With demands for electricity in Russia declining as a result of the economic crisis, the power companies are requesting the government to stop state-supported industry expansion plans. Holding off on expansion now will be conducive to maintaining the viability of broad reforms in the economic sector as a whole.

Utility companies created by the government prior to the dismantling of the state monopoly ROA UES in July of 2008 are under an obligation to increase electricity supplies and upgrade their facilities. These plans have been put in place within the framework of liberalizing the market by the former head of ROA EUS Anatoly Chubais.

Utility companies have been sold to domestic and foreign investors, including a number of large utility companies in Europe – E.On AG of Germany and Enel SpA of Italy. In return, these companies promised to invest in a USD 70 billion privatization plan envisioned to be completed by 2012.    

In view of falling consumption that resulted from a reduced industrial demand, these investment obligations have become very difficult to meet.

In responding to the concerns of the generators, the government noted that it does have plans to extend the deadlines and reduce capacity targets.

In the event the state authorities would choose not to compromise on the original schedule, the power companies will struggle to break even on their operations. The generator companies advocate for government measures aimed at setting the mandated increases in power generation on the basis of the actual demand by end consumers. If the requirements are to remain unchanged, experts say that the market will be oversaturated with excess unused power.

Mr. Rapio Kuula of Finland’s Fortum Oyj said his company is currently pursuing an ambitious investment program at generating station TGK-10, and extension of construction timeframes would be most helpful. 

Investors from abroad made an appearance on the Russian power-generation market two years ago. The companies’ decision to invest in Russia was based on the country’s growing demand for electricity that was prompted by favorable economic conditions.

Power-generating company Fortum paid a price tag of 2.7 billion euro for a 76-percent share of TGK-10. Later, the company increased its ownership in the enterprise to 93 percent. Germany’s E.On made the greatest investment to-date. It paid 4.5 billion euro to get a 78-percent stake in OGK-4. Enel purchased 60 percent of OGK-5 at a cost of 2.6 billion euro, later reducing its ownership to 56 percent. 

After the investments were made, Russia experienced the effects of the global economic crisis, suffering from the sharp fall of prices on oil and other commodities.

Russia’s economic growth in 2008 stood at 6 percent. Most current estimates show that the country’s GDP may contract by as much as 2 percent in 2009.

The demand for electricity, which acts as a sensitive barometer of industrial activity, has been decreasing from week to week since the month of December. According to Market Council, the overall demand may be as much as 6.3 percent down since January.

Chief manager of Russian operations for E.On Sergei Tazin believes that the state is going to be aware of the great problems that may arise as a result of achieving the original expansion targets.

Among the dangers associated with the overproduction of electricity is the downward price pressure that would undermine the sector’s stability.  The power-generation capacity may also become obsolete when the industry finally expands to levels where more electric energy would be needed to advance economic growth.

As Dominique Fache, Enel’s COO for Russia noted, the Chubais plan for upgrades and construction is too ambitious and optimistic. The plan is removed from the realities of the sector, according to Mr. Fache.

In addition to the relaxation of the investment program, a number of power companies would like for the government to permit them to sell more electricity at unregulated prices on the wholesale market. Around 50 percent of electricity on the wholesale market is currently not subject to regulation.

Mr. Fache of Enel is of the view that the regulated price system is artificially low and fixed at 3 to 4 times below the levels at which it should be. In Russia’s western and central regions, the price of electricity is about USD 21 per megawatt hour, which only covers the expenses associated with generation and delivery.

The current development scheme for the power-generation sector calls for increasing Russia’s production of electricity to

1 197 billion – 1 260 billion kilowatt hours in 2010. In 2008, the figure for electricity production stood at 1 037 billion kilowatt hours. Even though current market indicators suggest that the fall in demand has become less dramatic, the stable growth in consumption seen in the previous years is unlikely. 

According to Deputy Energy Minister Vyacheslav Sinyugin, the levels for new power-generation capacity could be reduced from a half to a third of their original targets.

At the same time, industry experts point to problems that may arise in connection with the downgrade revision of the plan. Without advance preparation, the industry would not be able to meet a significant increase in demand. Electricity, in contrast to hydrocarbon fuels, may not be stored. Considering the likelihood that commodity prices return to their previous levels, analysts do not rule out the possibility that electricity demand would rise fast. 

Demand may also grow from electricity exports to China or South Korea. The likely suppliers for this energy though would be not the wholesale generators, but the government-owned Hydro-OGK and Inter RAO EES.

Inter RAO is a trading company that handles exports of electricity out of Russia. Hydro-OGK operates hydroelectric facilities, quite a few of which are situated in close proximity to the Chinese border.