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March 20, 2001

Russian power sector reform Presentation to AmCham Russia members by CEO of Unified Energy Systems of Russia, Anatoly B. Chubais. March 20, 2001. Moscow. Increase in power generation. 2000 saw a 3.9% increase in Russia’s power consumption level

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March 20, 2001

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  1. Russian power sector reform Presentation to AmCham Russia membersby CEO of Unified Energy Systems of Russia, Anatoly B. Chubais March 20, 2001 Moscow

  2. Increase in power generation • 2000 saw a 3.9% increase in Russia’s power consumption level • To achieve this, RAO «UES» has raised its power generation by 19.5 bn kWh as compared to 1999.(586.5 kWh in 1999 versus 606.0 bn kWh in 2000) • This is comparable to annual power consumption level of such highly industrialised regions as Samara and Perm • According to expert estimates, in 2001 power generation level is going to rise by 47.5 bn kWh compared to 1999

  3. Improvement of power quality and reduction of the number of technological failures Power quality Technological failures (number over the last 4 years) % of calendar Frequency, time Hz Y2000: number of technological failures fell by 25% compared to 1997 99.94 50 100 49.98 95 94.6 49.96 90 49.94 85 49.99 49.92 80 78.6 49.9 49.88 75 49.92 49.88 70 49.86 Average frequency of electric current 65 49.84 RAO UES’s time of standard frequency operation per year 49.82 60 1996 1998 2000

  4. Resolution of non-payment problem Significant improvement in cash collection % Paid in cash, %

  5. Normalisation of settlements with power suppliers During 1998 - 2000 RAO «UES» succeeded in: • increasing the share of cash in settlements with Gazprom by the factor of 3.4 (from 27% to 92%). • increasing the share of cash in settlements with coal companies by the factor of 4.4 (from 16% to 70%). • increasing the share of cash in settlements with oil companies by the factor of 5.3 (from 13% to 70%)

  6. In spite of increase in the capex volume... В 2000 the amount of RAO «UES» investments in production was 1.4 times as high as it was in 1998 (RUR 34.9 bn against RUR 24.3 bn). North-Western Co-Generation Plant • Late in 2000 the first unit of the North-Western Co-Generation Plant was commissioned - first CCGT plant in Russia • Total design capacity of the plant will be 1,800 MW • Its efficiency rate will amount to 51.5%, while at conventional steam plants this rate does not exceed 40% • Fuel consumption per 1 kW of generated power will fall by 20-25% • Construction of the plant is financed by RAO «UES» 1,116 MW 836.5 MW 823.9 MW RUR 34.9 bn RUR 28.7 bn RUR 24.3 bn

  7. …internal resources are not sufficient to solve the key problem Assets of RAO «UES» have highly deteriorated • Over the last 15 years virtually no large power projects have been commissioned • Annual retirement of capacities is 5 times as high as the introduction of new ones • Annual amount of investments is 5-6 times lower than required Without optimisation of «RAO UES» structure and that of the power generation sector in general, Russia would become energy deficient by 2005

  8. Current structure and economic mechanism Key drawbacks Basic accomplishments Federal (wholesale) market • System of «sellers» and «buyers» has been created; FOREM has been founded • Need to establish contractual relations between market participants has been recognised • Need to set price (tariff) taking into account power specifics (tariffs for power and capacity) has been recognised • «Sellers» do not sell, «buyers» do not buy, FOREM is not a true market • Principle of a «core payer» is applied, a buyer is linked to a seller, contractual relations are half fictitious • Price (tariff) is set not by the market but by regulators (Federal Energy Commission and Regional Energy Commissions) and is cost-based Regional (retail) level • Absolute monopoly at the regional level: single seller system, all buyers in the region are obliged to purchase from the single seller • No changes

  9. Basic directions for the development of power sector structure and economic mechanism Market structure; unbundling of monopolistic and competitive sectors Currentstructure Market structure; full liberalisation of economic relations within the sector Administrative System Enlargementof AO-energos

  10. Great Britain (1990) Argentina (1990) Hungary (1999) Skandinavia (1992) Thailand (1996) Brazil (1995) Most countries have chosen a competitive model Private California (1995) Moldova (1999) Privatisation Italy (1999) EC Directive for Power sector Kazakhstan (1998) Russia (2000) Ukraine (1997) Greece (2000) South Africa (2000) France (2000) State- owned Liberalisation State regulation Competitive market

  11. Russian power sector reform implies introduction of competition into generation and supply of power Segments, where development of competition is possible • Introduce free market pricing • Stop cross subsidizing Generation of power Dispatching Rules of the market High voltage grid Re-organise the regulatory system Regulated tariffs • Reorganise commercial/ technological infrastructure for functioning of power market • Provide equal access to distribution network Natural monopolies Distribution Supply of power

  12. The reform should harmonise Russian power sector with basic principles of EU Electricity directive (1996) Principles of Russian reform EU Directive’s principles Liberalisation of electricity generation and supply through implementation of competition Demonopolisation of generation and supply through restructuring of UES’ subsidiaries Free access to customers No constraints for third party access Community-wide Gradual opening of electricity markets over a period of 6 years Development of wholesale and retail electricity markets and conditions for private investments Separation and strict regulation of transmission; separation and regulation of distribution, third party access to the grid Unbundling and strict regulation of electricity transmission and distribution systems

  13. Raising investments is a key task of reform Replacement of depreciated capacity is necessary... …while investment are down 3 times over last 10 years... Rbls bn. (in 1991 roubles) … 80 GW by 2010... 6,5 6,3 4,5 3,1 2,9 2,8 2,7 2,2 2,2 …while new constructions is down 5 times GW 4 2,5 2,2 2 1,3 Capital requirements for a replacement of capacity is estimated between $2 bn to $6 bn annually 1 0,8 0,8 0,6 0,6

  14. Reform will open new horizons for co-operation between Russia and international investors in power sector Strengthening Russian electricity security is in the interests of international investments in Russian economy New markets for Russian and international power sector technologies Investments opportunities in generation and supply Russian power sector reform Continuing cooperation with multilateral organisations

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