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RAO UES Anatoly Chubais, CEO EEI International Utility Conference London, March 11, 2008

Power Sector Liberalization and Climate Change: The Russian Model. RAO UES Anatoly Chubais, CEO EEI International Utility Conference London, March 11, 2008. One of the world’s largest markets …. … is being served by the world’s largest utility.

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RAO UES Anatoly Chubais, CEO EEI International Utility Conference London, March 11, 2008

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  1. Power Sector Liberalization and Climate Change: The Russian Model RAO UES Anatoly Chubais, CEO EEI International Utility Conference London, March 11, 2008

  2. One of the world’s largest markets… … is being served by the world’s largest utility • Russia is the 4th largest electricity market in the world • ~5-6% of world generating capacities • Average growth in electricity consumption: 2-4% p.a. since 2006 Russian Power Sector and RAO UES • Electricity output: > 70% of Russia’s total • Heat output: ~ 33% of Russia’s total

  3. RussianGovernment 52% 48% RAO UES: Pre-reform Model Minority Shareholders RAO UES 73 AO-Energos Centralised Dispatch High Voltage Grids + Grid Services 32 FederalPower Plants Generation Low voltage & High voltage Grids Supply

  4. 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

  5. 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 Majority of senators in the Federation Council UES Reform Key political factions in the State Duma Influential oligarch groups Majority of minority shareholders 2000-2008

  6. Russian Power Sector: Post-reform Model 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

  7. 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)

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

  9. 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 electricity consumption by households ~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 

  10. Competitive wholesale electricity market as of September 1, 2006 Electricity Market System: Target Model Capacity market 2008 Liberalized retail markets as of September 1, 2006 Derivative market 2008 Ancillary service market 2008

  11. 5 1,2 %% kWh, bln 4,3 4 3,9 Average annual increase in 2006-10: 3,5% (basic scenario) 4 1,120 3,7 3,5 1,1 3 1,070 3 1,035 1,003 2 1 0,980 1 0,9 0 2006 2007 2008 2009 2010 2006-2010 2011-2015 2016-2020 Basic scenario Optimistic scenario Electricity Demand Growth Outlook: Mid-term and Long-term View Mid-term Long-term Source: UES estimates

  12. 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

  13. Private investments Credits and loans Other State budget financing Companies’ funds CAPEX 2006-2010 – 93 bn Euro Sources of Financing Euro, bn 27.5 (29%) 22.9 (25%) 22.8 (25%) 15 (16%) 4.8 (5%) 0 10 20 30 40 Total: ~93 bn Euro (private investments ~27.5bn Euro)

  14. Thermal Generation and Grid Assets: Undervaluation and Growth Potential Thermal generation-2008: Key growth drivers EV/IC, Euro/kW (Feb 08, weighted average) Market liberalization causes a stable rise in electricity prices M&A. The approaching competitive sale of OGK and TGK shares to strategic investors makes these assets more attractive to portfolio investors Distribution grids-2008: Key growth drivers: EV/length, Euro/km (Feb 08, weighted average) Consolidation of 61 regional grid companies converted into 11 interregional distribution companies (IDCs): higher liquidity; lower cost of capital; entry of large companies with a high free float into the stock market RAB: higher transmission tariffs; optimized revenues, profits, and investments of IDCs Connection fees as an effective CAPEX mechanism

  15. May 08 Funds raised so far and yet to be raised From CompetitiveShare Placements and Sales to Strategic Investors 30 27,5 Euro in billions Fact: 18.8 bn Euro UES estimates: + 8.5 bn Euro 20 10 0,4 4,2 3,1 2,4 2,0 1,7 1,5 1,3 1,2 1,1 0,8 0,8 0,7 0,7 0,7 0,7 0,6 0,5 0,5 0,4 0,4 0,4 0,4 0,3 0,3 0,3 0,2 0,2 Nov Mar May May Jun Sep Sep Sep Oct Oct Dec Dec Dec Jan Jan Feb Mar Mar Mar Mar Mar Mar Mar 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 08 TGK-7 TGK-6 TGK-7 OGK-1 TGK-8 OGK-3 TGK-5 TGK-3 TGK-3 TGK-9 OGK-5 OGK-3 OGK-2 OGK-5 OGK-6 TGK-9 TGK-1 OGK-4 TGK-11 TGK-13 TGK-12 TGK-10 TGK-14 TGK-12 TGK-10 TGK-2 TGK-4 Total: ~ 27.5 bn Euro

  16. 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

  17. 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

  18. 2006 2020 Gas generation Coal generation Nuclear generation Hydro generation and other renewable sources Changes in the Power Generation Mix Effects on Carbon Efficiency 2020 to 2006: Notes 50 Percent of total Gas consumption increased from 175 bn cu m to 210 bn cu m (or by 20%) Coal consumption increased from 128 mn t to 285 mn t (or by 123%) Nuclear generation increased from 23.5 GW to 53.2 GW Hydro generation increased from 44.9 GW to 71.7 GW 41,5 40 33,2 32,2 30 25,1 20,5 17,5 15,9 20 14 10 0 Fossil fuel generation: 66,6% Non-fossil fuel generation: 33,4% Fossil fuel generation: 65,5% Non-fossil fuel generation: 34,5% Source: RAO UES

  19. 1 • Gas generation: Introduction of combined cycle gas turbine (CCGT) technologies • Coal generation: Introduction of clean coal technologies (CCT), • introduction of carbon capture and storage (CCS) systems • Other requisite measures: • - Development of economic and market-based mechanisms for environment protection: CO2 emission tax; CO2 emission trading system • - Development of renewable energy sources (hydro, tidal, geothermal, wind) • A surge in power generation • Gas-to-coal substitution • (the gas share is 8% lower • and the coal share is 7% higher • in the generation mix by 2020) 0,8 0,6 0,4 0,2 0 Carbon Efficiency of the Russian Power Sector: Strategy Key challenges Solutions Emission efficiency of the Power Sector (CO2 emissions / Generation) 0,73 0,58 0,44 1990 2005 2020 (est.) Source: RAO UES

  20. 900 CO2 equivalent, millions of tonnes 850 793.51 (1990) 1990 level 783.3 (2020) 800 750 Actual Estimates 700 650 600 550 500 450 2018 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2020 Russian Power Sector: Changes and Estimates ofGHG Emissions (basic scenario) It is not until 2020 that the 1990 level of GHG emissions is exceeded Source: RAO UES

  21. 2008 2000 Our journey is about to end

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