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Investment Phase of Power Industry Reform in Russia

This document discusses the investment phase of the power industry reform in Russia, including the essence, concept, volumes, and mechanisms involved. It also highlights the structural transformations and market liberalization that have taken place. The aim is to attract large-scale, long-term investment in the Russian electricity industry. The document emphasizes the need to attract investment during the final phase of the reform, rather than after its completion. The investment required annually for the electricity industry is estimated to be around $7 billion in 2006 and $20 billion per year from 2008 onwards.

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Investment Phase of Power Industry Reform in Russia

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  1. RAO UES of Russia: Investment Phase of the Reform A. B. Chubais Chairman of the Management BoardRAO UES of Russia 10th Annual Investor Conference "Russia: Looking into the Future" June 20, 2006 Moscow

  2. 1. Investment Phase of the Reform: Essence, Concept, Volumesand Mechanisms ………………………….3-9 2. Structural Transformations …………………………………………………… 10-12 3. Market Liberalization ……………………………………………………………. 13-14 4. Conclusions ……………………………………………………………………….. 15

  3. Power Industry Reform: Investment Phase (2006–2008) Completionof structuraltransformations Attraction of large-scale long-term investment in the Russian electricity industry Liberalizationof electricitymarkets Investment Phase of the Reform: Essence

  4. Restructuring Concept Investment Deployment Concept Industry'scompetitive sectors (primarily, thermal generation) Private investment Industry's natural monopolysectors Budget financing Investment annually required for the electricity industry: about $7 billion in 2006, about $20 billion a year from 2008 ! ! Large-scale investment needs to be attracted, not after the completion of the reform, but during its final phase Investment: Concept and Volumes

  5. 8 40 Capacity commissioning dynamics, 2006–2010 Commissioning of generation capacity in Russia: actual and demand 7.2 38 6.6 6 30 21.8 4 GW GW 3.9 20 2.5 9 2 1.6 10 0 0 2006 2007 2008 2009 2010 2001-2005 2011-2015 2006-2010 Investment in the Russian Electricity Industry: Demand Source: RAO UESR estimates; material for the June 7, 2006 session of the Russian Government 2006–2010: Electricity industry's demand for investment: about2.3 trillion rubles (over $85 billion), including generation demand: about 1.28 trillion rubles (over $47 billion)

  6. Additional issue of shares in Wholesale Generation Companies (WGCs) and Territorial Generation Companies (TGCs) Direct private investment in local projects Project financing Investment Guarantee Mechanism Private placement Public placement Thermal generation is primary investment target 2/3 of Russia's total power generation Investment in Competitive Sectors: Major Mechanisms

  7. Potential Candidates for the First Placements of Additional Shares * - Upon completion of company formation (Q3 2006) Figures shown in columns 3 and 4 definethe limits of each additional issue. None of these figures are an end in itself. • Fundamental principles for defining the exact volumes, time limits, andsequence of each additional issue are: • Investors' actual demand for additionally issued shares • Market trends:maximizeplacement price • Provision of funds for companies' investment projects in specified volumes and within the required time limits !

  8. Investment in Competitive Sectors Investment Guarantee Mechanism Investment Guarantee Mechanism approved by a Government Resolution in December 2005 Essence: to compensate the investor for the difference between the electricity price formed in the marketand the price necessary for the investment project payback Total generation capacity to be constructed using the Mechanism in 2006–2010: about 5,000 MW The first projects will be implemented in the following energy systems: Tyumenskaya, Tulskaya, Sverdlovskaya, Kuzbasskaya, Tomskaya 2006: the first bids to attract investment through the Mechanism

  9. * * * Funds from the Federal Budget required to purchase shares in 2007–2009: 5.02 billion rubles Funds from the Federal Budget required to purchase shares in 2007–2009: 39 billion rubles Funds from the Federal Budget required to purchase shares in 2007–2009: 160 billion rubles Investment in Natural Monopoly Sectors: Major Mechanisms Additional issue of shares in Federal Grid Company, SystemOperator, and Hydro WGC to be transferred to theGovernment Special purposeinvestments VAT refund and other sources Loans * Federal Grid Companyof Unified Energy System(FGC UES) System Operator –Centralized DispatchingAdministration (SO – CDA) Hydro WGC

  10. Electricity Industry Reform (2001–2006) Structural Transformations Market Formation • 7 out of 7 WGCs, 13 out of 14 TGCs, • 4 out of 4 Interregional Distribution Grid Companies (IDGCs) established • Federal Grid Company and System Operator established and in operation • Unbundling by activity type completed in 57 out of 72 regional energy companies • Shares in 83 new generation, grid, sales, service and management companies placed in the Russian stock market (including shares in WGC-3, WGC-5, and TGC-3) • Free Trade Sector of the Wholesale Electricity Market established and in operation (annual trade volume is about $3.5 billion) • Competitive balancing electricity market in operation • All large generation companies brought to the wholesale market (as from January 1, 2006) • New model formed for the wholesale electricity and capacity markets (the model is based on a bilateral contract system and competitive markets) • New rules developed for the functioning of retail electricity markets Structural Transformations and Market Formation: Main Results as of mid-2006

  11. Selection of 1-3 generation companies • with pro rata distribution of shares • (candidates: WGC-3, WGC-5, TGC-5) • Decision on the additional issue and placement • of shares in 3–5 Thermal WGCs and TGCs • in the stock market Board of Directors of RAO UES of Russia (July–September) Structural Transformations: in the Short Term(from August 1, 2006) Structural Transformations Preparatory works for share placement in the first WGCs and TGCs First Reorganization: pro rata distribution of shares Board of Directors of RAO UES of Russia (June 23, 2006) General Meeting of Shareholders ofRAO UES of Russia (November 2006) • Approval of specific characteristics of the additional issue and placement of shares in WGCs and TGCs • based on the list approved on June 23, 2006

  12. Board of Directors of RAO UES of Russia (2007–2008) General Meeting of Shareholders ofRAO UES of Russia (2008) • Unbundling of RAO UES of Russia • Pro rata distribution of company`s assets • among shareholders • Transfer of functions to the Government • and to the power infrastructuralentities • Decisions on the additional issue and • placement of shares in WGCs and TGCs Structural Transformations: in the Medium Term (2007–2008) Structural Transformations Share placement in the rest of TGCs and WGCs Second Reorganization:pro rata distribution of shares Possible additional decisions: Sale of minority shareholdings inthermal generation companies Direct equity in project finance investments in thermal power plants SPVs

  13. Market Structure (from August 1, 2006) Competitive Markets Regulated Bilateral Contracts (RBCs) Day-Ahead Market (spot) Launch of short-term RBCs (with a term until the end of 2006) Balancing Market New rules in the Retail Market The 2007 State Budget should fund the termination of cross-subsidies • Status of the Supplier of Last Resort • Translation of the Wholesale Market price • to retail consumers in the case of deviations from • contractual volumes ! ! Market Liberalization: in the Short Term(from August 1, 2006)

  14. Modifying and Supplementing Market Structure Capacity Market Transition to the long-term RBCs(with a term of 3 years) • Transition from tariff-based capacity sales to • competitive capacity trade at auctions held by SO • Transition from one-year auctions to long-term auctions • Gradual market liberalization: • within a range from 5% to 15% a year(5% from January 1, 2007) • Voluntary exit from RBCs and entry into Free Bilateral Contracts, spot market Ancillary Services Market • Competitive market through auctions held by SO Retail Market • All new generation to be commissioned intothe free market (spotorFree Bilateral Contracts). • Synchronizationof liberalization processes in the wholesale and retail markets • Termination of cross-subsidies Market Liberalization: in the Medium Term (2007–2008)

  15. Investors Power Companies Growth in capitalization of energy companies and their appeal as an investment destination Implementation of large-scale investment projects, satisfaction of growing demand for electricity ROI guarantees Favorable conditions to attract investment Investment Phaseof theReform Predictable payback and financial profitability of investment projects Financial stability in afree marketenvironment Investment Phase of the Reform: Impact on Investors – Impact on the Electricity Industry

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