Primary demand

The main type of fuel used in Russia is natural gas. In 2009, the share of gas in the Russian energy equation was 56.2 percent. Oil accounted for only 18.3 percent of the country’s energy consumption, coal for 14.4 percent, nuclear energy for 5.3 percent, and hydropower for 5.6 percent.

The demand for energy in the Central and Eastern European region will reach 1 543 million tons of oil equivalent by 2014. The growth estimate for the five-year period from 2009 to 2014 is 17 percent. The market share held by Russian energy companies, according to Business Monitor International will decrease to 49.7 percent in 2014, from its current level of 50.4 percent. Russia’s gas reserves, which are considered to be the largest in the world, are 43 300 billion cubic meters. The gas sector in Russia has not been developed to its highest potential as a result of technological deficiencies declining fields, stringent governmental regulation, Gazprom’s industry domination, and technical limitations on export capacity (measured by the throughput of Russian pipelines). Gazprom sets special subsidized prices for the power-generating industry under a contract with the now-disbanded Unified Energy System, which was the monopoly supplier of electricity in Russia. The increase in price as part of the state’s initiative to deregulate the industry will likely prove to be extremely unpopular for Russia’s population.

Russia also boasts the second largest coal deposits in the world that are estimated to contain 157 billion tons of reserves. As a consequence of misdirected management during the period of the Soviet Union and the plummeting demand in the 1990s, the Russian coal industry faces numerous problems. Coal production began to recover in 2003 after a brief downturn in 2002. By 2008, Russian mines were producing 327 million tons of coal. The forecast for the years to come envisions that Russia’s production in 2020 will be 400 million metric tons. At the same time, Russia’s adherence to international obligations pursuant to the Kyoto Accords is expected to lower the use of coal by public utilities. The governor of Kemerovo region that accounts for more than half of Russia’s coal production has commented that sustained production growth might not be achieved. The region has already sustained substantial environmental losses, as the ecosystems of more nearly 200 rivers have been irreparably damaged by mining activities. The emissions of carbon dioxide in Russia were 7.87 tons per capita a year in 2006, according to the Energy Information Administration. Estimates done on the basis of increased thermal power production in 2009 show that emissions are likely to reach 7.95 tons per capita now.

Generation of electric power

As of 2009, Russia accounted for 38.93 percent of electricity generated in the Eastern and Central European region. By 2014, Russia’s share is likely to go down to 29.51 percent. Russia will still remain a net exporter of electricity to adjacent states. Generation of electricity in Russia is accomplished by using such other sources of fuel as gas, coal, hydropower, and nuclear energy. Gas accounts for approximately 47 percent of electricity generated in Russia. Coal accounts for 18 percent, hydropower for 17 percent, and nuclear energy for 16 percent.  

The country’s thermal generation in 2009 was 659 terawatt hours. This figure represents 51.6 percent of total production in Central and Eastern Europe. In 2014, Russia will be responsible for 49.8 percent of thermal energy.

The power sector in Russia consists of over 440 thermal plants and hydro-stations. Around 80 plants use coal as the source of fuel. Russia also has 31 nuclear reactors. A small number of generating facilities in the Eastern part of the country are not linked to Russia’s electricity-delivering network. The power-generation facilities have the ability to produce 216 gigawatts. In 2009, the system generated 984 terawatt hours. In the last two decades, the Russian power sector saw significant fluctuations. Between 1992 and 1999, power generation declined by 18 percent. The figures rose by the same 18 percent from 2000 to 2009.

Russian official have said multiple times that the country envisions enlarging the role of hydropower and nuclear energy in the domestic market in order to enable increased exports of hydrocarbons.

Presently, Russia’s atomic power plants have the capacity to generate 21 gigawatts of power. Russia’s 31 nuclear reactors are situated in 10 different locations to the West of the Urals. The country’s nuclear facilities are old. Nearly 50 percent of Russia’s reactors use the same RBMK design the led to the disastrous malfunction at Chernobyl. The standard useful life of a reactor is 30 years. Nine of Russia’s atomic stations are from 26 to 30 years old. Six other nuclear stations will soon be 25 years old. While Russia’s Ministry of Atomic Energy has predicted that nuclear power can account for as much as 300 terawatt hours by the year 2020, such goals can be realized only if annual investments in the power sector would amount to USD 5 – 10 billion.

The generation of electricity at hydropower station has also been prioritized according to the government’s agenda. Hydropower is likely to become more popular in the Russian Far East, where conventional electricity-delivery methods might not be feasible.

Consumption of power

Russia’s consumption of atomic energy in 2009 represented 46.5 percent of the region’s nuclear energy use. By 2014, the figure is likely to go down to 46.3 percent. Cumulative consumption of electricity for 2009 was 849 terawatt hours. According to a Business Monitor International forecast, consumption will increase to 946 terawatt hours by 2014. The increase in power generation will be close to 15 percent. At the same time, the 2.1-percent rate of capacity expansion will not be matched by the 1.5-percent mean yearly growth of demand. As a consequence, Russia will have surplus capacity available for exports – around 193 terawatt hours, much higher than the current 135 terawatt hours. If the demand continues to fall, capital expenditures on capacity enlargement might not be as high as they were expected.

The main trading partners of Russia for electricity exports are the countries of the near abroad, China, Finland, Turkey, and Poland. Talks have also been conducted regarding electricity supplies to Pakistan and Afghanistan.

Regulation

In 2004, the Russian Minister of Energy Khristenko signaled that the state-supervised disposition of electricity-generating assets would be postponed by 12 to 18 months. Even though a number of foreign investors have since acquired several Russian electricity generators within the framework of the power sector reform, much still has to be done. The reform of the electricity power sector began in March of 2004, when President Putin signed new laws that were designed to make electricity pricing arrangements uniform across the country. The program further envisioned the privatization of assets belonging to the Unified Energy System monopoly. Assets of Russia’s electricity transmission network were not included into the privatization plan.

Despite new pricing targets, the government has come under pressure, and the desired changes have not taken effect yet. While the most important goal of the reform consisted of splitting the electricity sector into a few wholesale generating companies, so that they could vie competitively with each other in an open market, some objectives have not been fulfilled yet. In 2003, Russia did start a partial wholesalers’ market under the so-called 5-15 model. However, the market which was launched for the purpose of deregulating from 5 to 15 percent of Russia’s electricity, serves as the trading platform for former regional UES companies. As of today, 10 separate wholesale generating companies have been organized. Generating companies were sold at auctions, the winning bidders of which included Gazprom and other major energy-sector giants. Utility companies based in other countries are now also involved in the Russian energy sector.

As a negative side effect of the economic slowdown, the power-sector privatization process in Russia came to a halt. Some analysts even believe that deregulation plans may be in jeopardy. Others are more pessimistic, noting that delays in private capital inflows would engender capacity shortages in the future.

In the fall of 2008, heads of electricity generating companies petitioned Russia’s Deputy Prime Minister Sechin, who is in charge of the State Commission for the Development of the Energy Sector, and requested low-interest loans in the amount of USD 50 billion that would be necessary for the completion of investment programs. The government did not extend the loans to these electricity companies.

It was former Minister of Finance Anatoly Chubais who organized the privatization of the power utilities within the Unified Energy System. The privatization program was further aimed at liberalizing the price of electricity, so that consumers – both commercial and residential – would in the near future pay market prices for power. Since then, Mr. Chubais was transferred to lead Russia’s development of nanotechnology, and supporters of the power-generation reform appear to have lost fervor.

Those lobbying for lower cost of electricity form a broad constituency. Oil companies, for one, have asked that the cost increases be postponed. The chief argument offered is that the price of hydrocarbons went down. There are numerous other opponents to the liberalization plan aside from Russian oil producers.

The preliminary phase of the reorganization of RAO EUS was finalized in early fall of 2007, with the creation of WGC-5 (Wholesale Generation Company) and TGC-5 (Territorial Generation Company). During the second phase of the reform that took place in 2008, all other entities that composed the Unified Energy System were sold off to investors.

Since that time, OGK-1 was forced to search for additional funding to aid in the expansion of its generating capacities and the running of its day-to-day operations. The generating company was able to procure a loan from Sberbank. It also asked the government to buy USD 848 million worth of its shares of stock. OGK-1 is the only entity that was not able to secure private investors and remained under government control. The company is owned by RusHydro and the Federal Grid Company.

Other generating companies were bought out by such entities as Gazprom, E.ON of Germany, and Enel of Italy. Indeed, these investors were prompted to search for project funding from whatever sources they had available. As such, OGK-5, whose majority stockholder is Enel, received a EUR 120 million loan from the European Bank for Reconstruction and Development.

In May of 2009, a joint venture company Energopromsbyt between the Russian Railways and the ESN Group purchased a 27.7-percent stake in TGK-14 from Norilsk Nickel. After the purchase, Energopromsbyt was in possession of a 77-percent interest in TGK-14, a 64-megawatt generator that supplies the bulk of electricity for the trans-Siberian railway.

In the future, Enel intends to spend USD 8.8 billion for projects in the power and gas sector in Russia. The company has already invested USD 4.62 billion. The company will allocate additional funds in the amount of USD 3.1 billion for developing its Russian assets before 2012.

Price setting

The methods by which prices in the Russian power sector are set vary significantly. Subsidies provided for gas and coal artificially keep generating costs low. On average, Russian prices are equal to half of the predominant European rate. Current wholesale prices are substantially below the level that would allow companies to construct new generating facilities. While it appeared in 2008 that the situation was starting to change and plans called for selling as much as 50 percent of Russia’s electricity at market rates by July of 2009, only about 25 percent of the power trade has been liberalized so far.

Transmission

In Russia there exist seven different regional power systems, North West, Central, Middle Volga, North Caucasus, Urals, Siberian, and Far Eastern. The network in the Far East is not linked to an integrated grid. The Unified Energy System, having shed its generating assets, controls most of the transmission systems in the country. The Russian government owns 52 percent of the Unified Energy System. In addition to controlling about 96 percent of the distribution network, EUS also runs the centralized dispatch unit and operates the nationwide wholesale market for electricity. Russia’s electric grid consists of close to 2 million miles of power lines. High-voltage lines that transmit more than 220 kilovolts measure 93 000 miles.

One of the projects that is now being realized envisions the unification of the Russian and the West European transmission networks. The Unified Energy System is taking part in the Baltrel program that is directed at creating strong energy companies in the Baltic countries. Furthermore, the Union for the Coordination of Electricity Transmission, that includes 20 European states as its members, began discussions with Russia to facilitate the integration of power grids. A feasibility study for grid integration is now being conducted.

The increase of supply and demand in the power sector works as a function of population growth, economic activity, and energy efficiency. Discounting the downward trends that became noticeable in 2009 and 2010, figures for the consumption and production of all types of fuel, including electricity, in Russia will be high. Oil will lose some ground to other sources of energy, especially if the price continues to stay high. The use of natural gas is also more beneficial from the environmentalist point of view.  

The effects of global warming, as well as other environmental considerations, gradually produce changes in the way the Russian society views nuclear power, which, until recently was falling out of favor. The area of renewable energy is also considered to be a fertile ground for important future projects within Russia. The potential for the construction of new gas and coal-fired power plants is also high in Russia.

Altogether, even though Russia’s image in the eyes of Western investors in the power sector is less than perfect, the advantages that the country’s huge natural resource base offers, coupled with a rapidly expanding domestic market, provide substantial encouragement to foreign companies for embarking on business ventures with Russian partners.