About 50 million people without electricity... August 2003: UK. About 400,000 people... September 2003: Denmark and Sweden. Almost 5 million people... September 2003: Italy. About 57 million people... Europe and North America: blackout geography and statistics May 2005: Russia. About 6 million people... August 29, 2005: The Management Board of RAO UES of Russia approved the Action Program for Reliability Improvement of the Unified Energy System of Russia Reliability and Interconnection Conclusions from the Russian Blackout It is necessary to modify the liberalization and restructuring process to make it more reliability-oriented The accident was not caused by the liberalization or reform

12 Electric Border Between FSU Countries and Europe: a hurdle on the path to cooperation The solution proposed is interconnection Reliability and Interconnection

13 Integration of Electricity Systems of FSU Countries and Europe: the sequence of steps Accomplished activities - CIS Electric Power Council (CIS EPC) and UCTE agreed to undertake a joint feasibility study on synchronous interconnection (July 2003); - CIS EPC and EURELECTRIC signed a long-term cooperation agreement to promote future electricity markets integration (November 2003) Current activities - Development of the joint feasibility study of synchronous interconnection ( ), with a Conceptual Report by end Cooperation agreement on the joint feasibility study between the East (8 companies from FSU countries and the West (11 European companies) was signed (April 2005) Reliability and Interconnection Integration: Possible Options Synchronous integration Asynchronous integration (installation of direct current links) and/or

14 Climate Protection Climate and Environment Protection: challenges and business responsibility Major climate and environment protection initiative of RAO UES of Russia: support for the Kyoto Protocol mechanisms September 2004: the Kyoto Protocol was ratified by Russia allowing it to come into force - Replacement of steam-turbine equipment by combined cycle turbine facilities - Conversion of existing equipment from coal to gas - Development of renewables, including small- and medium-capacity hydroelectric power plants Problem: correct direction, but low speed Two main targets: Environment protection Technological breakthrough

15 Conclusions Global Power Sector: an arena of global changes The Russian power sector follows global trends using the best industry practices, taking account of Russia’s specificity. Common objectives and goals: For Europe, Russia should become more than a global supplier of oil and gas. Russian power sector should become an integral part of that of the continent. 2020: Market liberalization Competing generation Enhanced reliability Environment protection Participation by European strategic investors in the Russian power sector Participation by Russian strategic investors in the European power sector