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RAO UES Anatoly Chubais, CEO Davos, January 25, 2008

Power Sector Liberalization: The Russian Way. RAO UES Anatoly Chubais, CEO Davos, January 25, 2008. One of the world’s largest markets …. … is being served by the world’s largest utility. Electricity output Heat output E mployees.

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RAO UES Anatoly Chubais, CEO Davos, January 25, 2008

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  1. Power Sector Liberalization: The Russian Way RAO UES Anatoly Chubais, CEO Davos, January 25, 2008

  2. One of the world’s largest markets… … is being served by the world’s largest utility • Electricity output • Heat output • Employees • Russia is the 4th largest electricity market in the world • ~5-6% of world generating capacities 1998 2008 > 70% of Russia’s total ~ 30-33% of Russia’s total ~ 670 000 ~ 470 000 1998-2008: RAO UESand Russian Power Sector

  3. RAO UES 1998 2001 Payments due by customers Avalanche of bankruptcy claims to RAO’s leading subsidiaries Arrears of wages and salaries to personnel Reliability of power supply: standard current frequency 18% >20 energy companies and power plants 3 months in average,personnel strikes, including hunger strikes 94.5% of calendar time 100% since 2001 None since 1999 None since 2001-2002 100% of calendar time since 2001 + + 1998-2001: Crisis Management in RAO Cleaning up for the Reform Launch In the late 1990s, RAO implemented a crisis management project to overcome systematic financial, productionand social crisis… …yet sustainable development of the electric power industry necessitated a large-scale structural reform

  4. Tools for accomplishing crisis management tasks HR Policy Supply Policy • A new teamfor the company’s Management Board was mobilized • 90% of CEOs of subsidiaries were replaced (average age of CEOs went down from 60to 50years) • About 50 000 people were employed • andtrained • Regulatory framework for the supply system was created • General principles for planning supply operations were introduced as well as a motivation system to ensure their abiding Corporate Governance Business Planning budgeting system, business planning system, KPI system with divisional structure - were adopted • A modern corporate governance system with all relevant mechanisms was set up

  5. Basics of the Reform: Separation of Monopolistic and Competitive Sectors Private property and market Generation Competitive sectors Supply Government property and Government regulation Dispatching Transmission and Distribution grids Monopolistic sectors

  6. UES Reform Reform Opponents Political and business elite changed theirstanding on the reform essence Conservatively-minded energy specialists and scientists VIPs in the Governmentand Kremlin Majority of regional Governors and influential presidents of republics Majority of senators in the Federation Council UES Reform Key political factions in the State Duma Influential oligarch groups Majority of minority shareholders 2000-2007

  7. Threat of“pocket privatization” of RAO Threat ofasset value dilution Reform Opponents Concerns of the minority shareholders dispelled Imaginary and reasonable concerns of the minority shareholders of RAO UES: digest 2000 “Key reform-related decisions will be adopted ignoring the opinions of minority shareholders. The principal assets will go to investors that are friendly to the management of RAO” “The assets of RAO will be sold too quickly and, consequently, at a price lower than their market value, which will dilutethe value of stakes held by minority shareholders” Non-profitability ofinvestments in the electric power industry Unclear position of the state and local authorities “The state has not formulated its final position with respect to the restructuring plan. No political guarantees of the irreversibility of reform, no legal framework are in place” “Electricity tariffs were artificially reduced and do not provide return on investment. This situation is aggravated by the customers’ systematic failure to pay” The years of reform have answered all of these questions: • Active participation ofminority shareholders in the development and conducting of the reform was ensured. • Theprinciple ofassets pro rata allocation among the shareholders was implemented. • The reform of RAO lasted longer than originally planned: quality is more important than pace. • The aggregatecapitalization of new companies will be considerably higher than the value of RAO UES. • The reform gained absolute support from the state and legislative guarantees. • Tariffs were replaced by competitive market: full liberalization is envisaged by 2011.

  8. RussianGovernment 52% 48% Power sector pre-reform:Double vertically integrated and overregulated… Minority Shareholders RAO UES 73 AO-Energos Centralised Dispatch High Voltage Grids + Grid Services 32 FederalPower Plants Generation Low voltage & High voltage Grids Supply

  9. …Post-reform model provides competition Monopolistic sectors Competitive sectors 6 Wholesale GenCos (OGKs) 14 TerritorialGenCos (TGKs) SystemOperator Federal Grid Company Competitive market Rosenergoatom (nuclear) Hydro OGK Independent GenCos 11 Interregional Distribution Companies(IDCs) Supply Private ownership Government ownership

  10. Power Sector: Functional, Legal and 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 Functional unbundling Legal unbundling Ownership unbundling July 1, 2008 Russia Deadline forownership unbundlingof RAO UES (Federal Law No. 250, November 4, 2007)

  11. 600 700 500 600 400 500 300 400 300 200 200 Competitive wholesale market: Supply/Demand Equation Prices Average prices (Europe+Urals and Siberia), Rb/MWh Week and month Day (Apr 07) 01.10.07 08.10.07 15.10.07 22.10.07 29.10.07 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 800 Year 600 400 (January 1-20) 200 Sep.06 Oct.06 Nov.06 Dec.06 Jan.07 Feb.07 Mar.07 Apr.07 May.07 Jun.07 Jul.07 Aug.07 Sen.07 Oct.07 Nov.07 Dec.07 Jan.08 Source: Administrator of Trade System (ATS)

  12. Sept 1, 2006 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, 2011 Power Market DevelopmentPace of liberalization: government’s plan and actual progress 100% 100% ~90% actual pace of liberalization (facts and estimates) mandatory increase of the liberalized market share 100% 80% 80% ~70% Excluding householdconsumption ~60% 60% 60% 50% ~40% ~35% 40% ~ 25% 30% ~18% (Sept 06) ~20% (Jan 08) 25% 20% 15% 10% 5% 0% 0% All new capacity and consumption commissioned after 2007 go to the free market 

  13. 1,300 Average annual increase in 2006-10: 5% (basic scenario) 1,197 1,200 1,133 kWh, bln 1,100 1,082 1,030 1,000 981 900 2006 2007 2008 2009 2010 Basic scenario Optimistic scenario Electricity demand growth outlook: Mid-term and long-term view Mid-term Long-term 5,6% 6 5,3% 5% 5% 3,9% 3,7% 4 2 0 2006-2010 2010-2015 2015-2020 Source: Ministry of Industry and Energy (Minpromenergo); UES estimates

  14. Prospects until 2030: Target Concept, General Scheme, Investment Programs 2030 Target Concept for Development of the Russian Electricity Power Sector until 2030 General Scheme for locating power capacity until 2020 2020 5-year investment programs of energy companies from 2008 2006-2010 Investment Program of UES Holding Company 2010 2006 2010 2020 2030 2006

  15. Private investments Credits and loans Other State budget financing Companies’ funds CAPEX 2006-2010 – over 92 bn Euro Sources of financing Euro, bn 26.8 (29%) 22.9 (25%) 22.8 (25%) 15 (16%) 4.8 (5%) 0 10 20 30 40 Total: ~92.3 bn Euro (private investments ~26.8bn Euro)

  16. 30 20 10 0 Nov Mar May May Jun Sep Sep Sep Oct Oct Dec Dec Dec Jan Jan Feb Feb Feb Feb Mar Mar Apr Apr May May 06 06 07 07 07 07 07 07 07 07 07 07 07 08 08 08 08 08 08 08 08 08 08 08 08 TGK-9 TGK-7 TGK-8 TGK-7 TGK-6 TGK-5 TGK-3 OGK-3 TGK-3 TGK-4 OGK-3 OGK-2 OGK-5 OGK-1 OGK-5 OGK-6 OGK-4 TGK-9 TGK-1 TGK-11 TGK-10 TGK-13 TGK-12 TGK-14 TGK-12 Funds raised so far and yet to be raised From competitiveshare placements and sales to strategic investors 26,8 Euro in billions Fact: 17.5 bn Euro UES estimates: + 9.3 bn Euro 4,2 0,4 3,1 2,0 2,0 2,4 1,7 1,5 1,2 1,1 0,7 0,8 0,7 0,7 0,7 0,6 0,5 0,4 0,4 0,4 0,4 0,3 0,3 0,3 0,04 0,2 Total: ~ 26.8 bn Euro

  17. 2006-2010 RAO UES Capacity Commissioning Program MW 2006-2010 2006 2007 2008 2009 2010 1 186 1 545 2 050 5 788 14 364 24 934 Thermal generation OGKs, TGKs, RAO UES 67 690 420 1 224 1 612 4 013 Hydro OGK Totalcommissioning 1 253 2 235 2 470 7 089 15 919 28 947 20,000 15,000 MW 10,000 5,000 0 2006 2007 2008 2009 2010

  18. RAO UES Investment Program for 2006-2010: Higher Demand for Suppliers’ Products and Services * Construction materials(Solely cement expenses of TPPs and HPPs): ~ 0.3 bn Euro 2010 vs. 2006 Generation equipment(Procurements of solely primary generation equipment for OGKs and TGKs):~21.6 bn Euro 4.5-fold 8-fold Electrical equipment (Procurements solely for FGC): ~ 7.6 bn Euro R&D(Solely in thermal power sector): ~ 2 bn Euro Power Sector DevelopmentProgram 4-fold 4-fold Coal: ~ 731 milliontonnes of coal 40% Construction and installation(Solely in thermal power sector): ~ 9 bn Euro Gas: ~ 848 billioncub.m. of gas 8-fold 30% * Expert estimates

  19. UES Extraordinary General Meeting(October 26, 2007) Federal Law No. 250 (November 4, 2007) Two final chords of the reform Coordinated Synchronized RAO UES EGM approved the final reorganization (more than 95.43% of the attending shareholders voted for) Federal Law No. 250 to adjust power sector laws in connection with RAO UES reorganization. Corporate and legal actions taken according to the plan Transitional period of the power sector reform will end by July 1, 2008 (date of completion of the RAO UES reorganization)

  20. Our journey is about to end 2008 1998 Newheights are to be conquered

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