Several problems in implementation of the investment programs in power industry

1. «Nice Club – Energy and Geopolitics» 7-th annual Forum Several problems in implementation of the investment programs in power industry Speaker:A.Y.Kopsov, Member of the “Nice Club”, Doctor of Technical Science, Professor Nice, 12 - 14 of November, 2008

2. Reforming the sector «Power industry» Structure of the sector in 2000 Target structure of the sector after reformation

3. New owners of the power generation companies

4. Demand for installed capacity Dynamics of the existing installed capacity Prerequisites for development and technical reconstruction of the generating capacities in the power energy Source: Report of B.F. Wineziher on the Vinternational energy forum of “Fuel and Energy Sector of Russia of ХХI century”, April of 2007 Energy consumption in the Russian Federation CAPACITY BALANCE: AVAILABILITY AND DEMAND Base Variant/ Maximum Variant 392 232 GW 400 322 340 257 293 Level of the year 1990 300 249 209 180 GW 200 203 208 180 160 100 Demand for commissioning new generating capacities 0 2006 г. 2010 г. 2015 г. 2020 г. Average annual growth rate for 2000-2005: 1,7% Average annual growth rate for 2006: 4,2%

5. Decommissioning of the old equipmentSource: General Scheme of location of the objects in power industry till 2020 2007 The installed capacity of the power plants of the area of centralized power supply as of 31.12. 2006 totaled 210,8 mln. KW. The total generating capacity of the old equipment on the power plants of Russia totals 82,1 mln. kW, or 39 % of installed capacity of all power plants, including thermal power plants - 57,4 mln. KW, or 40 percent of their installed capacity, and hydro - 24,7 mln. KW, or more then 50 percent of their installed capacity. 2020 By the year 2020 57 percent of capacities of the current thermal power plants will be exhausted. By this time taking into account the works for technical reconstruction it is planned to decommission the old equipment in the amount of 51,7 mln. KW of currently installed capacity, incl. the thermal power plants- 47,7 mln. KWand nuclear power plants - 4 mln. KW. Share of the old equipment of the power plants of the sector as of 31.12.2006 Including the share of the old equipment at thermal power station - 40% and hydro power plants 55% Share of the old equipment of the thermal power plants As of 2020- 60% 60%

6. Main tasks of the General Scheme for Generating Facilities Allocation for the period up to 2020Source: General Scheme for Generating Facilities Allocation up to 2020 • The main task of the General Scheme is to form a reliable, economically effective and expedient structure of generating capacities and power grid objects • General Scheme IS MEANT to draw the power industry of Russia to the new technological level • Generating Scheme will orient companies of different forms of ownership, federal executives bodies and executives agencies of the territorial subjects of the Russian Federation towards creating conditions which will ensure rational use of all energy resources on a national scale.

7. 20 000 MW 15 000 10 000 5 000 0 Programme of capacity commissioningSource: report by А.V.Trapeznikovat theVInternational Energy Forum «Fuel and Energy Complex of Russia ХХI century, April 2007 MW 2006-2010 гг. 2006 2007 2008 2009 2010 Heat Power Generation OGK, TGK, RAO UES 1 196 1 474 1 596 7 576 16 979 28 821 Small Hydro-power plant TGK 2 110 161 96 124 493 56 696 477 1548 2152 4 929 Hydro-OGK Holding Total 1 254 2 280 2 234 9 220 19 255 34 243 Other commissioning 402 771 2 093 2 201 1 190 6 657 Commissioning total, MW 1 656 3 051 4 327 11 421 20 445 40 900 2008 2010 2006 2007 2009

8. Start of implementation of the investment program and first problems • Non-availability of the engineering and construction complex of the sector for implementation of the investment programs of the energy companies; • Shortage of ЕРС-contractors; • Non-availability of the related industries (power-plant engineering, electro-technical industry) for execution of the orders of the energy companies; • Excess of order volumes of Russian and Western companies as compared to abilities of the foreign manufacturing plants; • Growth of value of the equipment and all construction materials.

9. Financial crisis and new problems Lately there have appeared new problems, which prevent the companies from execution of its investment obligations in full scope and in due time: • Problem of liquidity and newly aroused situation of non-payment for energy by the consumers; • Decrease of the energy consumption growth rate and as a result to correct the forecasts of the territory development; • Aggravation of the financial condition of the companies and their owners – main shareholders; • Difficulties in obtaining credit resources for fulfillment of the investment obligations and high interest rates; • Insufficiency of the state guarantees in return of investments; • Increase of the fuel cost; • Increase of the equipment cost; • Absence of investor guarantees for obtaining the relevant pay back of the mandatory investment projects, due to the absence of clear market price-formation mechanism defined by some normative document under the conditions of the current short-term capacity market (capacity market of the transition period), especially for the objects commissioned starting from 2009.

10. Summary • Implementation of the social and economic development program elaborated by the Government of the Russian Federation for the period till 2020 requires the adequate commissioning of the generating capacities. • Today all power generation companies have Programs on new capacity construction and modernization of old ones. • The start of the investment programs implementation revealed the first problems. The main problems became the non-availabilityof the design & construction complex and energy equipment manufacture complex to implement the orders of the power generation companies as well as high cost of materials and equipment. • Today it is the indefinite performance of the power and capacity markets that is a constraining factor for the increase of new generating capacities and its further development. • The financial crisis revealed the following main problems: • Outlined decrease of the energy consumption growth rate and indefiniteness related the forecast of regional development; • Difficulties in obtaining credit resources at acceptable interest rates for a long period.

11. Thank you for attention!