1
RAO UES
Anatoly Chubais, CEO
EEI International Utility ConferenceLondon, March 11, 2008
Power Sector Liberalizationand Climate Change:The Russian Model
2
Russian Power Sector and RAO UES
Russia is the 4th largest electricity market in the world
~5-6% of world generating capacities
Average growth in electricity consumption: 2-4% p.a. since 2006
One of the world’s largest markets…
One of the world’s largest markets…
… is being served by the world’s largest utility
… is being served by the world’s largest utility
Electricity output:
> 70% of Russia’s total
Heat output:
~ 33% of Russia’s total
3
RAO UES: Pre-reform Model
Generation
Low voltage& High voltageGrids
Supply
73 AO-Energos High VoltageGrids
+Grid
Services
CentralisedDispatch
32 FederalPower Plants
MinorityShareholders
RussianGovernment
52% 48%
RAO UES
4
Basics of the Reform: Separation of Monopolistic and Competitive Sectors
Mo
no
po
list
ic s
ecto
rs
Dispatching
Transmission and Distribution grids
Co
mp
etit
ive
sect
ors
Supply
Generation
Private propertyand
market
Government propertyand
Government regulation
5
Reform OpponentsPolitical and Business Elite Changed Their Standing on the Reform Essence
UES
Reform
UES
Reform
Key political factions in the State Duma
Conservatively-minded energy specialists
and scientists
Majority of regional Governors
VIPsin the Government and
Kremlin
Majority of senators in the Federation Council
Influential oligarch groups
2000 - 2008
Majority ofminority
shareholders
6
Competitive market
Government ownershipPrivate ownership
SystemOperator
Monopolistic sectors Competitive sectors
Federal Grid
Company
11
Interregional Distribution Companies
(IDCs)
Hydro OGK
Supply
6
Wholesale GenCos (OGKs)
Rosenergoatom (nuclear)
Independent GenCos
14
TerritorialGenCos (TGKs)
Russian Power Sector: Post-reform Model
7
Functional unbundling Legal unbundling Ownership 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
??
Power Sector:Functional, Legal and Ownership Unbundling
8
Competitive Wholesale Market:Supply/Demand Equation Prices
Source: Administrator of Trade System (ATS)
Average prices (Europe+Urals and Siberia), Euro/MWh
6
9
12
15
18
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Day (Apr 07)
6
9
12
15
18
21
01.10.07 08.10.07 15.10.07 22.10.07 29.10.07
Week and month
6
12
18
24
.Sept.06 Oct.06 Nov.06 Dec.06 Jan .07 Feb .07 Mar .07 Apr .07 May.07 Jun .07 Jul .07 Aug.07 Sept.07 Oct.07 Nov.07 Dec.07 Jan .08 Feb 08
Year
9
Power Market DevelopmentPace of Liberalization: Government’s Plan and Actual Progress
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 Jul 1, 2007 Jan 1, 2008 Jul 1, 2008 Jan 1, 2009 Jul 1, 2009 Jan 1, 2010 Jul 1, 2010 Jan 1, 2011Sept 1, 2006
~18% (Sept 06)
~20% (Jan 08)
Excluding electricity consumption by households
actual pace of liberalization (facts and estimates)
mandatory increase of the liberalized market share
~ 25%
~35%
~40%
~60%
~70%
~90%100%
10
Electricity Market System: Target Model
Competitivewholesaleelectricity
marketas of September 1,
2006
Competitivewholesaleelectricity
marketas of September 1,
2006
Capacity market 2008
Ancillary service market2008
Derivative market2008
Liberalized retail marketsas of September 1, 2006
11
Electricity Demand Growth Outlook: Mid-term and Long-term View
Mid-term Long-term
Source: UES estimates
Basic scenario Optimistic scenario
kWh, bln
Average annual increase in 2006-10: 3,5% (basic scenario)
0,980
1,003
1,035
1,070
1,120
0,9
1
1,1
1,2
2006 2007 2008 2009 2010
3,5
4,3
3,73,9
3
4
0
1
2
3
4
5
2006-2010 2011-2015 2016-2020
%%
12
Prospects until 2030:Target Concept, General Scheme, Investment Programs
2006
2010
2020
2030
General Scheme for locating power capacity until 2020
Target Concept for Development of the Russian Electricity Power Sector until 2030
2006-2010 Investment Program
of UES Holding Company
5-year investment programsof energy companies
from 2008
2006 2010 2020 2030
13
CAPEX 2006-2010 – 93 bn EuroSources of Financing
Private investmentsState budget financing
Credits and loans Companies’ funds
Other
Euro, bn
4.8 (5%)
15 (16%)
22.8 (25%)
22.9 (25%)
27.5 (29%)
0 10 20 30 40
Total: ~93 bn Euro (private investments ~27.5 bn Euro)
14
374
1099
1857
0
500
1000
1500
2000
Thermal OGKsand TGKs
Emerging markets Developedmarkets
EV/IC, Euro/kW
(Feb 08, weighted average)
8198
3199
22756
0
5000
10000
15000
20000
25000
DisCo's Emergingmarkets
Developedmarkets
EV/length, Euro/km
(Feb 08, weighted average)
Thermal generation-2008: Key growth drivers
Market liberalization causes a stable rise in electricity prices
M&A. The approaching competitive sale of OGK and TGK shares to strategic investors makes these assets more attractive to portfolio investors
Distribution grids-2008: Key growth drivers:
Consolidation of 61 regional grid companies converted into 11 interregional distribution companies (IDCs): higher liquidity; lower cost of capital; entry of large companies with a high free float into the stock market
RAB: higher transmission tariffs; optimized revenues, profits, and investments of IDCs
Connection fees as an effective CAPEX mechanism
Thermal Generation and Grid Assets: Undervaluation and Growth Potential
15
Funds raised so far and yet to be raisedFrom Competitive Share Placements and Sales to Strategic Investors
Total: ~ 27.5 bn Euro
27,5
0,4
10
20
30
Euro in billions Fact: 18.8 bn Euro
UES estimates:+ 8.5 bn Euro
0,80,5 0,70,20,30,4 0,40,8 0,7 1,3
3,1
0,30,50,60,20,41,51,2
0,4
2,4
0,31,7
1,1 0,7
4,2
2,00,7
TG
K-1
3
TG
K-1
4
TG
K-7
Apr May MayMar08 08 0808
TG
K-4
TG
K-1
2
May08
TG
K-9
TG
K-1
2
OG
K-6
TG
K-3
TG
K-9
Dec Dec Dec Jan Jan07 07 07 08 08
OG
K-5
OG
K-3
TG
K-5
TG
K-3
OG
K-5
OG
K-4
TG
K-1
OG
K-2
TG
K-8
OG
K-3
Nov Mar May May Jun Sep Sep Sep Oct Oct06 06 07 07 07 07 07 07 07 07
TG
K-1
0
TG
K-7
TG
K-1
1
TG
K-6
TG
K-1
0
OG
K-1
Feb Mar Mar Mar Mar Mar Mar08 08 08 08 08 08 08
TG
K-2
16
2006-2010 RAO UES Capacity Commissioning Program
MW 2006 2007 2008 2009 2010 2006-2010
Thermal generationOGKs, TGKs, RAO UES
1 186 1 545 2 050 5 788 14 364 24 934
Hydro OGK 67 690 420 1 224 1 612 4 013
Total commissioning 1 253 2 235 2 470 7 089 15 919 28 947
0
5,000
10,000
15,000
20,000
MW
2006 2007 2008 2009 2010
17
RAO UES Investment Program for 2006-2010: Higher Demand for Suppliers’ Products and Services*
Power SectorDevelopment
Program
2010 vs. 2006 Generation equipment(Procurements of solely primary generation equipment for OGKs and TGKs):~ 21.6 bn Euro
8-fold
Electrical equipment(Procurements solely for FGC):~ 7.6 bn Euro
4-fold
Coal:~ 731 milliontonnes of coal
40%
Gas:~ 848 billioncub.m. of gas
30%
Construction materials(Solely cement expenses of TPPs and HPPs): ~ 0.3 bn Euro
R&D(Solely in thermal power sector):~ 2 bn Euro
Construction and installation(Solely in thermal power sector):~ 9 bn Euro
4.5-fold
4-fold
8-fold
* Expert estimates
18
2006 2020
Gas generationCoal generation
Nuclear generationHydro generation and other renewable sources
Percent of total41,5
25,1
15,9 17,5
33,232,2
20,5
14
0
10
20
30
40
50
Fossil fuel generation:
66,6%
Non-fossil fuel generation:
33,4%
Fossil fuel generation:
65,5%
Non-fossil fuel generation:
34,5%
Gas consumption increased from 175 bn cu m to 210 bn cu m (or by 20%)
Coal consumption increased from 128 mn t to 285 mn t (or by 123%)
Nuclear generation increased from 23.5 GW to 53.2 GW
Hydro generation increased from 44.9 GW to 71.7 GW
2020 to 2006: Notes
Changes in the Power Generation MixEffects on Carbon Efficiency
Source: RAO UES
19
Carbon Efficiency of the Russian Power Sector: Strategy
SolutionsKey challenges
• A surge in power generation
• Gas-to-coal substitution (the gas share is 8% lower and the coal share is 7% higher in the generation mix by 2020)
• Gas generation: Introduction of combined cycle gas turbine (CCGT) technologies
• Coal generation: Introduction of clean coal technologies (CCT), introduction of carbon capture and storage (CCS) systems
• Other requisite measures:- Development of economic and market-based mechanisms for environment protection: CO2 emission tax; CO2 emission trading system- Development of renewable energy sources (hydro, tidal, geothermal, wind)
Emission efficiency of the Power Sector (CO2 emissions / Generation) 0,73
0,58
0,44
0
0,2
0,4
0,6
0,8
1
1990 2005 2020 (est.)
1990 2005 2020
CO2
emissions, mn t
794 552 783
Generation, bn kWh
1082 953 1793
Source: RAO UES
20
Russian Power Sector: Changes and Estimates of GHG Emissions
2014 2016450
500
550
600
650
700
750
800
850
900
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2018 2020
793.51 (1990) 1990 level 783.3 (2020)
Actual Estimates
CO2 equivalent, millions of tonnes
(basic scenario)
It is not until 2020 that the 1990 level of GHG emissions is exceeded
Source: RAO UES
21
Our journey is about to end
2000
2008