1. Energy aspects of the North-European region Presentation to the Northern Dimension Business Forum by CEO of Unified Energy Systems of Russia and Vice-President of BALTREL Anatoly B. Chubais 4 April 2001Tallinn

2. 2 Northern Dimension — active element of cooperation in the North of Europe Northern Dimension must make its contribution into the cause of peace and security in the region Northern Dimension may act as an instrument of complex spatial development of North- Western Russia Russia Finland Poland Iceland Estonia Latvia Lithuania Norway Sweden Kaliningrad

3. 3 Establishment of well-balanced export of electricity - high priority task of RAO UES of Russia RUSSIAN FEDERATION Kazakhstan and Central Asia Baltic states Belorussia and Ukraine Transcaucasian republics During Soviet times parallel operation was carried out within 11 USSR republics, 4 Central Asian republics were interconnected with each other... …the decision of RAO UES of Russia restored synchronous operation with 9 of the 12 CIS countries and all the Baltic states - former USSR members

4. 4 Finland 40% Belarus 32% Turkey 5% Poland 4% Latvia 6% Georgia 2% China 1% Kazakhstan 10% Key markets for electricity deliveries from Russia Presumptive electricity exports structure for 2001 Total: 15,525 mn kWh Existing transmission capacity of RAO UES of Russia’s electricity connections with power grids of Latvia and Estonia allows to increase the exports by 3-4 TW per annum Northern Dimension member countries account for 50% of Russia’s electricity exports

5. 5 Exchange between power grids of Baltic countries Exchange between power grids of Baltic countries in 2000 was 50-55 TWh per annum, in the future will be 65-70 TWh Russia’s share in the total volume of exchange with Baltic region countries is approximately 12 TWh per annum 12 TWh 38 TWh

6. 6  Construction of the third 400 MW transmission line to Finland from the Vyborg transforming plant (Vyborg-Kymi)  Installation of DC connectors allowing export of electricity from the Kola power grid to Finland  Strengthening the 330 kV Lenenergo-Karelenergo-Kolenergo transit transmission line (1100 km)  Final putting into operation of the first stage of the North-Western thermal plant consisting of 2 CCGTs with capacity of 450 MW each  Construction of Kaliningrad No. 2 thermal plant based on the combined cycle technology with capacity of 900 MW 2000 saw continuation of efforts on several investment projects aimed at export expansion

7. 7 Conditions and advantages of power grid integration  Conditions -parallel operation of power grids according to agreed upon rules and technological standards  Advantages -increase in energy security -increase in reliability -possibilities of regulation -more even and therefore, more economical operation of power grids

8. 8 Development of electricity exports from Russia to Western Europe has already begun... Example: Contractual deliveries of electricity to Germany RAO UES of Russia Counterparty (Poland) Counterparty (Germany) Deliveries (transit via Belorussia) Contract Framework agreement Re-exports  Electricity deliveries to Turkey (transit via Georgia) already started  Patterns of electricity contractual deliveries to Hungary, Yugoslavia and Italy under development

9. 9... however the choice of further cooperation pattern determines the necessity of the grid development...... However, if the strategic orientation towards parallel operation of power grids is adopted, the DC connectors are not needed... However, if the strategic orientation towards parallel operation of power grids is adopted, the DC connectors are not needed If it is decided to retain the existing situation it is necessary to develop the back-to-back stations OUR STRATEGY IS RESTRUCTURING … and is determined by strategic plans of the partners

10. 10 Russian power sector reform implies introduction of competition into generation and supply of power Generation of power Supply of power Segments, where development of competition is possible Natural monopolies Introduce free market pricing Stop cross-subsidisation Reorganise commercial/ technological infrastructure for functioning of power market Provide equal access to distribution network Re-organise the regulatory system Market rules Regulated tariffs Dispatching High voltage grid Distribution

11. 11 Most countries have chosen a competitive model Liberalisation Privatisation Private State- owned State regulation Competitive market Russia (2000) France (2000) Hungary (1999) Thailand (1996) Italy (1999) California (1995) Great Britain (1990) Ukraine (1997) Skandinavia (1992) EC Directive for Power sector Argentina (1990) Brazil (1995) South Africa (2000) Greece (2000) Kazakhstan (1998) Moldova (1999)

12. 12 Liberalisation of electricity generation and supply through implementation of competition No constraints for third party access Community-wide Unbundling and strict regulation of electricity transmission and distribution systems Gradual opening of electricity markets over a period of 6 years Demonopolisation of generation and supply through restructuring of UES’ subsidiaries Free access to customers Separation and strict regulation of transmission; separation and regulation of distribution, third party access to the grid Development of wholesale and retail electricity markets and conditions for private investments EU Directive’s principles Principles of Russian reform Basic principles of the Russian power sector reform correspond to key principles of EU Electricity directive (1996)

13. 13 In spite of increase in the capex volume... North-Western Co-Generation Plant * Late in 2000 the first unit of the North-Western Co-Generation Plant was commissioned - first CCGT plant in Russia * Total design capacity of the plant will be 1,800 MW * Its efficiency rate will amount to 51.5%, while at conventional steam plants this rate does not exceed 40% * Fuel consumption per 1 kW of generated power will fall by 20-25% * Construction of the plant is financed by RAO «UES» In 2000 the amount of RAO «UES» investments in production was 1.4 times as high as it was in 1998 (RUR 34.9 bn against RUR 24.3 bn). RUR 24.3 bn RUR 34.9 bn RUR 28.7 bn 823.9 MW 1,116 MW 836.5 MW

14. 14 In particular, investments are needed for construction of units 3 and 4 of the North-Western Co-Generation Plant, Kaliningrad Co-Generation Plant-2 …internal resources are not sufficient to solve the key problem Assets of RAO «UES» have highly deteriorated  Over the last 15 years virtually no large power projects have been commissioned  Annual retirement of capacities is 5 times as high as the introduction of new ones  Annual amount of investments is 5-6 times lower than required

15. 15 «5,000 MW» Program: First stage of an investment breakthrough  Under the «5,000 MW» Program the capacities to be put in operation will provide for gas savings of up to 6.6 bn cub. nm per annum  Corresponding budgeted investments will amount to US$ 1,737.4 mn  Deadline for completion of pre-feasibility studies under the Program – 30 April 2001

16. 16 Negotiations about possible attraction of investments are currently underway with largest international companies 30 largest electricity companies of the world by market capitalisation US$ bn Companies, with whom meetings have already been held Second-tier strategic investors, with whom meetings are planned On behalf of RAO UES of Russia the negotiations with 9 large electricity companies have been held, additional meetings are planned *approximately, based on the expert estimates

17. 17 Reform will open up new horizons for international co-operation in power sector Investment opportunities in generation Strengthening of European electricity security Asset swaps between Russian and European companies New markets for power sector technologies Expanded export and import of electricity Russian power sector reform

18. THANK YOU FOR YOUR ATTENTION