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1 RAO UES of Russia Anatoly Chubais, CEO European Policy Centre Brussels May 15, 2008 Russian Power Sector Reform: New Market opportunities for Russia and the EU
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2 Reform results Structural changes Markets Investment Building up new markets Post-reform risks Risk of market monopolization Risk of price manipulation Electric Power Sector in Russia and EU Member States Current results, problems and cooperation prospects Contents
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3 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 Structural changes
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4 High Voltage Grids Centralized Dispatching Administration 32 Federal Power Plants Minority Shareholders Russian Government 52%48% RAO UES 73 АО-Energos Generation Transmission and Distribution Grids Supply Regional Dispatching Administrations Structural changes Pre-reform RAO UES structure
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5 73 АО-energos Generation Wholesale and Territorial Generation Companies (OGKs and TGKs) Regional Dispatching Administrations System Operator Supply Supply companies Transmission and Distribution grids Federal Grid Company (transmission grids) Interregional distribution grid companies (distribution grids) АО-energo unbundling: Key element of structural changes Structural changes
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6 2000 - 2008 UES reform UES reform Key political factions in the State Duma Certain Officials in the Government and the President’s Administration The majority of Senators Conservatively-minded energy specialists and scientists The majority of Governors Influential oligarchs The majority of minority shareholders Power Sector Reform: No objectors left Structural changes
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7 Post-reform Power Sector structure Structural changes Competitive market Government property Private property Monopolistic sectors System Operator Competitive sectors Supply 6 Wholesale Generation Companies (OGKs) Rosenergoatom (NPP) 14 Territorial Generation Companies (TGKs) 11 Interregional Distribution Companies (IDC) Federal Grid Company Wholesale Hydro Generation Company Independent Generation Companies
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8 Market system: What is done, what is to be done Markets Competitive Electric Power Wholesale Market since 1.09.2006 Capacity Market 2008 Ancillary Services Market 2008 Derivative Financial Instruments Market Retail Market since 1.09. 2006 Liberalized Trans-border trade 2008-2009 Balancing Market 2005
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9 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, 2007 July 1, 2007 Jan.1, 2008 July1, 2008 Jan.1, 2009 July 1, 2009 Jan.1, 2010 July 1, 2010 Jan.1, 2011 Sept. 1, 2006 ~18% (Sept. 06) ~20% (Jan. 08) Excluding Household consumption Actual pace of liberalization (facts and estimates) Mandatory increase of the liberalized market share ~ 25% ~35% ~40% ~60% ~70% ~90% 100% Competitive wholesale market: Pace of liberalization… Wholesale market (NOREM) Markets
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10 Source: Administrator of Trade System (ATS) Average prices (Europe+Urals and Siberia), Euro/MWh 6 9 12 15 18 123456789101112131415161718192021222324 Day (Apr 07) 6 9 12 15 18 21 01.10.07 08.10.0715.10.0722.10.0729.10.07 Week and month 6 12 18 24 Year …and Supply/Demand Equation Prices. Sept.06Oct.06Nov.06Dec.06Jan.07Feb.07Mar.07Apr.07May.07Jun.07Jul.07Aug.07Sept.07Oct.07Nov.07Dec.07Jan.08Feb 08Mar.07 Markets
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11 2006 2010 2020 2030 Target concept for Development of the Russian Power Sector until 2030 2006-2010 Investment Program for UES Holding Company 5-year investment programs for energy companies from 2008 2006201020202030 Investment Prospects until 2030: Target Concept, General Scheme, Investment Programs General Scheme for allocating power capacity until 2020
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12 Total : ~ 119.6 billion Euro Expenditure by business, billion Euro Sources of finance, billion Euro 39.2 (34%) 36.1 (30%) 24.2 (20%) 5.2 (4%) 14.9 (12%) Private investments Companies’ funds Credits and loansOther State budget financing Generation (thermal and hydro) Grids (transmission and distribution) Dispatching 65.6 (54%) 48.4 (41%) 1.1 (1%) 4.5 (4%) Far East Investment CAPEX 2008-2012 – over 119 bn Euro Sources of finance and expenditure
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13 Investments 2002-2012: Volume of financing 1.71.72 2.82.8 3.53.5 28.3 27.3 4.64.6 9.99.9 22.3 22.2 19.5 10 20 30 Volume of financing (generation+grids+dispatching) 2009 vs. 2002: Growth of annual investments by a factor of 17 20022003200420052006200720082009201020112012 billion Euros 0 Investment 20022003200420052006200720082009201020112012 Average annual volume of generating capacity commissioning (including NPP), according to the General Scheme up to 2020. 2006-2010: 7.2 GW 2011-2015: 16.3 GW 2016-2020: 13.7 GW 0.60.6 2.12.1 1 1.91.9 1.71.7 1.91.9 2.22.2 5.15.1 12.9 13.7 10 0 4 8 12 16 ГВт Capacity commissioning as of the years (thermal- + hydro generation) 2011 vs. 2002: Increase in annual commissioning, 23-fold 2002-2012: Volume of financing and capacity commissioning
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14 Development trends: Current and emerging types of business activity Power Sector Development Program Power machinery (procurements solely for OGKs and TGKs): ~ 21.6 billion Euro Electrical equipment (procurements solely for FGC): ~ 7.6 billion euro Coal: ~ 731 million tonnes Gas: ~ 848 billion cub. m. 8 - fold 4 - fold 40% 30% Construction materials (solely expenditure on cement of TPPs and HPPs): ~ 0.3 billion Euro R&D (solely in thermal power sector): ~ 2 billion euro Construction and installation (solely in thermal power sector): ~ 9 billion Euro 4.5 - fold 4 - fold 8 - fold (Expert estimates) New markets Turnkey project implementation (EPC/EPCM-contracts) ~8.5 billion Euro (as of 01.03.2008) 2010 vs. 2006
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15 Post-reform risks
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16 Market liberalization refusal risk 0% 5% 10% 15% 25% 30% 50% 60% 80% 100% Jan.1, 2007 July 1, 2007 Jan.1, 2008 July 1, 2008 Jan.1, 2009 July 1, 2009 Jan.1, 2010 July 1, 2010 Jan.1, 2011 Sept.1, 2006 0% 20% 40% 60% 80% 100% ~18% (Sept. 06) ~20% (Jan. 08) Exclusive of Household consumption Actual pace of liberalization (facts and estimates) Mandatory increase in the liberalized market share ~ 25% ~35% ~40% ~60% ~70% ~90% 100% Legal: Law on electric power bans state regulation of prices since 2011. Market liberalization schedule was introduced by the Russian Government regulation. Political: In fact liberalization schedule is a direct promise of the Russian Government to the Russian and foreign investors. Economic: Review of liberalization schedule will destroy investment program of power companies. Annual average growth of electric power tariffs in 2005-2007: 10.7% Annual average expected growth of electric power tariffs in 2008-2011: 20.7% Arguments against the risk Conclusion: Risk is improbable Risks
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17 Risks Risks of market monopolization by major player Risk reduction instruments – Expanded special powers of antimonopoly bodies: Antimonopoly regulation and control in the wholesale and retail markets (in accordance with Article 25 of the Federal Law "On the Electric Power Industry") Development of antimonopoly regulation and control rules in electric power sector (draft of Government Regulation– Q2 2008) 20%GazpromRussia 20%British EnergyUK 22%VattenfallScandinavia 32%E.OnGermany 38%EndesaSpain 45%EnelItaly 82%EdFFrance Market ShareCompanyCountry/Region Generation: Internal market shares of European energy companies As of July 1, 2008, affiliation is prohibited in the Russian competitive and monopolistic energy sectors
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18 Risk of electricity price manipulation through fuel prices Gazprom controls the supply of approximately 54% of fuel for Russian thermal power sector Risk reduction instruments: Expanded special powers of antimonopoly bodies: Antimonopoly regulation and control in the wholesale and retail markets (in accordance with Article 25 of the Federal Law "On the Electric Power Industry") Development of antimonopoly regulation and control rules in electric power sector (draft of Government Regulation– Q2 2008) Existing powers of antimonopoly bodies: Penalties (up to 10% of fuel revenue in local markets) for monopoly abuse Behavior conditions for monopolists – as strict as possible forced sale of assets Fuel balance structure of thermal generation in Russia Structure of gas supplies for thermal generation in Russia Gas 68% Coal + fuel oil (32%) Independent producers 21% Gazprom structures 79% Risks
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19 Electric Power Sector in Russia and the EU: Current results, problems and cooperation prospects
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20 Foreign strategic investors Other strategic and portfolio investors EU strategic investors: Participation in the IPO and competitive OGK/TGK share sale … Russia and Europe 21.6 billion Euros is what has already been received from private sector investments as a result of IPOs and competitive sale of OGKs/TGKs shares Billion Euro ENEL (June 2007): Purchase of the State’s share in ОGК-5 stocks at auction for 1.1 billion Euro. E.ON (September – October 2007) Purchase of additional issue of ОGК-4 stocks and purchase of State’s share in ОGК-4 stocks for 4.1 billion Euro. Fortum (February – March 2008) Purchase of additional issue of ТGК-10 stocks and purchase of State’s share in ТGК-10 stocks for 2 billion Euro. 14.4 (67%) 7.2 (33%)
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21 … and present role in the Russian Power Sector * - As of March 2008 ** - At the moment of share purchase exclusive of commissioning under investment programs until 2012 European strategic investors control companies with total capacity of 20.4 GW– approx. 10% of the Russia’s installed capacity 13% of the RAO UES’ installed capacity in 2007 19% of all thermal OGKs and TGKs installed capacity Total installed capacity of RAO UES power plants in 2007 -161.2 GW, including thermal OGKs and TGKs – approximately 108 GW Russia and Europe ENEL Current shareholding: ~60% OGK-5 shares * Installed capacity of OGK-5 power plants – approximately 8.7 GW** Original shareholding: ~25% of OGK-5 shares E.ON Current shareholding: ~76% OGK-4 shares * Installed capacity of OGK-4 power plants – approximately 8.6 GW** Original shareholding: ~73% of OGK-4 shares Fortum Current shareholding: ~76% TGK-10 shares* Installed capacity of TGK-10 power plants – approximately 3.1 GW** Original shareholding: ~76% of TGK-10 shares
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22 Volume of orders of thermal OGKs and TGKs to power machinery and electrical equipment companies in EU countries 30 122.7 92.3 320.3 0 100 200 300 400 2005200620072008 Million Euro European companies account for approximately 27% of total volume of orders for primary equipment for thermal OGKs and TGKs Russia and Europe Supply of Equipment: Increase in orders from Russia
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24 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 ?? Functional, Legal and Ownership Unbundling: Similarities and differences Russia and Europe
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25 Sources: EU, IMF Russia and Europe Ownership Unbundling: European Energy Policy Evolution Until 1990 – unity of conservatives Countries opposing ownership unbundling of VICs 2008: Russia’s position helps European liberals
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26 Chemistry of the Russian reform We do not consider this recipe the best option for Europe – Each State has its own “mix of ingredients” But we are convinced that market values – even in such a complicated area as the Power Sector and in such a unique setting as Russia – are central and indispensable components Basic principles: Market, Competition, Transparency Best global practice in reforms In-house know-how gained during the reform + + The Russian model of Power Sector reform
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