Focus on Russia Power Reform

Focus on Russia Power reform

Anatoly Chubais. Photo: Lystseva Marina/ITAR-TASS/Corbis Anatoly Chubais. Photo: Lystseva

May / June 2008 European Energy Review

68 Power reform Focus on Russia

Liberalisation turns into renationalisation Russian power play

The liberalisation of the Russian power market has drawn in a number of European electricity companies, including Enel, Eon, RWE, EdF and Fortum. But the way things are going, it looks like the newly liberalised market will be controlled by none other than Gazprom.

| by Jeroen Ketting

The restructuring of the Russian power The power sector reform involves the public buyout offer, paying a total of $4 sector currently taking place is one of separation and privatisation of the billion. OGK-5 has its main assets in the the greatest economic reform generation, transmission and sales Ural region, in the northern Caucasus, programmes ever undertaken. The old companies. The grids will be brought and in Central Russia. The aggregate Russian power monopolist RAO UES has under regulatory supervision. Although installed capacity is 8,672MW for power been broken up into a host of smaller the restructuring should be fully and 2,242 gigacalories per hour (Gcal/h) power producers, which are being sold implemented by July 2008, the transition for heat. Enel plans to invest around $9 piecemeal to private investors, foreign to a fully open competitive market will and domestic. The restructuring, to be only happen in 2011. The motivation for largely completed this summer, is meant the reform programme is to attract Any foreign company to lead to a nationwide liberalised investment. More than $120 billion is electricity market – unprecedented in needed until 2010 for the upgrading of will have to dance to Russia. Foreign investors have been the aging energy infrastructure and for Gazprom’s tune lining up to buy up the OGKs (wholesale building additional generating capacity generation companies) and TGKs to deal with increasing domestic (territorial generation companies), demand. billion in the Russian power sector. Enel which were formed as part of the had earlier, in April 2007, acquired the restructuring process. Auction | gas assets of Russia’s bankrupt oil In Russia, however, things are hardly The first company to move in was Enel. company Yukos. ever that straightforward. The foreign The Italians acquired a 25.03% stake in companies might find that they will get OGK-5, Russia’s largest wholesale In October 2007, Eon spent $753 per a little more – or less – than they generating company, at an auction in kilowatt to pay $6 billion for a 60.75% bargained for. They will run up against June 2007. Enel offered 39.2 billion stake in OGK-4. Subsequently, in February formidable competition from some of roubles ($1.5 billion) for a majority stake 2008, Eon raised its stake in OGK-4 to an Russia’s biggest industrial conglomerates against the starting price of 24.7 billion absolute majority of more than 75%. This – above all from Gazprom. The gas giant, roubles ($953 million). The sales price move made Eon the first foreign company controlled by the state, is rapidly amounted to $690 per kilowatt. Enel to fully control a major Russian power extending its control over the newly beat Eon of Germany, and Russian producer and the biggest foreign investor liberalised power market. Some even companies Rusal Energy and Novatek. By in Russia’s power sector. An absolute fear that the market will be re- now, Italy’s biggest utility has increased majority implies that no other OGK-4 monopolised. its stake in OGK-5 up to 59.8% after a shareholder will be able to block Eon's

European Energy Review May / June 2008

Anatoly Chubais 69 Focus on Russia Power reform

decisions on the board of directors. Kostroma regions. In March 2008, RWE particular with IES and SUEK, Gazprom is OGK-4, with its headquarters in Moscow, paid an additional 9 billion roubles for well on its way to becoming Russia’s new operates five power generation plants the purchase of TGK-2's newly issued power sector monopolist. throughout Russia, with a total installed shares, giving it effective control of the Gazprom and IES recently emerged as generation capacity of 8,630MW that firm for a total of around 19 billion partners as the two companies set up an accounts for about 3.9% of Russia’s total roubles ($802 million). investment firm that will enter joint bids installed generation capacity and for for government stakes in Russia’s power approximately 5.75% of Russia’s total EdF of France was poised to acquire OGK-1 sector. With both companies together installed thermal generation capacity. at an auction on April 17, along with its controlling stakes in eight of the twenty Russian partner TransNeftServis-S. Just large power producers, and with all other In February 2008, after winning the one day before the auction, however, RAO players having effective control over not auction for electricity generator TGK-10, UES announced that the auction would more than one power producer each, it is Finnish energy company Fortum agreed be delayed and that only one bidder not hard to imagine what influence IES to pay $1.2 billion for a 55% stake. In remained: Integrated Energy Systems and Gazprom will hold over the Russian March 2008 Fortum increased its share to (IES), a consortium of Russian multi- power sector. This influence can already 76%, spending as much as $3.1 billion for billionaires, led by the investment vehicle be seen in the price of the stake that was the entire stake, and giving Finland's of metals and oil magnate Viktor bought jointly by IES and Gazprom in largest utility its first controlling stake in Vekselberg. The definite outcome of the TGK-7. Whereas the Western players paid a Russian power producer. Fortum has process was still undecided as this roughly between $600 and $800 per stated it is ready to invest up to $4.1 magazine went to press. kilowatt of generating capacity, the price billion. The deal values TGK-10 at $767 per per kilowatt of TGK-7's generating capacity kilowatt of capacity, which is a record in Power game | will be $456. Russia. Other companies that expressed With the strategic moves of these first five Western energy majors, the game has only In addition to its joint venture with IES, started. Companies such as Spain's Endesa, Gazprom has also announced a merger Some fear that the Gaz de France, Czech CEZ, South Korea’s with SUEK with the aim to join their market will be KEPCO and America's AES are following respective power and coal assets into a the developments in Russia with a keen holding company. The value of the re-monopolised eye. Yet the outcome of the Russian power holding company will be somewhere game is far from certain. Western around $16 billion. The total generating interest were Gaz de France, Russian oil companies will have to compete with capacity of the pooled companies will be major Lukoil and Eon. TGK-10 controls some of Russia’s industrial giants, such as 30.5 gigawatts, or about 15% of Russia's eight power stations in central and IES, which has managed to buy up some total. It is estimated that the holding northern Russia with 2,785MW of of the choicest UES assets. company to be established by Gazprom electrical capacity and 10,014Gcal/h of and SUEK will control more than 40% of heat. The investments by Fortum are Another big Russian player is the Siberian the fossil fuel based generation assets much needed as the utility plans to spend Coal and Energy Company (SUEK), the being sold off by UES. Perhaps even more billions of dollars to increase capacity by nation's largest coal producer. The importantly, the two partners together 2012 to 5,025MW. Fortum also owns about company supplies nearly 31% of steam will also have a near monopoly on the 25% of TGK-1, the main supplier of coal to the domestic market and around fossil fuels used to produce power, as electricity and heat to St. Petersburg. 25% of Russian exports. SUEK bought SUEK is by far the country's largest stakes in OGK-2, OGK-6, TGK-12, TGK-13 producer of coal and Gazprom of gas. Another German company, RWE, recently and in the independent far-Eastern power Natural gas accounts for about 60% of became the fourth European utility to generation companies, with a total the fuel used to produce electricity and become a major player in the sector. RWE installed generating capacity of about coal for 25%. paid $568 per kilowatt of TGK-2's 30,000MW. Gazprom will control a 50% plus one generating capacity which is considerably share of the venture while SUEK will less than Fortum, Eon and Enel paid for Then there is Gazprom, which has secured hold the rest. This will include their assets. RWE, with junior partner effective control of four of the twenty controlling stakes in four major Sintez Group, a Russian utilities investor, large power producers, including the generating companies: OGK-2, OGK-6, paid 9.3 billion roubles ($392.6 million) main suppliers of electricity to Moscow TGK-12 and TGK-13, as well as minority for the state's 33.5% stake in TGK-2, which and St. Petersburg. But Gazprom wouldn’t stakes in OGK-5 and TGK-5. This joint operates in northern and north-western be Gazprom if it didn’t try to dominate venture will create a giant enterprise Russia, including the Arkhangelsk, the market. Through strategic that will partially re-monopolise the Novgorod, Tver, Vologda, Yaroslavl and manoeuvring and tactical alliances, in sector and undermine the largely

May / June 2008 European Energy Review

70 Power reform Focus on Russia

successful liberal reforms started in 2003 seem justified as Gazprom-SUEK would latest merger. Although a sensible move, that were aimed at making the power enjoy unparalleled market dominance it comes too late to prevent the Gazprom- sector more open and competitive. and lobbying power in Russia. IES-Suek combination. from wielding overwhelming influence on Russia’s Sector specialists, along with RAO UES Gazprom's merger with SUEK must still power sector. As with Russia’s gas and chief Anatoly Chubais and former be approved by the Federal Anti- oil sectors, Gazprom will be the Minister of Economic Affairs German Monopoly Service, which is widely dominant player. Any foreign company Gref, have expressed fears that Gazprom’s expected to give the green light this already present in or wanting to enter acquisition of power and coal assets will year, perhaps setting some minor the Russian power sector will have to be undermine Russia's power sector conditions. It is also widely expected prepared to dance to Gazprom’s tune.  liberalisation and harm competition as that the Federal Anti-Monopoly Service Gazprom would control the utilities as will not allow Gazprom to buy any more well as their supply chains. These fears assets in the electricity sector after this

Gridlock Russian corporations seize control of the former state owned power sector

Asset Main Stake Price Capacity The balance of power shareholders (%) (billion USD) (GW) Working together Wholesale OGK-1 IES - - 9.5 IES Gazprom Suek Generating OGK-2 Gazprom Majority 8.7 Large Largest Largest Companies OGK-3 Norilsk Nickel 53.83 3.1 (for 38%) 8.5 industrial producer producer (OGK) OGK-4 E.On Ruhrgaz >75 6 (for 61%) 8.6 conglomerate of natural gas of coal OGK-5 Enel 59.8 4 8.7 (by far) OGK-6 Gazprom Majority 9.1 Hydro OGK Russian state Majority 23.3 of all electricity in Russia comes from Territorial TGK-1 Gazprom Majority 6.1 85% gas or coal fired Generating Fortum Oy 25 powerstations Companies TGK-2 RWE 43 0.802 2.6 (TGK) TGK-3 Gazprom Majority 10.5 TGK-4 Onexim/Norilsk Nickel 32 0.5 3.3 TGK-5 IES 46.1 3.8 Ownership by production capacity TGK-6 IES 65.2 1.06 3.1 Territorial Wholesale TGK-7 IES-Gazprom JV 32 6.9 IES 23 Foreign owned TGK-8 Lukoil 80 2.3 3.3 Suek TGK-9 IES 67 4.8 Gazprom EBRD 8 0.14 TGK-10 Fortum Oy 76 3.2 2.6 IES TGK-11 SUEK 32 2.0 UES* UES 28.9 Lukoil TGK-12 SUEK 43.48 3.6 TGK-13 Gazprom -SUEK JV Majority 2.5 State owned TGK-14 UES 49.66 0.6 Gazprom cooperates with IES Majority: majority stake and Suek through joint-ventures *Still to be privatised

Ownership, geographical distribution 6 1 TGK’s (1-14) OGK’s (1-6) 2 Gazprom 1 4 6 2 IES 5 H RWE 2 H H 3 Gazprom 3 4 3 3 1 UES 3 Norilsk Nickel (Mosenergo) 4 6 6 9 IES 4 E.On Ruhrgas 6 H 5 1 H 4 10 Lukoil 5 Enel 1 H 2 2 4 6 H Fortum Oy 6 Gazprom 8 H 7 1 1 H 5 Suek Russian state 2 H 5 H H 5 3 H H 2 13 H 1 11 H 6 H 4 H Far East 14 H 12 H 3 3

Onexim can raise its stake to between 45% and 50% once TGK-7's minority shareholders exercise their preemptive rights. X&Y Graphics

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