The Russian electricity production sector today is among the best performing and most dynamic in the world and has many competitive benefits and partnership opportunities for foreign importers. At the same time, the market is confronting a whole series of problems that still limit investment activity and hinder the development of the industry.

General situation in industry

The production and distribution of electricity, gas, and water from January to October 2012 was 101.1 percent of the level for the corresponding period of the previous year. In October 2012, the level of production and distribution declined to 99.4 percent of the volume seen in October 2011.

With the exception of seasonal and calendar factors, the production and distribution of electricity, gas, and water in October 2012 decreased 0.6 percent to the previous month.

From January to October 2012, Russian energy facilities generated 862.9 billion kWh of electricity, or 101.1 percent of the level for the corresponding period of 2011. In October 2012, electricity production increased 0.3 percent to the results of October 2011.

Electricity consumption from January to October of 2012 was 849.7 billion kWh, or 1.7 percent more than in the corresponding period of 2011. In October 2012, 88.2 billion kWh were consumed, a figure that is 0.8 percent over October 2011 consumption.

Most of the production load to meet the demand for electricity in January to October 2012 was placed on thermal power plants (TPP), where electricity generation reached 581.4 billion kWh. Nuclear generation for the reporting period stood at 145.5 billion kWh, and hydropower generation went down to 135.5 billion kWh.

The reduction in hydropower production was due to an unfavorable hydrological situation in a number of rivers in Siberia. As such, from January to October 2012, electricity generation from the Angara-Yenisei cascade of hydropower installations decreased by 5.2 billion kWh, or 7.2 percent from the production level for the corresponding period of 2011. Production at the Volga-Kama cascade of installations increased by 1.1 billion kWh, or 3.7 percent from last year’s figure.

As a result, from January to October 2012, the composition of electricity production by type of generation method was as follows: the proportion of electricity at nuclear and thermal power stations of total electricity production increased from 16.4 percent to 16.9 percent and from 67.3 percent to 67.4 percent respectively compared to the corresponding period in 2011; the share of hydropower decreased from 16.2 percent to 15.7 percent.

The balance of power flow of export-import supplies of electricity from January to October 2012 is estimated at 13.1 billion kWh, which is 27.2 percent less than in the corresponding period of 2011. The decrease was due to lowered exports to Finland.

According to the information of the United Energy System, the volume of new power capacity that entered service from January to October 2012 was 3,425.4 MW. Some 884.3 MW of capacity was decommissioned.

Main market players

The following is a summary of the performance results of the key players in the Russian eletricity production sector.

UES FGC

The shareholding structure at FGC is such that the Russian Federation owns 79.55 percent of the company, and the remaining 20.45 percent is in free float. The net profit of UES FGC in the first nine months of 2012 according to Russian Accounting Standards amounted to 6.417 billion roubles, which is 65 percent lower than the profit in the corresponding period of 2011. The revenues of FGC UES for the nine months of 2012 decreased by 3.336 billion roubles (down 3 percent) compared to the corresponding period of the previous year and amounted to 101.458 billion roubles.

Center IDGC

During the first nine months of 2012, revenues at Center IDGC stood at 50.5 billion roubles. The revenues from the transmission of electricity were 49.5 billion roubles and the revenues from on-grid connections reached 525.5 million roubles, while other revenues amounted to 493.8 million roubles.

Gross profit of Center IDGC for the reporting period amounted to 11.5 billion roubles, and its net profit reached 5.0 billion roubles. The capital of Center IDGC is 4,221,794,146.80 roubles, which is divided into 42,217,941,468 ordinary registered shares with a par value of 0.1 roubles.

RusHydro

RusHydro’s net profit under RAS for the first nine months decreased by 18.4 percent to 19.96 billion roubles, the company said. A year earlier, the company’s profits stood at 24.45 billion roubles.

The company’s revenue decreased by 1.7 percent, reaching 68.27 billion roubles. Gross profits decreased to 27.21 billion roubles against 38.43 billion roubles a year earlier.

The authorized capital of RusHydro as of October 31, 2012 was 317,637,520.94 roubles, which was divided into ordinary shares with par value of one rouble.

The 60.49-percent stake of the Russian government within the ownership structure of the company is held by the Federal Agency for State Property Management. ING Bank Eurasia owns 12.99 percent of RusHydro, and the non-bank credit organization National Settlement Depository Stock Company owns 16.88 percent. The remaining 9.63 percent are spread among other stockholders.

INTER RAO UES

The total installed capacity of power plants that are part of the INTER RAO UES Group is about 18,000 MW. The company is a major investor, enjoying a dominant position in Russia in the field of exports and imports.

The authorized capital of INTER RAO UES is 272,996,961,720 roubles, divided into 9,716 billion ordinary shares with a nominal value of 0.02809767 roubles each. The revenues of INTER RAO UES for the nine months of 2012 amounted to 31.8 billion roubles, which is 43.6 percent, or 24.6 billion roubles, lower than the revenues for the corresponding period of the previous year.

In the first nine months of 2012, the company’s profits before taxes stood at 8.3 billion roubles, an increase of 4.4 billion roubles (112.8 percent). The net profits amounted to four billion roubles (growth of 800 million roubles, or 25 percent).

RAO Energy System of the East

RAO Energy System of the East and its energy subsidiaries operate in the regions of the Far Eastern Federal District. The installed capacity at Far Eastern energy companies that are part of RAO ES of the East is 8,785 MW. The company takes the sixth place in Russia in terms of capacity.

For the nine months of 2012, RAO ES of the East increased power output compared to the corresponding period of 2011 by seven percent to 21,008 million kWh.

The net loss of RAO ES of the East in the first nine months according to Russian Accounting Standards totaled 752 million roubles, down 7.2 times compared to the corresponding period of the previous year. The revenues for the period decreased by 3.9 percent to 687.1 million roubles.

The authorized capital of RAO ES of the East is 22,716,986,149.00 roubles, divided into 45,433,972,298 shares.

Wholesale generating companies

The following is a summary of the performance results of the Russian wholesale generating companies.

OGK-1

The revenues of OGK-1 for the first nine months of 2012 decreased by 25.1 percent compared to the corresponding period of the previous year, or 13.1 billion roubles. As such, the revenues stood at 39.0 billion roubles. OGK-1 received net profits of 2.1 billion roubles, which is 25.0 percent less than in the corresponding period of 2011.

Total assets of OGK-1 increased as of the end of September 2012 by 1.0 billion roubles, or 1.5 percent, reaching 66.2 billion roubles.

INTER RAO UES owns 31.02 percent of the outstanding shares of OGK-1. JSC INTER RAO Capital owns 27.99 percent, and Gazprombank Asset Management owns 19.13 percent. The remaining stake is spread among minority shareholders.

OGK-2

The revenues of OGK-2 for the nine months of 2012 amounted to 76.222 billion roubles, which is 3.4 percent, or 2.653 billion roubles less than in the corresponding period of 2011.

Profits for the nine months of 2012 decreased compared to the corresponding period of the previous year by 11.4 percent to 1.751 billion roubles. Currently, there are 59,327,926,960 shares of OGK-2 in circulation with par value of 0.3627 roubles.

OGK-3

The net profit of OGK-3 in the first nine months, according to Russian Accounting Standards, declined by 32.7 percent to 1.87 billion roubles.

Sales of OGK-3 for the nine months of 2012 grew by 3.4 percent to 31.87 billion roubles. The authorized capital of OGK-3 is 47,487,999,252 roubles, divided into 47,487,999,252 ordinary shares with par value of 1 rouble each.

OGK-4 (E.ON Russia)

The net profit of E.ON Russia (OGK-4) according to Russian Accounting Standards for the nine months of 2012 increased compared to the corresponding period of the previous year by 24.6 percent, to 13.59 billion roubles. The revenues increased by 15.1 percent to 55.48 billion roubles.

The authorized capital of E.ON Russia is 25,219,482,458.37 roubles. The share’s par value is 0.4 roubles. E.On Russia Holding GmbH, a 100-percent subsidiary of the international energy company E.On AG, owns an 82.3-percent stake in E.ON Russia.

OGK-5

The net profit of OGK-5, in line with International Financial Reporting Standards (IFRS), for the nine months of 2012 increased compared to the corresponding period of the previous year by two percent to 4.666 billion roubles.

Operating revenues of OGK-5 totaled 48.012 billion roubles, a figure reflecting an increase of eight percent against the corresponding period of 2011.

The company’s electricity supply for the nine months of 2012 reached 32,997 GWh, which is six percent higher than in the corresponding period of 2011. The sales of electricity at OGK-5 stood at 37,383 GWh, an increase of six percent over the corresponding period of the previous year.

The authorized capital of OGK-5 is 35,371,898,370 roubles. The par value of one share of its stock is one rouble.

Territorial Generating Companies

The following is a summary of the performance results of the Russian territorial generating companies.

TGK-1

The revenues of TGK-1 for the nine months of 2012 decreased by 1.2 percent compared to the corresponding period of the previous year, reaching 40,984.1 million roubles.

Gross profit of TGK-1 for the first nine months of 2012 amounted to 2,468.6 million roubles. Net income in the reporting period of the current year decreased by 33.1 percent compared to the corresponding period of 2011, reaching 1,951.4 million roubles.

The main shareholders of TGK-1 are Gazprom Energy with 51.7869 percent, Fortum Power and Heat Oy with 25.6633 percent, CJSC DCC with 9.9 percent, and NCO JSC NSD with 4.95 percent.

TGK-2

The net profit of TGK-2 from January to September 2012 according to Russian Accounting Standards totaled 168.951 million roubles. From January to September of the previous year, the Company had a net loss of 697.128 million roubles.

Overall, revenues increased by 2.6 percent to 19.119 billion roubles.

The major shareholders of TGK-2 are Kores Invest with 39.15 percent, Prosperity Capital Management Limited with 26.99 percent. Other minority shareholders have 33.86 percent of the company.

TGK-3 (Mosenergo)

During the first nine months of 2012, Mosenergo reduced net profits two times – to 51.3 percent of the profits level for the previous year’s corresponding period to 3.469 billion roubles from 7.125 billion roubles.

The revenue for the reporting period decreased by four percent to 109.617 billion roubles from 114.169 billion roubles registered a year earlier.

Major shareholders as of the end of December were Gazprom Energy with 53.50 percent, the government of Moscow with 26.45 percent, and INTER RAO UES with 5.05 percent.

TGK-4 (Quadra)

The net loss of Quadra according to Russian Accounting Standards for the first nine months of 2012 amounted to 706.2 million roubles against a net profit in the corresponding period of the previous years in the amount of 473.7 million roubles.

The revenues decreased by 8.9 percent to 24,327 million roubles.

The authorized capital of Quadra is 19.8 billion roubles. 49.99 percent of the voting stock is owned by ONEXIM Holdings Limited.

IES-Holding

The generating companies of IES (TGK-5, TGK-6, TGK-7, TGK-9) reduced the generation of electricity for the first nine months of 2012 compared to the corresponding period of the previous year by 6.3 percent to 40,787.2 million kWh, according to the holding’s press service. TGK-5 increased electricity production by 0.9 percent to 7.309 billion kWh. Production at TGK-9 fell by 2.9 percent to 9.755 billion kWh. TGK-6 reduced production by 13.2 percent to 7.337 billion kWh. Electricity generation at TGK-7 fell by 7.9 percent to 16.386 billion kWh. The holding company also decreased heat production for the first nine months of 2012 against the corresponding period of the previous year by 6.4 percent to 75.629 million Gcal. Heat production at TGK-5 increased by 14.1 percent to 10.615 million Gcal. At TGK-6, heat production went up 9.9 percent to 11.218 million Gcal. TGK-9 decreased production by 7.9 percent, to 24.005 million Gcal. TGK-7 reduced heat production by 5.4 percent to 30.499 million Gcal.

The net loss of TGK-5 for the first nine months of 2012 amounted to 393.34 million roubles against earnings of 385.03 million roubles in the corresponding period of 2011. The revenues for the nine months of 2012 amounted to 15.09 billion roubles, down 16 percent compared to the corresponding period of 2011, when they reached 18 billion roubles.

The net loss of TGK-6 from January to September 2012 increased compared to the corresponding period of 2011 some 2.1 times, up to 1.366 billion roubles.

The revenues declined by nine percent to 18.283 billion roubles. The revenues from the sale of electric power went down by 34.7 percent to 7.435 billion roubles. The revenues from the sale of solar energy decreased 2.7 percent to 7.395 billion roubles.

The net loss of Volga TGK (TGK-7) for the first nine months of 2012 increased 1.7 times of the loss figure from the corresponding period of the previous year. As such, the net loss reached 1,289.216 million roubles. The company’s revenue from January to September 2012 decreased by 14.7 percent to 34,964.106 million roubles.

TGK-9 from January to September 2012 experienced a net loss of 857.2 million roubles against an 85-million-roubles profit for the corresponding period of 2011. The company’s revenue from January to September 2012 amounted to 32.45 billion roubles, down 2.1 percent.

TGK-8 (Lukoil Ekoenergo)

TGK-8 is owned by Lukoil. The company’s installed power capacity is 295.3 MW. Lukoil Ekoenergo is composed of four business units, including the Tsimlyanskaya hydropower station in the Rostov region, the Krasnopolyanskaya hydropower station in the Krasnodar territory, the Belorechenskaya hydropower station also in the Krasnodar territory, as well as the Maikopskaya hydropower station in the Adygea republic.

TGK-10 (Fortum)

The net income of Fortum (TGK-10) for the nine months of 2012 decreased by 39 percent compared to the corresponding period of 2011, reaching 1,726.189 million roubles.

The company’s revenue from January to September 2012 amounted to 25,518.673 million roubles, which is 12 percent higher than in the corresponding period of the previous year.

The main shareholder of Fortum is Fortum Russia BV, which owns 94.51 percent of the company.

TGK-11

The net loss of TGK-11 for the first nine months of 2012 according to Russian Accounting Standards rose from the previous year by 60 percent to 800 million roubles.

The revenues of TGK-11 for the first nine months of 2012 amounted to 14.7 billion roubles, which is 1.0 billion roubles (7.3 percent) more than the revenues in the corresponding period of 2011. The revenues from heat production stood at 7.1 billion roubles, accounting for a 48.3-percent share of revenues. The increase in revenues attributable to heat production was 200 million roubles, or 2.9 percent of the corresponding revenues for the previous year.

TGK-12 (Kuzbasenergo)

The net loss at Kuzbassenergo (TGK-12) according to Russian Accounting Standards for the first nine months of 2012 decreased by 37 percent relative to the corresponding period of 2011 to 821 million roubles. Last year, the loss amounted to 1.3 billion roubles.

The company’s revenues for the reporting period increased by 16 percent to 24.9 billion roubles. The authorized capital of TGK-12 is 706,759,847 thousand roubles.

Siberian Energy Investments owns 66.4 percent of Kuzbassenergo. VTB Bank Austria owns another 10.6 percent, and Sibenergoholding owns 6.74 percent.

TGK-13 (Yenisei TGK)

During the first nine months of 2012, the Yenisei TGK power company generated 9,685,300,000 kWh of electricity, which is 869 million kWh (9.9 percent) more than in the corresponding period of the previous year. The company also generated 8,836.5 thousand Gcal of thermal energy, which is 352.7 thousand Gcal (3.8 percent) less than in the first nine months of 2011.

According to Russian Accounting Standards, Yenisei TGK’s revenues from its commercial activities in the reporting period were 19,346.0 million roubles, which is 4,799.9 million roubles (33.0 percent) over the revenues for the first nine months of 2011.

The net profit amounted to 392.6 million roubles against a loss of 1,504.6 million roubles in the corresponding period of 2011.

TGK-14

The net profit of TGK-14 according to Russian Accounting Standards from January to September 2012 was 1.159 billion roubles, which is five times the net profit for the corresponding period of the previous year.

The revenues at TGK-14 for the reporting period decreased by 11.3 percent compared to the corresponding period of 2011, reaching 5.468 billion roubles.

The authorized capital of TGK-14 is 1,357,945,609.11 roubles. 39.81 percent of the generating company is owned by Energopromsbyt. Management Company Trasnsfingroup owns 24.94 percent; TRINFICO owns 20.549 percent; and other legal and natural persons own 14.71 percent.

Problems and prospects for the industry

The Russian electricity sector is currently one of the largest in the world and has many competitive advantages. However, a number of problems continue to limit investment activity and the development of the industry.

The main problems of the Russian energy sector are the inconsistency in volume, structure, and condition of facilities, as well as the rapidly growing demand for electricity and the limitations of the fuel and energy balance.

The main problem of the electric power industry is equipment wear. 20.9 percent of the power generating equipment has been in operation for over 50 years.

Another problem is the high share of gas in the fuel mix. The share of gas is now at 70 percent. The unequal domestic demand for electricity, both in the regions and in the industry, also presents challenges.

The main drivers of growth in the recent years have been the increase in demand for electricity from the real sector of the economy and the commissioning of new capacities. As such, Euroresearch & Consulting estimates that in the period from 2012 to 2021 the consumption of electricity will increase at an average annual rate of 2.0 percent. In turn, the growth of electricity production will increase by 1.9 percent.

“Power has been and remains the most important component of the national economy,” said Russia’s President Vladimir Putin. He noted that in recent years, investments have exceeded 3.7 trillion roubles. In the coming years, UES FGC and IDGC expect to realize their investments of 500 billion roubles and 300 billion roubles respectively.

The main task before the Russian power industry is to attain reliability, quality, and the availability of services for consumers, according to the Russian President.

As the President explained, it is first necessary to change the management structure so as to benefit consumers. New customers need to be connected to the grid without delay, and at prices that make sense economically.

Second, there exists a need to improve the efficiency and competitiveness by reducing costs and implementing energy efficiency programs. The synchronization of the development program for long-distance lines and the program for local distribution networks is an important task. A common energy policy also needs to be selected.

Finally, it is necessary to take into account the interests of minority shareholders. The state holds a controlling stake in the main power grid companies. At the same time, protecting the interests of other shareholders is essential.

At the end of 2012 and in early 2013, the government is to take a number of key decisions relative to the energy sector. In particular, the government is to implement mechanisms for the regulation of the wholesale and the retail market, for the gradual elimination of cross-subsidies, as well as for creating clear and predictable rules necessary to attract long-term investment.

President Vladimir Putin also signed a decree On the Joint Stock Company Rossiyskie Seti to rename IDGC Holding as Rossiyskie Seti (translated as the Russian Networks). 54.52 percent of the shares of IDGC belong to the federal government.

There are proposals for the government to make a contribution to the charter capital of Rossiyskie Seti in the form of a 79.55-percent stake in UES FGC, which is also owned by the state. The capital infusion into Rossiyskie Seti will allow the company to issue additional stock.

At its recent meeting, the board of directors of UES FGC approved the regulations on uniform technical policy in the power sector of Russia. The document is also approved by the technical board of the FGC, by IDGC Holding, and by other system operators.

The priority areas of a unified technical policy are aimed at increasing the manageability of the Russian grid complex, at implementing full automation of key business processes, at ensuring the metrological support of production, at introducing a single technological electricity network, and at improving the training of operating personnel.

The Ministry of Energy of the Russian Federation approved the investment program of RAO ES of the East for 2012-2014. Under the approved program, the amount of financing for the holding’s investment projects, including the projects of its subsidiaries will amount to 20.1 billion roubles in 2012, 28.5 billion roubles in 2013, and 25.8 billion roubles in 2014.

As part of the investment program, RAO ES of the East plans to implement the following priority construction projects in 2012-2014: unit no. 5 at the Yuzhno-Sakhalinsk CHPP-1, gas turbine generation plant site at TSPVB (Primorye), Yakut GRES-2 (first phase), Ussuri CHP, gas turbine cogeneration plant at Vladivostok TPP-2, the CHP at Sovetskaya Gavan, the Sakhalin GRES-2, and the second phase of the Blagoveshchensk CHP.

Many analysts have noted a trend toward the consolidation of generating companies. This new tendency was observed in the operations of IES Holding, Gazpromenergoholding, as well as in the absorption of OGK-2 and OGK-6.

Gazpromenergoholding CEO Denis Fedorov believes that the consolidation of companies in the Russian power sector in the future is necessary and inevitable. According to Fedorov, in the medium term, the fate of TGK-4 and TGK-2 will be decided. They will likely join either Gazpromenergoholding or Inter RAO. Despite the trend toward integration that is gaining momentum, foreign companies will still be present in the Russian power sector.