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Energy Industry: Retarding or Driving Force for Economic Advancement? Anatoly Chubais Chairman of the Management Board RAO UES of Russia Moscow February 13, 2007 Energy Industry: Retarding or Driving Force for Economic Advancement? Economy Development Demand Retardation Energy Industry Main sections of this Presentation: • Energy Industry: Needs of the Economy • Energy Industry: Market Reform and Development Strategy • Energy Industry: Impetus to Economic Sectors 2 Needs of the Economy Electricity Consumption: Approaching Historical Highs 1400 kWh in billions 1200 1074 1082 1990 level 992 1000 984 856 828 809 1996 1998 800 1990 1992 1994 864 878 2000 2002 924 2004 2006 2008 Average annual rate of growth in 2000-2005: 1.7% Average annual rate of growth in 2006: 4.2% Source: Forecasted Balance of Electricity and Capacity for 2006-2010 (baseline scenario); RAO UESR estimates 3 Needs of the Economy Peak Load Regions: Exceeding the Electricity Consumption Peak of the Soviet Period 180 Source: RAO UES of Russia 2006 vs. 1990, % 170 1990 = 100% 160 160 150 140 130 121 120 124 115 108 110 102 104 105 110 110 106 100 4 Needs of the Economy 2006-2010: Changes in Electricity Consumption and Required New Capacity Source: Resolution of the Russian Government of November 30, 2006; RAO UESR estimates 1,300 1,200 Average annual increase in 2006-2010: 5.0% 1,198 kWh in billions Dramatic growth of demand for new capacity 1,134 1,100 1,086 Revision of Investment Program for the energy industry: from 23.4 GW to 40.9 GW 1,035 1,000 Exhaustion of generation additions using existing capacity 984 900 Change in demand trends 2006 2007 2008 2009 2010 For reference: new capacity commissioned in Russia in 1991-2005 – 23.3 GW, maximum annual commissioning of new capacity in Russia in the Soviet period – 8.9 GW (1985) 5 What makes this possible? Effective demand Reform of the energy industry: turning into a competitive sector Development strategy: strategy finalization 6 Energy Industry: Reform and Development Strategy Reform of the Electric Power Industry: National Policy Essence of the reform: separation of monopolistic and competitive sectors Competitive sectors Generation Electricity sales GOALS: • to create market players • to transfer to market pricing principles Market rules Government as regulator Natural monopolies Dispatching Main grids Regulated tariffs GOALS: • to reorganize infrastructure for market operations • to ensure nondiscriminatory access to grids Distribution grids 7 Energy Industry: Reform and Development Strategy RAO UES of Russia: Pre-reform Structure Minority Shareholders of the Parent Company Russian Federation 52% 48% RAO UES 73 AO-Energos Centralized Dispatching Administration Generation Grids Sales High Voltage Grids + Grid Services 32 Federal Power Plants 8 Energy Industry: Reform and Development Strategy Russian Electric Power Industry: Target Structure Monopolies Competitive Sectors Private shareholders Government System Wholesale Generation Companies (6) FGC Operator IDC Holding Company Central NorthWest Ural and Volga Siberia Competitive Market Rosenergoatom Independent Generation Companies Sales Companies FGC – Federal Grid Company IDC – Interregional Distribution Company Territorial Generation Companies (14) Hydro WGC (1) Engineering Centers 9 Energy Industry: Reform and Development Strategy Investment Deployment Concept for the Electric Power Industry Reform Concept Investment Deployment Concept Private investments Investments from the state budget Competitive sectors (primarily thermal generation) Monopolistic sectors 10 Energy Industry: Reform and Development Strategy Investment Mechanisms Competitive sector (thermal generation, sales, services) Monopolistic sector (grids, dispatching) • Additional issues of shares in WGCs and TGCs in favor of private investors • Additional issues of shares in FGC, SO, and HydroWGC in favor of the Government • Investment Guarantee Mechanism • Funds from the federal budget • Direct private investments in local projects • Payment for technical connection to grids • Revenue from sale of assets • Revenue from sale of assets • Loans and advances • Loans and advances • Own funds • Own funds Most investment mechanisms result from the energy industry reform and market creation 11 Energy Industry: Reform and Development Strategy Investment Program of RAO UES Holding Company: Scope and Mechanisms 900,000 rubles in millions 820,211 825,586 753,652 800,000 100 700,000 520,452 600,000 60 500,000 Own funds 28.3% Raised funds 14.7% Issue of additional shares 12.6% Payment for technical connection 8.7% Revenue from sale of assets 8.4% 400,000 300,000 Federal budget 30 180,019 200,000 15 100,000 5 0 2006 2007 2008 2009 Total in 2006-2010: 3,099,920,000,000 rubles 2010 7.2% Funds from external investors for projects under IGM 4.8% Long-term projects for expansion of the Investment Program 4.5% Special purpose investments 1.2% Accumulation fund, accumulated own funds Other 0.2% Step-by-step increase in the share of electricity sold at nonregulated prices, % 9.4% 12 Energy Industry: Reform and Development Strategy Additional Issue of Shares in WGCs and TGCs: Key Mechanism of the Investment Program RAO UESR Administrative Order No. 914 of December 20, 2006 List of companies issuing additional shares: WGC-1 WGC-2 WGC-3 WGC-4 WGC-5 WGC-6 TGC-1 Mosenergo (TGC-3) TGC-4 TGC-5 TGC-7 TGC-8 TGC-9 TGC-10 Kuzbassenergo (TGC-12) TGC-13 Overall assessment of funds raised from additionally issued shares in 2006-2008: 179.5 billion rubles – total for WGCs 242.1 billion rubles – total for TGCs Total: 421.6 billion rubles Companies whose Programs for Preparation and Placement of Additional Shares are approved by the Board of Directors of RAO UES of Russia 13 Energy Industry: Reform and Development Strategy Prospects until 2030: Targeted Vision, General Layout, Investment Programs 2030 Targeted Vision for Development of the Russian Electric Power Industry for the Period Ending 2030 2020 2010 General layout of electric power facilities until 2020 Investment Program of RAO UES Holding Company for 20062010 2006 2006 2010 5-year investment programs of energy companies as from 2008 2020 2030 14 Energy Industry: Reform and Development Strategy Capacity Commissioning Program MW Thermal generation WGCs, TGCs, RAO UESR Small TGC HPPs 2009 2010 2006-2010 1,596 7,576 16,979 28,821 110 161 96 124 493 56 696 477 1,548 2152 4,929 1,254 2,280 2,234 9,220 19,255 34,243 402 771 2,093 2,201 1,190 6,657 1,656 3,051 4,327 11,421 20,445 40,900 2006 2007 1,196 1,474 2 Hydro WGC Total for Holding Company Other commissionings Total commissionings, MW 2008 20,000 15,000 MW 10,000 5,000 0 2006 2007 2008 2009 2010 15 Energy Industry: Reform and Development Strategy 2006-2015: Changes in the Fuel Mix 250 200 tonnes of fuel equivalent in millions 233.4 212 179.3 143.1 150 Gas Coal 90.6 100 68.9 50 0 2006 2010 1% 2015 1% 1% 27% 29% 37% 3% 3% 2% 69% 67% Gas Fuel oil Coal 60% Other 16 Energy Industry: Reform and Development Strategy New Technological Structure in the Electric Power Industry Generation Efficiency 34% Gas-fired generation: steam-power technology replaced by combined cycle gas technology (CCGT) Efficiency >50% Efficiency 34% Coal-fired generation: circulating fluidized-bed technology; Implementation, Innovation, and Reconstruction technology; and super-supercritical technology Efficiency 42-46% Hydropower: active development of pumped storage power plants and tidal power plants Grids are a passive element of the energy system Mode control using administrative and command methods Transmission Implementation of Flexible AC Transmission Systems (FACTS), new DC transmission technologies (DC Converters), and high-temperature superconductivity technologies Dispatching Radical renovation of data processing technologies based on SCADA-EMS. Grids become an active element of the energy system, with a capacity to change power and energy flows Mode control through economic motivation of market participants Creation of 3-tier technological vertical of dispatching centers Creation and servicing of the electricity market, system service market, and balancing market 17 Energy Industry: Impetus to Economic Sectors RAO UES of Russia Investment Program – Factor for Power Plant Engineering Development Planned expenses related to purchase of primary thermal power equipment for generation facilities of WGCs and TGCs 250 200 rubles in billions 210.3 212.4 2009 2010 146.3 150 96.1 100 50 29.8 0 2006 2007 2008 Total for 2006-2010: 694.9 billion rubles Purchase orders for construction materials can be placed on the B2B-Energo online trading floor at http://www.b2b-energo.ru 18 Energy Industry: Impetus to Economic Sectors Factor for Power Plant Engineering Development as exemplified by Power Machines 2006 Sales 2010 $0.68 billion $1.5 billion 8 GW 17 GW Share of services in portfolio of orders less than 10% 15% Share of exports in portfolio of orders more than 80% 40% Generation facilities Corporate Investment Program for 2007-2010: $1 billion Key investment sources ($ in millions) Issue of additional shares in Power Machines ~ 200 ~ 450-500 Bonded loans and bank loans Sale of assets ~ 300-400 19 Energy Industry: Impetus to Economic Sectors … Factor for Electrical Engineering Development Planned expenses related to purchase of high-voltage equipment and materials for FGC facilities (incl. transmission companies) for 2007-2011 25 19.5 19.4 20 rubles in billions Total procurement expenses for 2007-2011: 15 Equipment: 97.5 billion rubles 10 5 8 Materials: 97.2 billion rubles 3,5 0 2006 2007-2011 (average annual) High-voltage equipment Materials Purchase orders for construction materials can be placed on the B2B-Energo online trading floor at http://www.b2b-energo.ru 20 Energy Industry: Impetus to Economic Sectors … Factor for Coal Industry Development Coal demand in TPP sector (excl. isolated generating plants) for 2006-2010 180 tonnes in millions 160 153 151 159 136 140 121 120 100 80 60 2006 2007 2008 2009 2010 Increased annual coal consumption in 2010 as compared with 2006: 38 million tonnes (~31.5%) Source: RAO UES of Russia 21 Energy Industry: Impetus to Economic Sectors … Factor for Gas Industry Development Source: Resolution of the Russian Government of November 30, 2006 Gas deliveries to energy companies for 2006-2010 200 186 cu m in billions 162.9 150 166.9 174.8 143 100 50 2006 2007 2008 2009 2010 Increased annual gas consumption in 2010 as compared with 2006: 43 billion cu m (30%) • Provision is made that 5-year long-term agreements for transportation of gas from independent producers be signed • As from April 1, 2007: transition to 5-year gas delivery agreements with energy companies. Price guidepost: equal profitability of gas sale both in the domestic market and for export in 2011 22 Energy Industry: Impetus to Economic Sectors … Factor for "Secondary Processing" Development as exemplified by the construction materials sector Source: research by Progressor at the request of RAO UES of Russia (preliminary estimates) 2 Demand for cement of TPPs and HPPs of the Holding Company: new construction and technical upgrading: 7.2 million tonnes 1.8 tonnes in millions 1 0.3 0 2006 6 Cement expenses of TPPs and HPPs of the Holding Company: new construction and technical upgrading: rubles in billions 2007-2010 (annual average) 4.8 4 2 0.6 19.2 billion rubles 0 2006 2007-2010 (annual average) Purchase orders for construction materials can be placed on the B2B-Energo online trading floor at http://www.b2b-energo.ru 23 Energy Industry: Impetus to Economic Sectors … Factor for R&D and C&I Development Source: research by Progressor at the request of RAO UES of Russia (preliminary estimates) 12 Research and development (in thermal power industry only): 43.5 billion rubles 10.9 rubles in billions 8 3.9 4 0 2006 66.3 80 60 Construction and installation (in thermal power industry only): 265.2 billion rubles 2007-2010 (annual average) rubles in billions 40 20 10 0 2006 2007-2010 (annual average) Orders for R&D and C&I can be placed on the B2B-Energo online trading floor at http://www.b2b-energo.ru/ 24 Energy Industry: Impetus to Economic Sectors … Factor for Science and Education Development March 2006: Agreement for Cooperation signed between RAO UES of Russia and the Russian Academy of Sciences Major Areas of Joint Activities Development of the Targeted Vision of Development of the Russian Electric Power Industry for the Period Ending 2030 Research to create new competitive equipment for energy companies Development and mastering of new technologies Cooperation with the Industry-Related Higher Education Institutions • Recruitment of graduates from higher education institutions • Programs for personnel training, retraining, and advanced training • Corporate scholarships and contests 25 Reform of the electric power industry turns it into a driving force for economic advancement Reform of the Electric Power Industry Economy Demand Electric power industry Economic advancement Economic retardation 26