Russia – DPRK Electricity Cooperation: the Role of INTER RAO UES Company at Current Stage

1. Russia – DPRK Electricity Cooperation: the Role of INTER RAO UES Company at Current Stage DPRK Energy Experts Working Group Meeting, Beijing, March 8-9, 2008 Alexander OGNEV, Deputy Director, Ph.D. Eastern Branch of INTER RAO UES Company – Vostokenergo Ruslan GULIDOV, Research Fellow, Ph.D. Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences

2. INTER RAO UESis a Transnational Energy Holding Company • Russia’s single operator of electricity export/import supplies • Shareholders are JSC RAO UES of Russia (60%) and JSC Rosenergoatom (40%) • Affiliates more than 20 companies in 14 countries of Europe and Asia • Controls a number of generating and distributing energy assets in Russia and abroad • Total staff ~ 17,000 people • Headquarters – Moscow, Russian Federation 2

3. Core Business Areas of the Company 1 Electricity Export-Import InvestmentActivities Electricity Generation and Distribution AssetManagement 2 3 4 3

4. Russia’s Electricity Export and Import Turnover over 2004-2007, bln kWh Export Import 20.9 20.5 19.1 10.5 10.1 10 10.0 5.6 5.1 Finland Norway 2007 2004 2005 2006 Latvia Belarus Lithuania Ukraine Kazakhstan Mongolia Moldova Georgia Azerbaijan China 4

5. In Our Further Development We Are Guided to 5 Priority-Oriented Regions Scandinavia Baltic states Central and Eastern Europe North East Asia and the Far East The Black Sea region 5

6. Company’s Activity at North-East Asia and the Far East • Branch of Inter RAO UES company – Vostokenergo was established in 2005 (headquarters in Khabarovsk) • Export supplies from Russia are carried out to China and Mongolia • 3 Transmission Lines 110-220kV – from Amurskaya Oblast to Heilongjiang province (Northeast China) • 4 Transmission Lines 6-220kV – from Irkutskaya Oblast, Buryat Republic and Zabaikalskiy Krai to Mongolia • The project of large-scale electricity export from Eastern Russia to China is currently under discussion and elaboration (60 bln kWh)

7. Profile of Russia – Korean Peninsula Energy Bridge Project (2001-2004) • 1. Construction of AC Transmission Line 500kV Vladivostok – Chonjin • 380 km (250 km through Russia,130 km – DPRK) • capital costs ~$200 mln • time-frame – 3-4 years • 2. Construction of DC Transmission Line ± 500-600 kV Vladivostok – Seoul • 1280 km (250 km through Russia, 1030 km – DPRK) • capital costs ~$1.3 bln • time-frame – 5-6 years Russia – DPRK 500 kV AC transmission line Chonjin Russia – ROK DC transmission line 500-600 kV

8. Recent History of Promotion Russia – DPRK Electricity Cooperation • Memorandum betweenInter RAO UES company and Ministry for Electric Power and Coal Industry of DPRK (Pyongyang,August 18, 2005) • Protocol on negotiationsof the delegations ofMinistry for Electric Power and Coal Industry of DPRKand branch of Inter RAO UES company – Vostokenergo (Pyongyang, August 7-10, 2006) • Protocolof 4th meeting of DPRK – Russia Intergovernmental Commission on trade, economic, scientific and technical cooperation (Moscow, March 19-23, 2007) • Protocolof working meeting of the delegations ofMinistry for Electric Power of DPRKand Inter RAO UES company on discussion of the project of electric power supplies from Russia to DPRK (Pyongyang, January26-31, 2008)

9. Main Directions of Russia – DPRK Cooperation in the Field of Electricity • Modernization of CHP plants of DPRK • Construction of 500 kV transmission power line for electricity supplies from Unified Power Grid of Eastern part of Russia to DPRK • Supply of transmission and transformer equipment • Most of power plants, transmission lines and substations were built with the technical assistance of USSR.It is reasonable to reconstruct them with the Russian assistance as well • It is recommended for JSC Technopromexport (Russia) and Korean Society on Export and Import of Complete Plant to prepare relevant offers Source: Protocolof the 4th meeting of DPRK – Russia Intergovernmental Commission on trade, economic, scientific and technical cooperation (Moscow, March 19-23, 2007)

10. Developments since the Project was Suspended: Case of Russia • problem of electricity cooperation between Russia and DPRK was raised to the governmental level • most of the problems of domestic power supply in the Russian Far East were resolved/be resolved in near term • construction of Bureyskaya HPP is finishing (1700 MW – 01/01/2008, 2010 MW in 2009) • T&D infrastructure in the Southern part of the Russian Far East was/is enhanced greatly (built ~ 1000 km of TL 500 kV, SS 500 kV Vladivostok – starting point of export supplies – in 2009) • construction of new power plant and expansion of existing capacities was planned (400 MW for APEC Summit 2012) These changes provide real preconditions to match demand for Russian electricity announced by DPRK

11. Developments since the Project was Suspended: Case of DPRK • At the working meeting of Ministry for Electric Power of DPRKand Inter RAO UES (Pyongyang, Jan.26-31, 2008)delegation from DPRK • confirmed again that electricity import from Russia is of high importance for DPRK due to hard economic conditions • argued that development of electric power sector is the most important task to solve for Government of DPRK in recent years • announced another time about impossibility to pay in monetary funds for electricity and financing investment of the Project (necessity to pay in money for import of food and fertilizers for food production) • Energy sector of DPRK keeps on experiencing serious problems • power plant and transmission facilities equipment is out-of-date and wore out • stable shortage in feedstock fuel due to decline in coal production (inundation of a number of mines) • supplies of fuel oil in exchange for consent to cease the nuclear program are insufficient and interrupted; China and ROK informed that instead of fuel oil they will supply coal and industrial equipment, respectively Under such circumstances demand for electricity import from Russia becomes more and more urgent and crucial for rehabilitation of DPRK

12. Up-to-date Profile of the Project • AC transmission line 500 kV Vladivostok – Kraskino (Russia) – Chonjing (DPRK) • Electricity export from Southern part of the Russian Far East to Northeast of DPRK into loading islands due to various frequency of AC in Russia and DPRK (50 vs. 60 Hz) • Distance – 390 km, of that – 240 km on the Russian territory • Load – up to 500 МW (2,5-3 bln kWh annually) • Investments estimates – $250 mln • The major problem is the source of payment for the electricity supplies • Korean party offered joint development of Sanson deposit of complex ore and payment for electricity imported from profit of Korean party • as preliminary assessment of Sanson project showed it can be efficient but under certain circumstances • to attract investors INTER RAO UES held preliminary talks with Russian metallurgical companies (RUSAL, Mechel, NLMK). For the reasons of high investment risks due to political situation in DPRK the positive decision has not been received • INTER RAO UES suggested to expand the list of mineral deposits and to include that of coal but DPRK delegation refused and offered as alternative option to implement modernization of CHP plant in Chonjin town Realization of the investment project of Interstate Transmission Line by INTER RAO UES singly, without involvement of other Russian energy and metallurgical companies is likely to be not profitable and highly risky

13. Next Steps ahead Towards Implementation of the Project (1) • to achieve the political decision in the form of Intergovernmental Agreement on reconstruction of DPRK’s electric power industry as it was made for reconstruction of the railway up to Rangin • to enlist support of Ministry for Industry and Energy Sector of Russia and Ministry for Economic Development and Trade of Russia to attract into the project Russian metallurgical company(es) • to keep on strengthening the power network in the south of Primorskiy Krai and to achieve inclusion into investment program of Federal Grid Company 500 kV transmission line SS Vladivostok – Kraskino. This line will • secure current and future demand of domestic consumers in Hasan area of Primorskiy Krai • make feasible the project of electricity supplies from Russia to DPRK as well as will meet future electricity requirements of Russian Railway company under the projects of unification of Trans-Korean and Trans-Siberian railroads and expansion of North Korean sea port in RaSon economic trade zone • bring the starting point of electricity export to DPRK closer for 190 km and, therefore, will reduce capital costs of the Interstate Transmission Line almost twice Russia’s Potential

14. Next Steps ahead Towards Implementation of the Project (2) • to expand the list of mineral deposits (and to include coal deposits) being offered as guarantees for investments returns and payments for electricity imported DPRK’s Potential ROK’s Potential to participate in the Project more actively with money, technology, political influence to consider the Project as a first stage of cooperation between Russia and the countries of Korean peninsula and even broader context as an initial stage of realization of an idea of the power interconnection among counties of Northeast Asia

15. NEAREST Project Sheme RF Quite weak tie (110/220kV) MO Under discussion CH DPRK Undersea cable(DC) Under discussion ROK Existing Lines Future Lines JP Undersea cable(DC)

16. Thank you for attention!

17. Scheme of RFEpower lines 500 kV SS Khabarovskaja SS Amurskaja SS Hehtcir Zejskaja Hydro Station Primorskaja power station Burejskaja Hydro Station SS Chuguevka SS Dalnevostochnaja SS Vladivostok SS Nakhodka • Blue – existing lines • Red – under construction • Green – plan for 2009-2011 • Lilac – under discussion now 250 km Perevoznaja SS Kraskino Zarubino Tumen project 130 km Hunchun (China) Source: Federal Grid Company Chonjin (DPRK)