Did you know we could be seeing the end to Russia’s power sector liberalisation? Russia’s state controlled energy giant Gazprom and Ranova a private-sector investment fund are planning to merge their interests in the nation’s six largest generating companies. Such a proposal would create a new company dominating 25% of Russia’s power sector. It would also increase state influence over the power sector, due to Gazprom being a partially privatised energy utility.

Who will this benefit?

The proposed company would certainly bring new benefits, in terms of economies of scale, improved access to new investment funds, resources and specialist expertise in many related fields from district heating to solar power.

The question is, how would such a merger benefit Russia’s national interests to modernise and upgrade its mostly Soviet era power infrastructure? Such a development is likely to be greeted by concern by the Kremlin as it could slow down further the urgent need to replace and enhance capacity and efficiency of Russia’s power sector, while for customers, the new Gazprom Ranova utility would be the dominant electricity supplier in many regional markets. It would also raise competition concerns, as it would increase Gazprom’s influence over the Russian energy sector.

Russia Needs New Investment

Unfortunately, the nation’s power sector has its problems; the industry lacks sufficient capacity to meet ever-increasing demands for power from Russia’s growing economy. In addition, much of country’s mostly Soviet era power plants and transmission grids are obsolete and inefficient. That is why the power sector was partially privatised, in 2008. The power sector reforms broke up the state monopoly into six wholesale electricity companies (OGKs and 14 territorial generating companies (TGKs). Much of the assets of the former state monopoly were sold off to both domestic and foreign investors, though the national grid, nuclear and hydro companies remain in state hands. Since then Russia's Federal Antimonopoly Service (FAS Russia) has approved some consolidation.


Russia Needs 186 GW of generating capacity by 2020

Prime Minister Putin says Russia needs 186 GW of power generating capacity by 2020 to meet current growth in demand. That means the country has to build 100 new power stations; so far, only 35 power plant projects have started construction. The new owners have promised to invest $802 billion over the following five years from 2008, bringing 43 GW of brand new capacity online reports Pennwell Global Power 2011. However, the current credit crunch has slowed down such efforts. Amongst the new investments announced so far, include:

• Finland’s Fortum owners of regional power utility TGK-10 have announced plans to commission an extra 2300 MW of generating capacity by 2014.
• German owned EON. A significant shareholder in OGK4 has plans to invest $2.3 billion over the next decade.
• German owned RWE is a shareholder in TGK-2, a regional power utility, has started construction of a 450-megawatt steam-gas unit in Yaroslavl. This new plant is located 250 miles north east of Moscow, and is due for completion by 2012.
• OGK-5 is one of the leading wholesale power generating companies in Russia, and owned by Italy’s Enel has launched plans to upgrade a 410 MW gas plant at Newinnomysk in the Western Caucuses of Southern Russia.
• Russia’s state owned hydro company RusHydro has plans to replace the aging 3000 MW plant at the Siberian dam located at Boguchanskaya and construct an addition 3 GW of new capacity elsewhere by 2011.
• Russia’s state owned nuclear power operator Rosenergoatom has announced plans to invest $5.8 billion in ten new nuclear power plants, which should bring the country’s atom generating capacity up to 43 GW by 2020.
• Russia’s state owned JSC Federal Grid Company of Unified Energy System has announced an investment programme of $31 billion between 2010 and 2014.

Regulator could block Gazprom's and Renova's plans!

It will be interesting to see how the Kremlin reacts to such a proposal, especially with Russian Presidential Elections due in 2012. Nevertheless, the FT suggests Russia’ energy czar Igor Sechin supports such a proposal. However, the market will have to await the decision of Russia's Federal Antimonopoly Service (FAS Russia) for a decision. FAS head Igor Artemyev has already greeted the proposed merger of Gazprom's and Renova's power assets as undesirable from the viewpoint of anti-trust legislation and has already indicated that the competition watchdog would try to structure the deal to exclude Gazprom's controlling stake in the new power company. Given past independent mined decisions of the FAS, Gazprom’s proposals are not yet a done deal. Even if this proposal is approved by FAS, the new super utility is likely to be forced to sell some of its assets in certain regions and be closely monitored by the regulator. However, both Prime Minister Vladimir Putin and Russian President Dimitry Medvedev could see this this latest Gazprom proposal as a consolidation too far!